"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 ->http://en.wikipedia.org/wiki/Business_cycle]
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
->http://en.wikipedia.org/wiki/Information_economy] 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 next week)
***
[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]