After graduate school, I went to work for maverick Wall Street economist A. Gary Shilling. Gary was a follower of the Kondratieff Wave Theory, which holds that global economic history is divided into extended S-shaped cycles, each lasting some 50 to 60 years.
Under the aegis of the dominant economic power of the day, each long K-wave starts with bunched-up technological innovation, or a technological revolution, which translates into a period of strong output growth and ends in a major slump. Each new wave is associated with a change at the top, when the old world leader gives way to the new.
Gary’s interpretation of Kondratieff’s writings — which appeared in the 1920s — tended to be a bit mechanical. Each leading power gets about a century to run the global economy. Deep economic crises occur every half-century or so, and each leader presides over three of them — first as a newly minted power, then as a ‘co-chair’ with an emerging rival and finally as a has-been.
For a junior economist like me, the implications of this theory spelled weeks in the stacks of Columbia University’s business library, mining for stats on 18th century Spain, France during the Napoleonic Wars and Britain thereafter. Having just marked the 50th anniversary of the Great Depression, we were looking for another major economic debacle just around the corner.
The Depression came at the end of the “Roaring Twenties” in the U.S., when technological novelties such as electricity, motor cars, airplanes and radios started to attain broad commercial applications. Other sectors benefited from the development of transportation, communications and business and financial infrastructure. The Depression began with a crash on Wall Street, but it promptly spread around the world. When the smoke cleared and the world economy returned to growth, the U.S. emerged as an unchallenged new leader, whereas Great Britain and its pound faded into irrelevance.
This being the early 1980s, Gary naturally pinpointed Japan as a power destined to eclipse the U.S. Drawing parallels with the Depression, he expected the next crisis to start with a market crash in Tokyo, and was looking for ways to short Japanese stocks.
Shorting Nikkei was a great idea. After Tokyo shares peaked in the late 1980s, they went through a protracted bear phase and even now are trading more than 50 percent below their all-time highs. But the rise of Japan — as well as the decline of American economic might — clearly did not follow the Kondratieff scenario.
Or did it? Japan may have turned out to be a paper tiger, but its economic model — based on technology transfers in manufacturing and relentless price-driven penetration into rich export markets — has been successfully adopted all over the Pacific Rim. A similar development model has now propelled China into the ranks of global economic superpowers.
After 25 years of growth averaging nearly 10 percent a year, China’s GDP is now approaching $10 trillion, gaining inexorably on the U.S. Its annual exports have increased six-fold over the past decade alone, and measure close to $1 trillion.
China is now flush with cash. Its stock of direct foreign investment is approaching $500 billion, while central bank reserves have reached $1 trillion. It has become a pivotal player in the global financial system.