Economic Cycles

Economic cycles are back in the headlines as the Coronavirus directly destroys the economies of the counties whose actions are effected while even those that are only receiving peripheral interference are also counting the cost.

When the topic of economic or as they are sometimes called ‘business cycles’ are mentioned, our first mental recall is the outstanding academic, the Russian Nikolai Kondratiev (Kondratieff) (1892-1938) who at his zenith was the world’s authority.  His theory was that the cycles moved in the fifty-year patterns.  This did not produce a problem for him, until the forecast that Western Capitalism was on a positive upswing.  This was a most unfortunate coincidence as Stalin was predicting that capitalism was collapsing.

The tragic outcome for Kondratieff was that he was sent to prison for eight years after returning from a trip to America.  On 17th September 1938 he was taken to the Kommunarka shooting ground, Moscow and executed by firing squad.

In 1987 as the policies changed in Russia, Kondratieff was officially reinstated for his outstanding work.

Although not linked is the Mayan civilisation of the Mexican Gulf and Northern Central America, that built their pyramidal structures at Chichén Itzá from 1800 BC.  The Mayan belief was that their society performed in fifty-two year cycles.

Linked to the work of Kondratieff is another world class economist, the Austrian Joseph Schumpeter (1883-1950) who after becoming an American citizen was Professor of Economics at Harvard University.

Amongst his extensive range of ideas, Schumpeter believed in economics including our existing businesses being destroyed by ‘creative destruction’ as entrepreneurs were challenged into producing a better, replacement productor to revise existing procedures of management methods.

Also Peter Drucker, who had known Schumpeter since he was a teenager in Vienna recorded as they had continued their acquaintance in America that “Readers familiar with the works of Joseph A Schumpeter will recognised without special reference how much the author owes to this most fruitful of modern economists.” – The Practice of Management (1954).

Later Drucker reflected that Schumpeter laboured mightily to determine when business cycles would occur and had to eventually conclude that they could only be determined after the event.

Against this background we can reflect on occurrences within living memory.

On 22nd October 1987 there was the biggest stock market crash in history – Black Monday – when the Dow Jones Index fell 22.6% and stock markets around the world watched with the London Stock Exchange closing at 12:30pm through staff shortages.

  • The drama had begun the previous week when the British Met Office had forecast passive weather. On the night of 15th/16th October beginning in the Bay of Biscay and it spread north through France and The Channel Islands across the English Channel into England with Kent and South East England becoming the epicentre.

 

  • What was described as a one in two-hundred-year event for this area of the UK but not for the North of Scotland a Force 11 hurricane – winds reached 220Km/h – 137mph. Electricity was cut-off, roads and railways were closed as fifteen million trees were felled resulting in Two Billion Pound in insurance claims.

 

  • In the middle of all this I begun my first connected encounter a couple of months before with one of the leading stock brokers, Quilter Goodison, whose leader was chairman of the London Stock Exchange as I negotiated to sell my first business. The outcome was a major share price collapsed often reflecting true asset value as inflation reached 27% with government bonds yielding 15%

 

  • The next major event in the cycles is the 2007/8 Financial Crisis centre from America as people failed to pay their mortgage resulting in house prices falling lower than in the Great Depression of 1929.

 

Now, where are we today?  As the Coronavirus of 2019 cycle effect is only beginning?  This is a story that we all know has a long way to run.

 

Questioned is how does it fit into Economic Cycles:

 

1920-1939     The Great Crash                  0

1987               Black Monday                       38 years

2007/8            Financial Crisis                    21 years

2019               Coronavirus                          11 years

 

Which goes to prove Schumpeter was correct; that cycles cannot be timed or forecast!

Peter Starbuck

27th April 2020