The Great Reflation: How Investors Can Profit from the New World of Money

Chapter 3. The Long Wave in the Economy

Man must accept motion.

—Lao-tzu^[19]

Investors and economists have long been fascinated by research purporting to show that there are cycles in industrial economies that evolve over a period of roughly 50 to 60 years. Our particular interest in the long wave is twofold. First, it provides an additional, useful perspective on the private-sector credit inflation of 1982 to 2007. Second, it will continue to provide important insights as to how effective the Great Reflation will be in the evolution of the postcrash economy and financial markets.

It appears that the United States entered a long wave downturn after 1972–1973, but the wave was interrupted from its natural course by the credit and asset bubble that formed after 1982. The bubble artificially inflated certain industries, resulting in an unsustainable boom in income and investment. Now that the bubble has burst, the long wave downturn has resumed and income and capital investment are falling again. The decline, unfortunately, may have several years to run. The Great Reflation is needed not only to mitigate the damaging effects of the crash and credit deleveraging, but also to dampen the deflationary effects coming from the long wave. Much of this chapter looks at the connection between the debt supercycle discussed in the preceding chapter and the long wave.

Economies and financial markets have a lot of moving parts, and they are all connected to each other. This is basic to Taoist philosophy. ...