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This year witnessed the bottom of one of several
components of the 120-year cycle of inflation and deflation. The cycle
to which IÂm referring is the 24-year cycle.
Of particular relevance is that this cycle answers to the cycle of war.
Since 1894 when the previous 120-year Grand Super Cycle
bottomed and a new one began, there have been four military conflagrations at
each subsequent bottom of the 24-year cycle. Most of these wars have
been major in scope. The first such instance of war occurred in the
years leading up to 1918, which saw the first 24-year cycle bottom of the
current 120-year cycle. The 24-year cycle that bottomed that year saw
the ending to the First World War. Remembering that the final Âhard down phase of the 24-year cycle
approximates to almost two-and-a-half years, this represented roughly the
second half of that major war, a war that involved the United States.
The next 24-year cycle bottom occurred in 1942.
This year represented the United States entry into
the Second World War against Japan and the Axis Powers. Both the 1918
and the 1942 cycle bottom years proved vicious in terms of military conflicts
on the global scale.
Following the 1942 bottom, the next 24-year cycle bottom
occurred in 1966. This was a particularly harsh year in the Vietnam War
in terms of the United States involvement.
Following the 1965 National Liberation Front attack on two American military
installations, President Lyndon Johnson ordered the continuous bombing of
North Vietnam.
The year 1990 saw the most recent 24-year cycle bottom in
the current 120-year Grand Super Cycle. This year saw the start of the
first Persian Gulf War involving the United States and its allies against
Iraq. This period also saw a rather conspicuous jump in the price of
crude oil as it related to the war and its anticipated supply
disruptions.
The waning years of the 120-year cycle witnessed a
winding down of the militarism which typified the years 2002-2010. A
two-front war in Iraq and Afghanistan, which dragged on for some eight years,
was waged in part to revive an economy rendered sluggish by the Âtech wreck and recession of
2001-2.
Although much was made over ChinaÂs industrial demand during those years, without the billions in
war spending between 2002 and 2010 the boom in commodities prices would
almost certainly have been less pronounced. Not coincidentally, the
decline in commodities prices began with the winding down of both wars.
War has long been used as a panacea to fight the ravages
of inflation as well as deflation. Viewed from this context, war is as
much a policy response to economic malaise as it is a political response to a
threatening foreign power. Most recently, RussiaÂs president, Vladimir Putin, has shown aggression against
Ukraine. Some observers, including Mohamed El-Erian, view PutinÂs militant threatening as a distraction effort designed at taking
his peopleÂs attention away from the increasingly
weak state of the Russian economy. Since RussiaÂs economic prospects are closely aligned with the oil market,
continued weakness in the oil price will only give the country more incentive
to find ways of reversing its woes. In the short term, a military
response may be RussiaÂs only recourse.
The last six years have seen economic policy governed
almost exclusively by the Federal Reserve. The executive and
legislative branches of the U.S. government have done amazingly little and
were content to cede their authority to the Fed. The pendulum swings
both ways, though, and the Rule of Alternation suggests that the years
immediately ahead will witness a greater authoritative response from
government. Now that the FedÂs QE program has
ended, look for Washington to craft its own policy response to the threat of
a global economic slowdown.
One such response would be of a military nature.
The dramatic plunge in oil and copper prices is a troubling sign that global
industrial demand for these key commodities is contracting. WhatÂs more, both commodities are considered by many economists to be
barometers for the global economy. Indeed, the stunning drop in the
prices of many commodities is reminiscent of the prelude to the 1998 global
mini-crisis which threatened to plunge the developed world into outright
deflation. A policy response from the Fed in late Â98 was sufficient to restore investorsÂ
confidence, however, and the malaise was quickly reversed. With
interest rates currently hovering near long-term lows in many countries, a
monetary policy response today would carry decidedly less weight than it did
then. The only alternative might be a military response.
The initiation of a fresh war campaign in the coming
years would provide an emphatic cure for persistently low commodity prices as
war spending always leads to higher prices. It would also fix the
reduced industrial output of many countries whose economies heavily depends
no industry. History shows that war is often the last resort of
desperate governments whose economies are wracked by diminished demand.
Even the rumor of war can have a short-term impact in boosting prices.
DonÂt be surprised then if war rhetoric finds its
way back into the headlines in 2015.
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Clif Droke is a recognized authority on moving
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