On what basis, then, do the Kondratieffites presume to bracket 1940 with 1896 and 1849 and 1789 as the terrible years of Kondratieff troughs? Really, on one and only one ground: each of these years was a trough point for the index of wholesale prices. All the other alleged confirmations of the Kondratieff troughs were simply of prices, or else of monetary phenomena reflected in prices.
-- Rothbard
Three long data series are shown on Graph #1: Robert Shiller's interest rate (in black), my debt-per-dollar (in red), and a 5-year moving average of the "real" interest rate (in blue). The blue is the one that makes the graph look crazy with all its ups and downs, despite being averaged. The black line shows the three peaks that I identify as three longwave peaks. The red DPD starts later, and shows only two peaks.
The red is composed of two separate lines actually, because I have two mis-matched sources for debt numbers: Historical Statistics (1916-1970) and FRED (1959-2010). (You can see the same mis-match in Krugman.) Also, the red one is scaled down by half to bring it near the black and blue, for comparison.
| Graph #1 |
The blue (real interest) line trends downward from the first black peak (1873) to the first black trough (1900). Black and blue then move upward together (if we ignore the exogenous "V" around the time of the First World War). Then black peaks (1921) and starts to fall, while blue continues to rise. Blue finally peaks with red (1931, 1933), then together these fall. (I second-thought this late peak, below)
Everything reaches a bottom together around 1946, then all begin to move upward.
Similar to the exogenous "V" of the First World War is an exogenous blue "U" from 1939 to 1951, bottoming in '46 and quite evidently related to the Second World War.
I think I see a third (exogenous?) anomaly from the mid-1960s to the early 1980s, caused by the high inflation of that period. If that is the case, I think the natural trend of the blue line would follow the red line from say 1962 to 1982.
After the black and blue peaks (1982, 1984), both interest rate lines trend downward -- just as they did from 1873 to 1900. But not as they did after the second black peak in 1921.
Now I am wondering about the blue peak at 1931. In 1928 the blue line is still on the downward path of 1923-1937. After 1937, war created an anomalous low. Perhaps after 1928, Depression created an anomalous high?
Yes, that makes sense: the blue line differs from the black by the rate of inflation. Three high periods of inflation -- WWI, WWII, and the seventies -- created three anomalous lows. And the one period of extreme deflation -- the Great Depression -- created an anomalous high.
If that is the case, and if we ignore the anomalies, perhaps there is a natural downward trend from 1923 to perhaps the mid-1940s. This would correspond to the earlier decline pattern (following 1873) and to the later decline pattern (following 1982).
I know, there is a lot of "if" in this analysis.
Treating the blue peak at 1931 as an inflation-related anomaly (rather than as trend), we are left with a blue line that runs up and down in a pattern much like the black: real and nominal interest rates moving together, except for episodes of high inflation or high deflation. Makes sense, I think.
Granted, there are almost as many anomaly years as normal-trend years.
The period between the peaking of interest rates and the peaking of debt-per-dollar is a period of financial euphoria.
There is a lot of "if" in the above analysis. Does that weaken my case?
Perhaps. But I think it weaken it less to say (as I say) that these unique events disturb the pattern, than it does to say (as Rothbard says) that these events create the pattern.
I agree with Rothbard that government actions sometimes create disturbances. When I look at my graphs, I can see those disturbances. But I also see a natural wavelike pattern only temporarily disturbed. And after each disturbance I see rapid return to the wavelike pattern. The First World War, for example, created a sharp drop in real interest rates. But after the war, the real interest rate trend returned to the pattern it showed before the war!
The disturbance in every case is a price disturbance.
The natural pattern itself arises from the accumulation of financial cost and the accumulation of financial wealth. These accumulations are monetary phenomena: imbalances, sometimes so severe that they topple governments.
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