The Cycles of Economic Life
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 30 October
2008, 7.50 am and 7.20 pm)
Poor Alan Greenspan, the former Chairman of the US
Federal Reserve. When he retired in January 2006, many people
saw him as the greatest central banker ever.
In his last appearance as Fed Chairman before the US
Congress in November 2005, a senator praised him, saying: “You
have guided monetary policy through stock market crashes, wars,
terrorist attacks and natural disasters. You have made a great
contribution to the prosperity of the US and the nation is in
Last week, three years after he was lionized like
this, Greenspan must have wondered whether he was in a
nightmare. In an appearance before a Congressional committee,
Greenspan was questioned very harshly by the
Instead of treating him like a demi-god, which they
used to when their stockholdings had higher values, the
lawmakers interrupted Greenspan’s answers. They sarcastically
quoted his own words from years ago, and forced him to admit
that his policies had worsened the current financial
In the face of the lawmakers’ attacks, Greenspan
conceded that he made the mistake of believing that free
markets could regulate themselves without government
Greenspan said that he was in a “state of shocked
disbelief” because his 40 years of experience made him believe
that free markets worked exceptionally well.
Forty years is a life cycle for any man. But for an
economic historian, 40 years is short. In 1925, Russian
economist Nikolai Kondratieff (1892-1938) published a book
outlining grand economic cycles that range from 40 to 60
These Kondratieff cycles alternate between periods of high
growth and periods of low growth. During high-growth periods,
prices rise and interest rates are low. During low-growth
periods, prices fall and interest rates are high.
Of course, not everyone believes in such economic
cycles. They say that looking for such cycles in a mass of
statistics is no different from looking for objects in the
formation of the clouds above us. Even among believers, there
is no agreement on the starting and the ending dates of these
Despite the disagreement, the more popular version of
Kondratieff Cycles used nowadays are the ones proposed by the
three economists - Schumpeter, Freeman, and Perez. According to
their model, there have been five Kondratief Cycles since the
Industrial Revolution in 1771.
This means that we are now at the mid-point of the
Fifth Kondratieff Cycle which began in 1971. Unfortunately, the
mid-points of Kondratieff Cycles tend to be the low-growth
years. If we go back to the middle of the Fourth Kondratieff
Cycle, it would bring us roughly back to the Great Depression
of the 1930s.
So the bad news is, according to Kondratieff Cycles,
the global economy will now have to go through a low-growth
period before the sun shines again. How bad the low-growth
period will be normally depends on how good the high-growth
period was. Since our recent high-growth period was very good,
perhaps we must expect the forthcoming low-growth period to be
If Alan Greenspan could have lived through a few
Kondratieff Cycles, he would not have rejected his belief in
the free markets last week. This is because the booms and the
busts will happen no matter what government policies, with
their checks and balances, are introduced.
How is that possible, you ask? Well, I suppose it’s
just like car accidents. Despite the many safety features
installed in modern cars, the proportion of drivers killed has
not really come down.
And that’s because car manufacturers have put in more
powerful engines, and drivers are taking even bigger risks on
the roads, thinking that the safety features installed in their
cars would save them.
In the end, car drivers will continue to kill
themselves, just as speculators will continue to destroy the
markets somewhere in the economic cycle.
Talking about grand economic cycles, this is the final
program of Money Talks for this current cycle. Thank you for
tuning in. We should be back next year.