The Kondratieff wave is going to be there - no matter what. It can be stretched to the limit - and that is what has been happening - but it will never go away (in a capitalistic society).
The transition from the stagnation phase of the Kondratieff wave (1970's in our case) to the plateau phase (1980's in our case, which was then stretched out to 2000 by the enforcement of the law against recessions) involves high interest rates and a recession (which happened in late 1970's/early 1980's) if the currency is disconnected from precious metals early in the stagnation phase (as was done in our case - Nixon in 1971). The disconnection is never a good thing, but it seems like the expedient thing to do at the time in most cases, and in most cases, it (therefore) happens. If it happens, the stagnation phase gets extended by a few years and the result is even higher inflation than at the beginning of the stagnation phase, high interest rates, and a(nother) recession. We had that.
The common belief is that Paul Volcker saved us from that - actually (as noted on this website), he only cooperated with what would have happened anyway. (If people would know about the Kondratieff wave in detail, they would realize that - but most people in the West do not know about the Kondratieff wave in detail at all.)
And then when the Kondratieff wave gets into the plateau phase, things settle back down again, disinflation (i.e., inflation that is going down) sets in, economic growth resumes, though at a lower level than during the growth phase and going steadily, though not continuously, lower as the plateau phase progresses (this is key!), and the stock market proceeds to go up more than it would have during the growth phase (new money goes into the stock market, rather than into consumer prices - this is key!).
So what did the Fed do come the stock market crash of 1987? Nothing more than cooperate with the Kondratieff wave and take advantage of it in terms of where it was at the time; the central bank really could not have done otherwise. The transition from the plateau phase to the depression phase happens when the stock market goes high enough that it can't sustain itself anymore - so it comes back down - and the disinflation of the plateau phase has reached a point where inflation has gone so low that it transitions into outright deflation. The combination of a falling stock market and inflation having transitioned to deflation results in a deflationary depression, which then (normally, in the past) runs its course over a few years and cleans out the imbalances in the system that have accumulated during the Kondratieff wave so that the next Kondratieff wave (i.e., the growth phase of that one) can begin.
What happened this time is that when the economy wanted to transition from the plateau phase to the depression phase (the stock market crash of 1987), the Fed pumped more money into the system (the first time that has ever happened at that point in the Kondratieff wave, as far as I can tell) and since the system had not actually transitioned into the depression phase yet - in other words, the mentality of the people was still in terms of the plateau phase - the money-pumping worked, the people stayed in the plateau phase mentality and the stock market went up even more (more than it could have if there had been no intervention).
So, in effect, the Fed extended the plateau phase of the Kondratieff wave beyond where it would have otherwise ended.
One of the results was that consumer demand continued and even accelerated (it turned into, by the end of the 1990's, what I then called a "spend-a-thon"), thus interrupting the overall disinflationary trend and causing that disinflationary trend to be stretched out over a much longer period of time.
But that all could only go so far - because a stock market can't go up forever. And, in fact, this one didn't - it went up as far as it could, going exponential in the late 1990's (topped out in early 2000), and then it came back down (as exponentials always inevitably do, there is nothing anyone can do about that).
That was the transition from the plateau phase to the depression phase of our Kondratieff wave.
But the Fed fought even that - and so the beginning of the end of the disinflationary trend did not even show up until 2003, as noted by Bernanke in his speech today.
At that point, the Fed, having been worried for decades about inflation (unnecessarily so once the plateau phase of the Kondratieff wave kicked in in the early 1980's - but Keynesians don't believe in the Kondratieff wave, see this website), started worrying about deflation (as noted by Bernanke in his speech).
That was a legitimate worry - but there is simply nothing the Fed can do about it in the long run. They can postpone it - and they have been doing that - but they can't ultimately stop it from happening.
The simple reality is that the Kondratieff wave can't be overridden - and the tail end of the Kondratieff wave involves deflation and depression. In fact, the very transition through the later phases of the Kondratieff wave involves high consumer price inflation going to low consumer price inflation eventually going to zero consumer price inflation (which we have had a whiff of already, despite the Fed's best efforts) followed by negative consumer price inflation, i.e., deflation.
The Fed has been trying to avoid the deflation phase with all its might in recent years - but the reality is that the phase can't be avoided forever and we are inexorably, slowly heading toward it. We have been in the transition phase since 2003 in the meantime - but inflation does still keep going down (on average) over the course of time, as predicted by the Kondratieff wave (actually as predicted by me, taking modern manipulations into account), and we effectively went below zero for a short period of time already during the downturn of the previous couple of years.
Things have come back up some during the recovery, but it is only a temporary, partial recovery, and there is nothing the Fed can (ultimately) do about that - note how the Fed keeps having to admit, during the past couple of years, that the economy is not responding as well to its efforts as it hoped and anticipated (a development that I predicted, it did not surprise me one bit) - the economy is going to continue to perform on a sub-par basis until the combination of the damage done by the initial downturn and the continued build-up of imbalances as a result of the momentum from the previous better times (as a result of the mentality of those times continuing to be in place for now) will overwhelm the economy and we will go into a big new downturn. That is inevitable, it is only a matter of time.
And when we get to that point, the Fed will be powerless to stop it - the initial overwhelming of the Fed happened in the fall of 2008, the final overwhelming of the Fed will happen when the time that I just described comes.
And it will happen because we are still in an overall downward trend in consumer price inflation (taking everything into account, including housing, which is important because more than half of Americans live in a home that they have bought) and that trend is ultimately unavoidable, it will continue - and the stock market will also not stay up, it is in a bear market bounce, and ALL bear market bounces are completely retraced to the downside and then some, in other words, the stock market will come back down, and when it does, we will have the conditions of negative inflation and a declining stock market that always accompany the transition into the deflationary depression of the Kondratieff wave - with the caveat this time that we will have been in the depression phase of the current Kondratieff wave for years already, since 2000, and so we have had a build-up of imbalances in the current Kondratieff wave that is unprecedented (due to the enforcement of the law against recessions), and so when the deflationary depression hits this time, it will be the biggest one in a long time. In fact, the closest precedent we have is nearly 300 years ago - the Mississippi and South Sea bubbles of the 1720's - and that is why I have been predicting the biggest bear market in nearly 300 years.
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