Tuan said:
NALs: I thought the last Kondratev cycle ended in 1990 which would put is halfway into a 25 year expansion?
Oh no, we are still on the cycle that was initiated in the late 1940s/early 1950s. Each cycle lasts +/- 50 years.
The way the cycle works is it starts with a trough, its a time when national savings are increasing. Following that period comes a time when the savings are invested into various economic activities and this causes the cycle to get its upstart. Such investments continue with an ever increasing dependence on debts to finance more investment opportunities as people begin to feel more confident in the upswing in the economy in general. Following that is a minor trough where economic activity halts and a mini-crisis follows. There is some debate if the oil crisis of the 1970s or the economic problems in the 1980s was this expected trough.
After the relatively quick downturn, the economy picks up again but this time its on pure debts as national savings fall considerably and consumption and spending increases along with debt levels. This causes a boom in the economy (ie. the roaring 1990s).
The following is what causes the most debate because it does not happens until it happens. In other words, the only way to know when the bust occurs is after it occurs, but speculation based on past experiences and the general accuracy of the Kontratiev Long wave theory suggest that in 2001 there was suppose to be a bust.
The only thing that occured in 2001 was the terrorist attacks in New York City and Washington DC which dampened the economic picture, which was already weak with the burst of the technology stock bubble a year before.
The main question now is why has the economy not tanked as it was expected?
The answer varies, depending to who you talk to. However, there seems to be a growing concensus that the reason why the boom did not busted as severe as expected was due to US government diligence in maintaining the economy flowing the best it could with the tax cuts and unscrupulous borrowing.
Thus, the US economy (and consequently the global economy) has been running on an ever increasing debt load since 2001. If it was not for such debt, the murky economic picture we are experiencing right now would have been much worst.
As long as the dominant economic centers of the world (mostly US and the Eurozone) don't overextend themselves, this economic "murkyness" can be maintained via borrowing until the next business cycle takes off.
The problem came earlier this year (around April) when the Capitol Hill had an emergency session on a Sunday to agree on increasing the "credit line" of the United States. Why? Because if that was not done at that particular time (thus the emergency), the US government would have defaulted on its Treasury Bills obligations.
A default on any government securities, particularly from the US government which is the only government to have never defaulted on its loans, would spell catastrophe to the global economy because it will shook off the confidence the world has on the US dollar as a hard currency. If the confidence is eroded, something of a panic follows.
Some say the existence of the Euro would balance a collapse of the dollar, while there may be some truth to that, I am not too convince that there is enough confidence in the Euro to replace the Dollar in the case of an economic catastrophic event as a default on the part of the US government on its securities.
Also, keep in mind that beginning this year the US is beginning its heavy duty increase of retirees as the baby boomers move into the "golden years". In fact, the fastest growing segment of the US population are people over the age of 80 (shocking!). It would be interesting to see how everything works out, given the increasing demands retirees impose on government programs such as Social Security and the lower contributions from the younger generations due to lower numbers of people in the younger generations themselves.
Add to this the increasing debt load... the only option will be massive increases in taxes in the future, perhaps in the near future.
Will they younger generations be willing to accept those higher taxes to finance a debt their parents and grandparents built in order to live the "good life"? Perhaps, then again, humans do have a habit of reacting in very irrational manners.
To conclude, until its evidently clear that the new business cycle has begun (and there are no indication this is the case) there will always be some sort of caution towards the possibility of a downward spiral. Of course, as with everything in life, in order for something to occur the conditions to allow such thing must be in place. The problem is that conditions are beginning to fall in place to create an economic downfall. Afterall, the only reason the US is able to borrow its way into relative economic stability right now is because the rest of the world has an extraordinarily high savings rate which is balancing the negative savings rate of the US. In other words, the rest of the world trust the US government in honoring its debt obligations and for that reason the rest of the world lends whatever amount the US wants to borrow. That is until a default occurs and that is where the problem lies as I explained above.
-NALs