Sunday, March 30, 2008
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)
[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]
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.
See
graph Economic Cycles.
(To be continued next week)
Rodrigue Tremblay is professor emeritus of economics at the University
of Montreal and can be reached at rodrigue.tremblay@yahoo.com
He is the author of the book 'The
New American Empire'
Visit his blog site at: www.thenewamericanempire.com/blog.
Author's Website: www.thenewamericanempire.com/
Check Dr. Tremblay's coming book "The Code for Global Ethics" at: www.TheCodeForGlobalEthics.com/
Posted, Sunday, March 30, 2008, at 5:30 am
Email to a friend:
http://www.TheNewAmericanEmpire.com/tremblay=1083
Send
contact, comments or commercial reproduction requests (in English or in French)
to:
N.B.: Messages may be published in our weblog, unless you request
otherwise.
Please register to receive free emails on new postings of
articles.
Send
an email with the word "subscribe" to: bigpictureworld@yahoo.com
To
"unsubscribe", write the word "unsubscribe" and send it to:
bigpictureworld@yahoo.com
The above is presented for educational purposes only.
(Home: TheNewAmericanEmpire.com)
© 2008 by Big Picture
World Syndicate, Inc.