Ghost of Kondratieff haunts world economic system

Implications: A Reuters report in the July 7 issue of the International Herald Tribune noted that the government of South Korea has initiated a plan to restrict the use of vehicles owned by public organizations. The move is part of a contingency plan to combat high transportation fuel costs. Prime Minister Han Seung Soo, in a televised media conference added that further restrictions could follow. South Korea is the fifth largest crude oil consumer and relies heavily on manufacturing to keep its place as the fourth largest economy in Asia. Almost all of its energy is imported. The nation expects to spend $111.2 billion on crude oil this year, up from $60.3 last year. The finance Ministry cut economic growth prediction to a three year low of 4.7%. If prices continue to rise, the growth rate will slow further. The announced conservation measures will reduce consumption by 6.6% in the public sector. Only if supply is restricted will the government impose restrictions on the private sector.

Analysis:  Business conditions in the U.S. are at or near recession stage. Gasoline consumption has declined from earlier in the year. The automobile business is in distress. Exxon Mobil announced that it will sell several hundred gasoline service stations. Many credit markets are moribund. In Europe less severe but similar conditions prevail, particularly in Ireland, the United Kingdom and Spain. Strikes and civil unrest related to high diesel prices continue. The European Central Bank’s determination to contain inflation is under attack by political leaders. The complaint is that high interest rates retard borrowing and by extension, new business opportunities. Immigration policies of the European Union are under scrutiny as the tide of starving African continues unabated. Who will feed them and at what cost? Will government functionaries pay these bills out of their own pockets? Now South Korea will deliberately reduce economic activity to save money. In recent weeks, some Asian nations have reduced energy subsidies. In June, China raised prices of both diesel and gasoline. Qatar has placed a moratorium on further development of liquefied natural gas (LNG) projects pending results of technical studies, a move that could reduce future supplies. As these events unfold, environmentalists clamor for world’s functionaries to institute a carbon tax. Their success or lack of it will place an additional burden on consumers. Disposable income will shrink. Fewer goods will be manufactured. Fewer ships will be needed to bring products to shrinking markets. People will do without. Once the momentum builds to certain levels, governments everywhere will confidently impose rationing on panic-stricken citizens. Chicken Little will be all aflutter. While this takes place, the international oil and gas industry will strive to meet a demand that is in retreat. Once supply/demand equilibrium is reached, possibly in three years, investment in new sources of supply will fall. This is the sixth time in the last 225 years that a long-term cycle of rising commodity prices has occurred. The first was in the 1790s, the second in the early 1850s, the third in the late 1890s, the fourth in the late 1930s and the fifth in the late 1970s. These long-length price trends were identified by the obscure Russian economist, Professor Nicolai D. Kondratieff. He reported his study of them in “Die Langen wellen der Konjunktur” (The Long Waves in Economic Life) in 1926. The first English translation appeared in November, 1935 in the Review of Economic Statistics. At the time it was sensational. His studies covered epochs when transportation and communication was slow and many currencies were linked by gold. In today’s fast-moving economy, the swing will be sharper and possibly more damaging before the pendulum begins to reverse but long enough to destroy weak “democratic” governments. Kondratieff was condemned in the 1930s, arrested and exiled into a Stalinist concentration camp in Siberia where he disappeared without a trace. But his shade is back.