-- Posted Wednesday, 17 May 2006 | Digg This Article
"Record oil and metals prices increase inflation concerns" was the headline in a May 15 Financial Times article that summarized the number one economic worry today. With inflation becoming an even bigger concern than normal, it’s time to examine the options faced by the nation’s financial controllers to tame this unruly beast in the months ahead. In light of recent indications, it will come as no great surprise that one of these options is an escalation of warfare in the Middle East. We’ll look at how likely this scenario is and how it would be used to subdue inflationary pressures.
To understand what is happening now it is necessary to look back at the past to see how similar times compare to today. The cycle of inflation and deflation can only be properly viewed within the context of the 60-year long wave, or K-wave, cycle. This is the cycle that essentially determines the long-term trends in our nation’s economy and financial system. Yet it also determines at which times major wars are likely to be fought among nations. An overly simplified K-wave/60-year cycle might look like this: inflation-deflation-inflation-deflation. Some analysts have further dissected the K-wave by recognizing sub-components of the two main aspects of the cycle (namely inflation and deflation). These sub-sections are labeled as follows: Early inflation (Spring), followed by late runaway inflation (Summer), which in turn gives way to early deflation (Fall), which gives way to late runaway deflation (Winter).
The above labeling used to describe the basic parts of the K-wave are apt, but a more detailed breakdown of the 60-year cycle is even more instructive. After the start of the K-wave, the 60-year cycle can be broken down into the following components:
* Fifteen 4-year cycles
* Seven-and-a-half 8-year cycles
* Six 10-year cycles
* Five 12-year cycles
* Three 20-year cycles
* Two 30-year cycles
The above cyclic composition follows the cycle progression of the Kress 120-year/60-year cycle as well as Kondratief’s conception of the 60-year cycle.
At both extremities of the 60-year K-wave it is not unusual to see wars initiated by governments (and their corporate and banking sector allies) for the purpose of reversing the negative effects of the K-wave. During the final runaway portion of K-wave inflation, for instance, wars are often started to cool off the hyper-inflationary aspects of the economy, namely high commodity prices. This is accomplished by funneling resources into the commodity-consuming and extremely wasteful engines of war. Sometimes it even serves a government’s interests to lay waste to "human resources" for economic reasons, as we’ve seen in the long history of warfare. (This aspect of war and the K-wave we leave off to another commentary).
The U.S. Civil War of the 1860s took place during the late runaway inflation part of the K-wave, while the Spanish American War occurred at the tail end of the depression of the 1890s (which witnessed the end of the previous 60-year/120-year cycle and the birth of a new one).
Incidentally, it has long been known by our nation’s leaders that war is primarily a tool for achieving economic gain and not, as in the days of old, for territorial gains. Senator John M. Thurston of Nebraska made this infamous statement just before the Spanish American War: "War with Spain would increase the business and earnings of every American railroad, it would increase the output of every American factory, it would stimulate every branch of industry and domestic commerce."
More recently, to end the 2000-2003 bear market and recession it was deemed necessary for the U.S. to invade Afghanistan and Iraq. Although these actions were successful in lifting the U.S. from its financial malaise, it also had the spinoff effect of escalating commodities prices, particularly the above mentioned metals and petroleum prices. This leads us to the conundrum of how the current inflationary environment will be addressed by the financial controllers. Specifically, will it require a further escalation of military activities (war with Iran?) Or will it require a respite in military activities for a while and a corresponding slowdown in money creation to temporarily cool off commodities prices? The coming 3-4 months will reveal the answer, for the 8-year cycle is due to begin its final hard bottoming phase in June through August or September. The 8-year cycle, which is a component of the K-wave as mentioned above, is another aspect we’ll discuss momentarily. But first...
A long-term graph showing the level of English commodity prices back to 1782 shows that major wars were fomented at major peaks in commodity price inflation. Wars have also been historically started at major bottoms of commodity price deflation. Examples would include the Napoleonic Wars of the early 1800s, which coincided with a peak in the English commodity price level that was unsurpassed for over 100 years. The long-term collapse in commodity prices that followed bottomed out between 1850-1865 when the Crimean War and the U.S. Civil War took place. A similar secondary bottom in the commodity price level (at lower lows) ended with the Boer War and Russo-Japanese War as well as the Spanish-American War.
Rising interest rates are another product of inflation. As former Senator Theodore Burton and G.C. Selden state in their 1919 book, A Century of Prices, "Bond yields must rise (and bond prices fall) with any prolonged advance in commodity prices." Concerning the connection between interest rates/commodity prices and wars the authors make the following observation: "It will be seen from these [trends] that every war which had a direct and important effect upon business conditions in England was preceded or accompanied by a rise in commodity prices and a [rise in interest rates], and that after every such war...commodity prices fell and [interest rates fell]."
The authors further pointed out what is now generally regarded as a truism, namely, that whenever the interest rate exceeds 6%, especially when coming off a level considerably under that level, it is nearly always followed by a serious bear market in stock prices as well as economic recession. With the current interest rate now above 5% and in a rising trend, now is the time the financial controllers will look to begin staving off higher rates and its ill effects (especially to the all-important housing market).
This brings us back to the question, will war be necessary to cool off the inflation trend...or will withdrawal and inactivity (including in the realm of money creation) be deemed the appropriate course to take away some of the froth from the commodities markets?
Looking back at commodities price history in relation to the 60-year cycle and its sub-components reveals some interesting clues. It would appear that within this cyclic structure the 12-year cycle bottom is the one used most often to foment wars for the purpose of ending deflationary or recessionary economic conditions. The most recent 12-year cycle bottomed in 2002 and with it ended the prevailing bear market of that time. It saw the early stages of America’s long-term "war on terrorism" military effort. The 12-year cycle bottom of 1942 witnessed the entry of the U.S. into World War 2, and the 12-year cycle bottom of 1918 saw the recent entry of the U.S. in World War I to name just a few examples.
The cycle that is now closest to bottoming is the 8-year cycle as previously mentioned. Looking back at history reveals that the 8-year cycle bottom, when it bottoms alone, is not typically accompanied by military aggression. When the 8-year cycle bottoms simultaneously with the 12-year cycle (as it did in 1942, 1918, and 1862) wars are common but this is mainly a function of the 12-year cycle. The year 1950 was the exception to this as the U.S. entered the Korean War at that particular 8-year cycle bottom.
The 8-year cycle, as we’ve discussed in previous commentaries, is known for bringing down high stock and commodities prices and to some extent real estate prices. The prevailing monetary and economic conditions of the time determines whether the pullback is moderate or severe (with the most recent 8-year cycle bottom in 1998 on the severe side). Given the current state of the economy the financial controllers may simply let nature take its course and allow the 8-year cycle by itself to take some of the froth out of high commodities prices this summer. Yet if this proves to be insufficient it wouldn’t be surprising to see the dogs of war once again unleashed shortly after the cycle bottoms.
Clif Droke is the editor of the daily Durban Deep/XAU Report, a technical forecast and analysis of several leading gold and silver stocks, including DRDGold and the QQQ available at www.clifdroke.com. He is also the author of numerous financial books, including "Gold Stock Almanac 2006."
-- Posted Wednesday, 17 May 2006 | Digg This Article
