During the 19th and early 20th centuries, the dominant study of macroeconomics was based on the business cycle, which was composed of many different kinds of component cycles.
One of the primary reasons for creating a central bank and introducing national income taxes in the United States in 1913 was the belief that monetary and fiscal intervention could reduce or even negate the volatility of business cycles and the tendency toward booms followed by busts that were the norm during the 19th century.
This was also supposed to render business cycles irrelevant and no longer worthy of study.
Even the proponents of business cycles agreed that monetary and fiscal interventions could mitigate the boom side of a cycle and therefore the bust side as well. But only -- and this is very important -- if those tools were used preemptively.
If the tools were used reactively, to mitigate a bust after a boom had already been allowed to occur, then the cycle proponents maintained, and have continued since, that monetary and fiscal interventions could only mitigate the rate of the bust, but could not stop or reverse it.
They further stipulated that the bust would finally conclude after the economy and financial markets stopped responding to the countercyclical fiscal and monetary interventions deployed reactively to stop it.
Cycle theory, in general, stipulates that boom-bust cycles are sinusoidal and that the corresponding economic destruction that occurs in a bust is equal to the boom that preceded it.
What's most interesting about this is that fiscal and monetary tools have been used throughout the 20th century as reactive rather than preventive measures. Preventive measures have relied on the legislature to enact preemptive regulatory schemes.
Although there are many different kinds of business cycles, the shorter-term ones are the focus of this column.
The highest-profile proponent of cycle theory today is Harry Dent, Jr.
But in his work he has renamed the cycles for some reason, with the Juglar referred to as "sunspot," Kitchin as "stimulus" and Kuznets as "geopolitical." I don't know why.
Although cycle theory is no longer a part of mainstream economic or financial market analysis, all of the data necessary to study and track the cycle still compiled by various government agencies and available through FRED.
The reason investors should be aware of their work, or at least the philosophy behind cycle theory, is that economies being increasingly unresponsive to monetary and fiscal interventions is, at least anecdotally, evident in the world's economies operating with the post-cycle theory neoclassical models; the US, Japan and Western European countries.
The best analogy for studying cycles that I can think of is that it is akin to pulling the paper map out of your car's glove box when your GPS is providing erroneous directions.
The most important and earliest of the cycles is the Juglar Fixed Investment Cycle, which is often referred to as THE business cycle.
The chart is the Juglar cycle, (defined as real non-residential investment per capita to private employment) overlaid with real per capita wage and salary disbursements.
The vertical grey shaded areas denote recession time periods.
With the exception of 1967 and 1986, contracting private investment has indicated either that a recession was imminent or had already started.
The Juglar cycle incorporates the Kitchin cycle and both are incorporated by the Kuznets cycle. All three are indicating the same pattern.
The most recent Kuznets infrastructure contraction began with the popping of the housing bubble beginning in 2006. The Kuznet model indicates that that bust continues and will likely not conclude until around the end of the current decade.
This is most probably one of the principal reasons, as well, for the Obama administration to be pursuing public sector infrastructure investment, so that it can counteract the private sector contraction.
I understand that the ideas presented here are probably new to most. At this juncture there is no action I am advising to be taken based on what the cycles are indicating.
But it is most probable that there will be renewed interest shown in business cycle theory by financial pundits in the near future and I hope this column helps to provide a reference for such discussion.