Economic Cycles and Political Trends in the United States (Part I)

The issue today is the same as it has been throughout all history, whether man shall be allowed to govern himself or be ruled by a small elite.

– Thomas Jefferson (1743-1826), 3rd U.S. President

I have learned to hold popular opinion of no value.

– Alexander Hamilton (1755-1804)

Those who cannot remember the past are condemned to repeating it.

– George Santayana (1863-1952)

PART I *

I have been a student of cycles, both of economic cycles and of political trends, for a very long time. To try to understand the economy or politics for that matter without having a knowledge of cycles and trends is like sailing without a compass, a weather report or a GPS (Global Positioning System).

There are four main types of cycles in economics, some relatively short, such as the slightly less than four year long inventory cycle, or the standard 10-year technology cycle, and some longer, such as the 18-year long real estate cycle (N.B.: We are presently in the downward part of this cycle, which should last until 2010-11), and some called long waves, such as the 54- to 60-year long Kondratieff cycle of a debt and price inflation-then disinflation-followed by a debt and price deflation (N.B.: We are presently in the deflation phase of this long cycle, a good example being the debt deflation of heavily levered banks and hedged funds and of price deflation in housing) such a deflation phase expecting to last also until 2010-11.

As I mentioned, the shorter cycle is the inventory cycle (Kitchin), which lasts slightly less than four years. This cycle has become very much less pronounced in recent years for two reasons. 1) First, the service sector as a percentage of the entire economy is much larger than it was 100 or even 50 years ago. In the United States, the service sector accounts for approximately three quarters of GDP. Today, four out of every five private sector non-farm jobs (80 percent) are in the economy’s service sector (federal, state and local government, wholesale trade, retail trade, transportation, public utilities, construction, finance, insurance, real estate, telecommunications, computer and related services, energy services, distribution, express delivery and audio-visual services, etc.). 50 years ago, the service sector accounted for about 60 percent of U.S. output and employment. Today, the information age has generated new forces that have driven the shift to a more services-oriented economy.

For the U.S., services exports represent approximately 30 percent of the total value of America’s exports, and it is in surplus. This sector of the economy is much less volatile than manufacturing, agriculture or mining.

2) Second, over the years, businesses have embraced the use of the computer and the digital revolution to manage inventories. This has lead to the “Just-in-time” inventory management method, which has considerably reduced fluctuations in the inventory stocks of distributors, thus smoothing the production cycle of producers.

During the entire twentieth century, as the economy moved from agriculture and industry and more and more toward service industries, the volatility of the US economy became less and less pronounced. As a consequence, recessions have been shallower and of shorter duration. And, of course, there has not been another economic depression, like the 10-year Great Depression that lasted from 1929 to 1939.

There was another structural development on the inflation side. Indeed, the internationalization of national economies has acted as a damper on price increases, as new low cost producers, such as China and other emerging economies, have entered the markets. For instance, exports and imports used to represent 20 percent of the U. S. economy; nowadays, it is 30 percent.

Sometimes we measure these cycles from bottom to bottom, and sometimes from top to top. For the 10-year cycle (the Juglar cycle), it often coincides with normal recurring recessions. In the U.S., there were recessions, for example, in 1969, in 1973-75, in 1980 and 1981-82, in 1990-91 and in 2001, most of them within about a 9-10 year interval. According to this cycle, there could be a somewhat severe recession in 2010-11, possibly following the slowdown or recession expected to occur this year.

What is of interest is that the real estate cycle or housing cycle (the Kuznets cycle) is also scheduled to bottom in this period. This is a cycle of about 12 years of price increase and of 5 or 6 years of price decline. The previous cycle, from top to top went from 1987 to the spring of 2005. A bottom would therefore be normal in 2010-11 and a future top around 2023.

But the multi-generation Kondratieff cycle is perhaps even more ominous in its influence on the economy. From bottom to bottom, this very long cycle began in 1949, when wartime prices were unfrozen, reached a top in inflation in 1980 at 13-14 percent levels, and is expected to bottom between 2003 and 2010. The current financial crisis and the credit crunch that accompanies it are the main players in this long cycle.

As you see, the table is set for an important economic bottom in the next two years. That is why I recommend being careful and alert financially during this turbulent period.

There are also cycles and trends in politics, and they sometimes coincide with economic cycles. For example, it would surprise no one to know that during the early inflationary phase of the Kondratieff cycle, a philosophy of government social spending would tend to prevail. In the U.S., this would be a period where the Democrats would be expected to be in power. When there is a need to fight inflation, a conservative philosophy of government would tend to prevail, and this would favor the Republicans. The Kennedy-Johnson administration of the 1960s is a case in point, while the Reagan-Bush Sr. administration is the other.

(To be continued)

* N.B.: This article is drawn from a conference to be pronounced by Dr. Tremblay before the Florida Renaissance Academy, Marco Island Yacht Club, on April 4, 2008. Those wishing to attend can call: 239-394-3089 or 239-434-4737.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and author of the book The New American Empire. He can be reached at: rodrigue.tremblay@yahoo.com. Read other articles by Rodrigue, or visit Rodrigue's website.

10 comments on this article so far ...

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  1. Max Shields said on March 29th, 2008 at 8:31am #

    National and global economics are on a collision course. Cycles/trends are curious blips, but have little to do with the real economics. First, economics is micro and local. It is all about trade balances at those local levels. As local trade balances are lost in the national and global aggregates, currencies become meaningless rather than feedback loops to economic producers; and in the end we have nothing but a computerized version of a pseudo-reality.

    Each transition we make away from exports, we lose the societal memory essential to ever do it again. So, farming can be viewed as purely ob creation/neoclassical GDP metric, or it can mean feed people. So, we will be a purely import nation. An import nation can best be understood by looking at those cities in the US that have utterly collapsed and are dependent on government remittances and social services to sustain it – essential a dead city. Best example would be to compare the sun’s energy hitting a desert and rain forest. The former is what the US is becoming. Energy (imports) hit and is lost in gobbled up consumption, needing replentishment from more imports. In the rainforest, the sun’s energy is diffused and used and reused throughout the highly diversed and vibrant life forms. That is a healthy economy that fully uses its exports to purchase imports and make those imports work throughout the locality.

    When you, Mr. Tremblay, foresake the purpose of ecomomics for neoclassical economic trends and cycles you take yourself on a journey of navel gazing that serves absolutely NOBODY!

  2. hp said on March 29th, 2008 at 9:12am #

    “The chief value of money lies in the fact that one lives in a world in which it is overestimated.”
    H. L. Mencken

  3. Max Shields said on March 29th, 2008 at 11:59am #

    “What makes money make money make money make money make money make money make money make money make money….?”
    Henry Miller

  4. D.R. Munro said on March 29th, 2008 at 6:49pm #

    Yes, HP, my thoughts exactly.

    I don’t speak from ignorance, but nevertheless – let the economy crash – I don’t really care! I don’t need much in this world, and large investment banks and multi-national corporations are not part of the something I do need!

    Putting all of your faith and basing your happiness on money will only lead to one thing – severe despair.

    If people were smart they would have enough money under their mattresses to cover things such as: food, shelter, and water. Instead they eat their money and donate it to companies selling plasma televisions, boats, and cars.

    Hey, middle-class, you have nothing to blame but your insane spending habits for your financial hardships.

  5. hp said on March 29th, 2008 at 7:12pm #

    True D. R. There are silver linings and with a little luck and elbow grease a person can do just fine. The finest things in life can’t be bought with diamonds, anyhow.

  6. Don Hawkins said on March 30th, 2008 at 4:41pm #

    Yes I’ll take that box of courage right there and that box of knowledge on the top shelf. How much is that? I’ll pay what you want. It’s not for sale do you know who I am. Everybody has there price. Sorry it’s not for sale.

  7. messianicdruid said on March 30th, 2008 at 5:33pm #

    ” …good news…It’s almost reached game over…

    The biggest lie that ever came out of the FED…Don’t worry children the deflationary dragon is never going to get you because we have a magic weapon that can slay the dragon forever…It also happens to be the most accepted of all the lies that ever came out of the FED…

    And since 2002 when it was told…I have had to put up with zealots…Really it’s a religion now…

    From the point The Germans were told by the City of London to print money to buy GOLD in 1920 until maximum potential gong show was reached was 4 years…and the actual Hyperinflation lasted 14 months…from early 1923 to late 1924…The whole situation comedy imploded into food riots and the German army was machine gunning people in the streets.

    It fueled the roaring 20′s in the USA…It took until 1927 for the German implosion to spread out into the system and hit the USA with the climax the 1929-1933 crash followed by the 1933-1945 bankruptcy reorganization of the now 314 year old global system…The whole global system collapsed…England was dumping grain at sea while the population starved trying to cut supply so that demand could bid up prices and get inflation started again.

    And that was minor compared to the insanity we are headed into.

    The FED is not going to print anything it does not print money…or electronically inflate…It’s consumer requests…and when consumers are maxed out…thats it…The FED is not going to buy all your food to feed you or pay all your bills.

    It’s liquidation time.”

    http://www.hypertiger.blogspot.com

  8. yourname required said on March 30th, 2008 at 5:39pm #

    The Problem:

    This is an attempt to state it simply, because if you understand the problem, then you’re going to see the solution clearly as well. If it doesn’t make sense the first time you read it, try reading it again. Eventually, the whole picture will sink in…

    A quick history of money

    1) Once, gold and silver were considered the only ”real” money, but it was heavy and risky to carry around…

    2) So people paid goldsmiths to store the money, and got paper receipts for it…

    3) After a while, people used the receipts like money, and left the gold in the bank most of the time. So the bankers got clever and came up with a scam…

    4) The banks printed off receipts for more gold than they actually had, and ”loaned” those receipts out to charge interest on it. They kept their fingers crossed, hoping that not more than a few people would come in asking to redeem receipts for real gold at the same time. This let them make a lot of money charging interest, because they could charge interest on MONEY THEY DIDN’T HAVE.

    An analogy can be made using property and titles. Here’s the scam in another way:

    Step 1: Acquire a vacation home.
    Step 2: Sell the title to the home to one person.
    Step 3: Sell the title to the home to ANOTHER person.
    Step 4: Hope both of them don’t show up on the same weekend!

    Fractional reserve banking lets a bank say to a depositor that all his money is safe and sound at the bank, while at the same time they get to loan most of it out to someone else and charge interest on it. So there are two people with a legitimate claim to the same pile of money. So whose is it, really? And where is it?

    This profitable scam runs the risk of discovery when too many customers ask for what is theirs all at the same time. This is called a run on the bank, and the best the banks can do is call in their loans and see how much money they can cough up, which is invariably far less than what people believed they had deposited.

    The story of the vacation home is a good analogy of how banking works today, except for one important thing: there is no home. Because our money is no longer backed by gold, we have all been trading titles to property which does not even exist! Paper backs paper, and all they represent are promises to pay. This is the reality of money, and is quite different from how most of us expect it to be.

    What’s the result?

    1) Loaning money while claiming it is still on deposit increases the money supply, essentially creating more money (otherwise deposits would vanish). In essence, for the bank to have your cake and loan it too, it must create more cake. This increase in money supply is the cause of inflation.

    2) Almost every dollar that exists is owed to a bank somewhere, because at some time in history, it was created when it was loaned out.

    3) The amount of money owed to banks is more than all the money in existence! So we cannot possibly get out of debt under this system. The bulk of this debt is in the form interest, which is an arbitrary amount of money banks demand in return, but never gave.

    4) There is no money, in the real sense. Just checks, data stored on computers, and promises. It is all created by typing on a keyboard, and signing signatures. The only tangible assets in regard to money anymore is the collateral we pledge when we ask for a loan. The money they loan you comes from nowhere, but the assets you lose in foreclosure are real!

    5) Because the US government borrows from the Federal Reserve, bankers have the power to influence our society and government by controlling finance. They decide to create (or not create) money depending on who’s asking, and for what. They choose what projects get funded, and let other needs wither on the vine by starving them of working capital. This subtle yet immense power is more than enough to undermine democracy, and guide the course of a nation’s history.

    So what’s the solution?

    Simple. The public must demand that money must not be created by loaning it into existence. It must be something that is openly and publicly controllable, issuable, accountable, and interest-free. Otherwise, a class of parasites will rise to power in society by cleverly disguising the fact that the money they are creating, spending, and controlling us with is MONEY THAT ISN’T EVEN REAL.

  9. Jeremy Wells said on March 30th, 2008 at 5:45pm #

    For a detailed Marxist analysis of the current economic situation. here are links to a five part presentation (with graphs) from the WSWS World Socialist Web Site.
    http://www.wsws.org (See also the links at right side of the home page.)

    Title:The world crisis of capitalism and the prospects for socialism
    By Nick Beams starting 31 January 2008 and the following 4 days.

    Economic history, graphical analysis and the current state of affairs are presented with much reference to leading economists, publications, government agencies.
    Start on Part one, with links found at the page top to the next part, 5 parts total.

    Part one: “Most economists are now predicting a recession and discussion is centring on how soon it will come and how long it will last.”
    http://www.wsws.org/articles/2008/jan2008/nbe1-j31.shtml

    Part two:
    http://www.wsws.org/articles/2008/feb2008/nbe2-f01.shtml#top

    Part three:
    http://www.wsws.org/articles/2008/feb2008/nbe2-f01.shtml#top

    Part four: (with charts, long term wave analysis)
    http://www.wsws.org/articles/2008/feb2008/nbe2-f01.shtml#top

    Part five:
    http://www.wsws.org/articles/2008/feb2008/nbe5-f05.shtml

  10. Jeremy Wells said on March 30th, 2008 at 5:48pm #

    For a detailed Marxist economic analysis:
    The world crisis of capitalism and the prospects for socialism
    Part one
    By Nick Beams
    31 January 2008
    http://www.wsws.org/articles/2008/jan2008/nbe1-j31.shtml