The Great Depression Ahead isn’t simplistic enough to say that everything goes in cycles. It does, however, suggest that the long-term economic cycles give you the best chance of long-term economic predictions.
The author, Harry S. Dent, Jr., has been tracking economic cycles for half a lifetime, and has more to say about them than you would expect from a book with a sensationalist business-cycle title. Such a book might refer just to the well-known demographic cycle, which has been widely expected to drag down the U.S. economy, the stock market, and Social Security over the next decade. The demographic cycle is big, with no clear solution at hand, but that is not the reason Dent is calling for a depression starting in 2010.
It turns out that there are several cycles due to decline between 2009 and 2012, including most of the same cycles that ushered in the Great Depression 81 years before. A return of the Great Depression? That is essentially what Dent expects.
Here is a quick look at three of the cycles Dent is looking at:
- The 40-year Demographic Cycle, which finds different numbers of people in different age groups. This is important because people of different ages have different tendencies. Most notably, those between 20 and 70 years of age are far more likely to work than those who are younger or older.
- The 4-year Presidential Cycle, which finds different political priorities for the economy after a presidential election than are there before the election.
- The 29-year Commodity Cycle, a recurring boom-and-bust pattern in basic materials.
Can you really predict economic trends years in advance? Yes and no. Yes, because long-wave patterns of economic activity are easy enough to spot in the historical record, whether you are looking at the 1800s or 2008. No, for a reason I alluded to last week: the hand is quicker than the eye. That is, people who take action (presumably using their hands) can change their personal economies around in a matter of months, faster than anyone who is following long-wave economic cycles can observe. If everyone took intentional action, the long-term patterns wouldn’t determine what happens to the economy.
Yet it is safe to say that people are, in general, not responding effectively to the larger economic trends. Most businesses plan next year based on what has happened in the last two years, with scarcely any awareness of the forces that could disturb the two-year trend line they are trying to follow (or trying not to follow). You don’t need to look any farther than yesterday’s housing construction report to see this in action. Housing construction continues at half the level of a year ago, despite the bursting housing bubble and projections that say that, even if no more buildings were built, the United States is likely to have an excess of 20 to 30 million housing units by 2020. Both the collapsing bubble and the long-term trend say that anyone who builds a house now, or pays to have one built, faces an almost certain significant loss in value even before the construction is complete. Yet the construction continues. Starbucks, General Motors, and Circuit City are current examples of companies that got themselves into trouble by looking only at short-term linear trends. The two-year trend line told them to continue to expand at a time when their market was already more than saturated. Most households, sad to say, base their spending decisions on how much money is left in the bank at the end of the month. Their decisions fully incorporate only about seven weeks of experience. There aren’t many people actively trying to position themselves ahead of the trends. And that’s why the long-wave economic cycles can repeat so regularly.
I still believe a depression can be avoided, but so far, the people making the big decisions, the government policymakers and large businesses, aren’t doing anything to help. They continue to act as if the larger trends in the current economic picture aren’t there at all. If we follow their lead, while they continue not to show leadership, all we can do is follow the long-term patterns as they spiral down into another Great Depression.