(Updated Oct. 7)
Financial systems themselves form a flammable landscape given to cyclical self-immolation, a fact that should come as no surprise to Wall Street and Washington. Wall Street is now littered with a highly combustible, near-invisible kindling called credit default swaps (CDS) – derivatives concocted by men as mad as Nero. And Rome is aflame.
It could be some time before this fire can successfully give birth to a healthy young Phoenix. When it does, the bird will rise from the ashes of the American Empire, as many doomsayers have predicted for years. While our own leaders and regulators danced and fiddled, the fire's foreboding shadows at least caught the attention of wiser men, including Warren Buffett who in 2003 termed CDS, "financial weapons of mass destruction."
According to long-wave cycle theory, severe economic downturns occur roughly every 60 years. Many experts assumed the firewalls constructed after the Great Depression would prevent a similar recurrence; in fact they have served only to delay, perhaps even intensify, the inevitable. Yes, Virginia, it's true: depressions are an inherent aspect of "economic cycles," although many are reluctant to admit it.
One of the most highly regarded theories, and one employed daily by money market technicians who track cycles, was developed by Nickolai Kondratieff (also spelled Kondratiev) and commonly called the "Kondratieff Wave." We can easily find cycles, of course, in astronomy and in nature. We even can find them in the rise and fall of civilizations (e.g. Toynbee and Spengler). And we can chart cycles in the financial markets on Wall Street, Bay Street and in the City of London.
A Kondratieff long-wave theoretically lasts 55 to 60 years. Proponents often subdivide it into 4 quarters, or "seasons." We've been in a Kondratieff Winter a time of runaway deflation since 2000, but its chill became obvious only recently.
Kondratieff devised his theory after the Russian Revolution and published it in 1926 in "Long Waves in Economic Life." A displeased Stalin threw him in the gulag since his premise insisted that capitalism is self-renewing: after winter comes spring, a time of beneficial inflation, according to the theory. Although we may look forward to the next Kondratieff spring around 2012, we must both endure and learn from these years of winter. In many cases, the lessons this winter are the same as those that followed the winter known as the Great Depression – lessons that seemingly were either forgotten or ignored.
In 1918, philosopher and historian Oswald Spengler published a theory on organic cycles in which civilizations purportedly rise and fall over a 2,000-year period. Our Western Civilization, nicknamed "Faustian Soul" by Spengler, was Classical (Greco-Roman) Civilization's Phoenix; the new Rome (us) rose from the ashes of the former Roman Empire. Spengler published this theory of cycles in his seminal work, "The Decline of the West."
Buffett himself sounded a Faustian note in 2003 when, during a BBC interview, he compared financial derivatives to hell: "Easy to enter and almost impossible to exit." Every day we seem to stumble upon new information about the $62-trillion CDS market.
For example, testifying before Henry Waxman's (D-Calif.) House Oversight committee, Eric Dinallo, the superintendent of the New York State Insurance Department noted that 90 percent of the credit default market is made up of what's known as a "naked" CDS, which is similar to naked shorting of a stock. And it's entirely unregulated. "The dollar value of the naked CDS market, Dinallo testified, accounts for more than the entire annual economic output of all the world's nations," according to an article in the Washington Post written by Frank Ahrens.
Will a $700-billion bailout of financial markets enable such an exit from hell, or only add to our hellish woes? Is it meaningful when the end of a Kondratieff Wave coincides with that of a Spenglerian Cycle? Perhaps such profound answers call for a prophet in sackcloth.
Spengler predicted that, in the final analysis, politics would destroy the money world. We may be witnessing the fulfillment of that prophecy in these days.