(be forewarned, this is a long post)
Economic growth and the excitation of ‘animal spirits’ can only occur in a supply constrained environment.
What the supply/demand balance looks like through the seasons of Kondratiev:
Spring comes when there is insufficient supply to meet effective demand and is signified by a burst of investment
Summer is the maturing of that balance, where supply begins to match demand.
Autumn is when supply begins to exceed demand.
- In response, credit creation is used to supplant demand, causing it to once again exceed supply.
- This new supply or capacity is based on credit growth and is therefore unsustainable excess capacity.
Winter is when the debt created during autumn can no longer be serviced.
- Excess supply can no longer be remedied by new credit. Conflict over scarce demand in preordained.
- Countries begin “demand scavenging” though currency devaluation, tariffs, etc.
- Corporations begin buying other businesses to acquire their “demand slice”
Two simplified examples of the seasons:
During WWII, spring was created by two crucial, simultaneous events.
First, there was the destruction of capacity (reduction in supply).
Second, there was forced savings (rationing, overseas soldiers unable to spend, etc).
2002-2010 was autumn. The first stage was the Great Easing of 2002, where the supply of credit was ramped up allowing demand to exceed supply once again, creating a “mini spring.” The second phase was the 2008 fiscal/monetary easing, which was much more dramatic than the 2002 easing and yet failed to create a new mini spring. Autumn it seems, can be extended only so far.
So, how can we hit the Kondratiev reset button ?
I only see one.
Supply must once again be reduced to levels below that of demand.
Debt must be liquidated to allow for the creation of additional effective demand.
Supply must be brought down by a reduction in capacity. Bankruptcy will only move productive assets from the insolvent to the solvent. Therefore, a percentage of the worlds productive base will need to be eliminated. When some of the capacity is eliminated and new demand is freed up by debt liquidation, rational actors will see the unfilled demand and invest/build/hire, thus setting off a new spring.
That might sound like extreme medicine but the excess capacity created during autumn is simply unsustainable. Hopefully, this iteration of ‘hitting the Kondratiev reset button’ will not include the use of war.
Keynesianism cannot work because:
- it does not account for the demand destroying overhang of debt.
- it cannot make up for the dramatic reduction in demand that accompanies winter’s credit contraction.
Capitalist growth requires that private, rational actors be inspired to invest/build/hire. For that to happen in the long term, demand must exceed supply. We are a long way off from that now…