Saturday, July 19, 2008


Well Friends, though I didn't get a lot of queries to continue the previous post, I will still do that.

So. I was there pondering over how could Kondratieff be wrong? Why didn't the new downward cycle start at all?

To recollect facts, there was sure a start of downtrend in economy in 1990. In the month of June, 1990 a recession started in USA but it ended early next year - 1991. That is official. The recession was mild in nature and there was not big damage - again official. But not all agree with that.

Some well known economists say the recession was far too greater in magnitude than told officially. Dr. Ravi Batra, a renowned economist explains it like this on his website - "The truth is that the slump of 1990, though not a full fledged depression of the type in the 1930s, was much more serious than revealed by official figures on output. The public said so at the ballot box and threw a once untouchable president out of office."

Harvard Professor Galbraith called it a recession cum depression

Economist David Levy said it was a "contained depression."

Lawrence Hunter, deputy chief economist for the US chamber of commerce, dubbed it as a "never-ending recession."

Peter Peterson, Commerce Secretary in the 1970s, called it a "middle class meltdown," and Wallace Peterson, a distinguished professor at the University of Nebraska, titled it the silent depression.

Even Massachusetts Senator Ted Kennedy, not a critic of Bill Clinton, described it as "quiet depression" as late as 1996.

The above quotes have been sourced from Dr. Ravi Batra's website which you can find at

So, the worldwide impression is - the US brushed aside the recession and in fact prospered in the 1990s. That is true if we see it partially, but the fact is different.

In 1990, there was a crisis in Japan also. The Japanese Stock Market crashed in the start of 1990 which led to start of interest rate cuts there. The rate cuts should have started helping the slowing Japanese economy but it did not do that. What happened in fact was that this rate cut led to flow of money to the US, which was in need for it. The US current account deficit was growing leading to a host of countries having a big reserve of US Dollar. While the US economy should have gone down with the slowdown / recession, the inflow of foreign funds turned it completely and the trade deficit turned out to be a blessing for it!!! Japan continued slowing, the dollar reserves of some countries kept growing and US had a boom!!! Then there was the Asian crisis in late 1990s, which affected US more positively as falling interest rates led to the well famous (now infamous) Housing Boom. A housing boom creates demand for many other things and economy experiences the best boom times.

So, what could have been the start of a big bust, actually went on to grow into a big boom, increasing prosperity that also spread worldwide later.

Anybody who has the very basic knowledge of economics, should know how money is created in today's world, but only few think about it. Its just a virtual money which is created by debt!!! To put it in very simple words, there was time when new money could be created when there was a reserve against it - like gold, but that's not the case now. All over the world, the practice is that Central Banks keep a FRACTION of reserve of the "money to be lent" by Banks. This fraction averages about 10:1. This means for lending 10 units of currency, the Bank needs to keep only 1 unit in the Central Bank. This simply means 90% of pure virtual money out of thin air !!! This practice had been doing well so far as the new money created was financing new economy, but, now the time has come when there are chances that this very practice is going to lead to the biggest bust in the history of human beings economic growth. Please visit this website for a thorough information on Money As Debt You can also watch the video here which is very nicely compiled and very informative. I bet all your queries regarding money creation will be solved !!!

Now, coming the question again - was Kondrateiff right? I think he was right and once again we are just sitting on an unstable rock put on a high cliff. We have only managed to POSTPONE it so far, but we can't do it forever.

Dear Friends, I want your comments - good or bad all. So please post your valuable comments.



  1. hi
    only one word ......... marvelous.

  2. I am not sure whether you've studied electronics, but I assume you know amplifiers.

    What you described in last para... just amplify it with Derivatives on debt/mortgages with leverages sometimes as high as 25:1.

    It doesn't matter, till it does!!! :-) Good work keep it up!!!

  3. hi abhijit,
    thanks buddy, I actually missed it but you have done a really good work, by reminding the "25 times thing".

    pls keep visiting and commenting...


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