Home » Long Wave » The Long Wave Versus the Printing Press: Central Banks Go All-In

The Long Wave Versus the Printing Press: Central Banks Go All-In

by John Rubino on September 14, 2012 · 36 comments

The short version of the Long Wave story is that we’re emotional creatures with limited memories. For as long as there have been markets we’ve been passing through the same sequence of mental states, beginning with anxious conservatism in the aftermath of hard times, followed by cautious optimism and finally –as the original “depression-era” generation is replaced by their clueless grandkids — let-it-all-hang-out financial excess. A horrendous debt-driven crash then resets the cycle.

There are several variations of Long Wave theory, but the most famous is based on the work of Nicolai Kondratieff, a Russian economist who gave the various stages seasonal names, with summer and autumn denoting the peak of financial speculation and winter the aftermath of the resulting crash.

The most recent cycle began after World War II and lasted until the tech stock crash of 2000, which means according to this theory we’ve already spent a decade in Kondratieff Winter. But the headline statistics published by the US and other major governments tell a different story, in which we have an anemic economy but not a depression.

What happened? This time around the world’s central banks have a new set of tools. In past cycles money was mostly gold and silver, which is to say it was real and in limited supply. Credit might have been flexible because of fractional reserve banking, but the money at the base of the financial system couldn’t be created out of thin air. Today, in contrast, it can. Since the US broke the final link between national currencies and gold in 1971, everyone has been running fiat currencies that can be created in infinite quantities and depend for their value on the trust we place in the competence and honesty of our leaders.

The fact that trust dies only slowly (at first) has given the world’s governments an effectively unlimited credit card that they can max out to keep the debt implosion at bay. And that’s what they’ve done since 2000, with ever-lower interest rates and ever-more-creative asset purchase plans. The result is a global economy that continues to grow — when measured by the same governments that are printing the money — and an electorate that still hopes for a solution in the run-up to each election.

But the debt is still out there, and is in fact growing as unfunded liabilities and derivatives and other exotica continue to pile up. So the Long Wave’s pressure on the global financial system is getting stronger. The past year proves that if taken off of central bank life support, the European, American and Japanese economies will implode.

Over the past couple of weeks the European and US central banks have accepted this reality and announced open-ended asset purchase plans, implying that zero interest rates and unrestrained money printing will go on for as long as the markets keep accepting fiat currency.

Does this mean the contest is over and the printing press has won? No, but it means that the analytical framework has to shift from linear to non-linear systems. Jim Rickards devotes a chapter in his book Currency Wars to the idea that a financial market is more like a weather front than a car engine, in that the various parts of the former communicate with each other and change in response to that communication. This gives a complex system some unique characteristics, the most notable of which is that as its size and complexity increases, its propensity for catastrophic failure grows exponentially. Double the size of a financial system and its chance of coming undone rises by ten times or more.

By going all-in, the major central banks are committing to a progressive increase in the complexity of global financial markets. As more individuals and pension funds abandon cash and safe-but-low-yielding paper for higher-yielding but more-volatile stocks and junk bonds, the system grows ever-more fragile, making a crash both likely and more destructive.

Another trait of complex systems is that the timing of their catastrophic failure is unpredictable. Once the conditions are in place the system can collapse immediately or continue on for a long time. Rickards’ analogy is a mountainside where snow accumulates until a single snowflake sets off an avalanche. But there’s no way to know which snowflake will be the one, or when it will fall.

So here we are. The conditions for a global catastrophic failure are in place. Snow (in the form of trillions of new dollars and euros) is falling. There’s no way to know which dollar (or which external event) will start the avalanche, but without doubt something will.

The nature of the avalanche is still to be determined, though. Will it be a wholesale loss of confidence in the dollar, euro and yen which manifests as hyperinflation, followed by a crash? Or will the bond markets at long last figure out they’re being conned and push interest rates up in a spasm that’s too fast and wide-spread for central banks to counter, sending us back to the 1930s in matter of weeks? We can’t know the answer, any more than we can know whether the next tropical depression will turn into a Cat 5 hurricane. We can only watch it happen and prepare for the most obvious risks.



  • Agent P

    Those outside the sphere of Western economies, but inextricably tied to them via the $petrodollar, could be the catalyst at some future (but probably not too far off) date. As long as outside economic influences and interests continue to play along, this can certainly remain longer that many of us can remain solvent, as the saying goes. And some wonder why Iran is such a big deal… Hint: It ain’t about ‘nuclear weapons’.

    • Hapa

      I also think that the precipitating event will come from outside the system. As China, Russia, Iran, the BRICS, and anybody else starts using their own currencies for oil and other hard goods, rather than the dollar, this starts the snowfall accumulating. The tipping snowflake is the person who doesn’t want their dollars anymore because they are obviously devaluing in front of their eyes. They’re willing to take a certain percentage less from the money changer for that fiat paper, and that amount crosses the line – vast amounts of dollars suddenly pile up and there are no longer any customers – end of the line…

      I’m all in with silver, and a bit of gold, as well…

    • david wollover

      Sir, you mean petrodollar vs. dollar-euro currency axis? So perhaps China knowing their Yuan won’t cut it, can conduct currency war via proxy? Or did I misappreciate your point? Thanks.

  • Gerald Zirnstein

    Fantastic article! This is how I feel about the situation also. I am in gold, silver, gold stocks, conservative dividend stocks with high payouts.

  • kopavi

    In Wiemar Germany they printed money as fast as they could. Literally, no computers, they used paper and ink and made money. Only thing is they could not print it fast enough so they ended up only printing it on one side of each piece of paper to speed up the process. It was shipped by the railroad car load to various points of dispersal.
    The times have changed, we are much are efficient now, we can print it with a few key strokes on a computer. We have university trained/employed economists in charge, and we are all assured that everything is under control. We are assured that we can navigate these hard times and all will be well. We are told “This Time Is Different.”
    I can’t help but wonder how history will treat the central bankers who just kept doing what they themselves proved could not or would not work, the politicians that installed them into their offices, MSM that chose not to ask the hard questions.
    We are setting ourselves up for a really hard fall. Buy gold and silver.
    The best to you all.

    • david wollover

      good observation kopavi; interseting that Wiemar printed As Much As They Did when other nations refused their paper (recall in post WWI punitive context). This time with N. America and Europe circling the wagons, raising China’s challenge, e.g., via SDR’s (certainly not the Yuan) to break the dollar-euro axis presenting a (de facto? – you decide!) currenly war. Big time skin in this game. Heck all I had to do was eschew all of my MS Econ dogma and smell the coffee and Don’t fight the fed. So while hard fall view is valid, big money can prolong; i.e. forgive cliche market masters of the universe can stay irrational (if it were only that) longer than we mere mortals can stay solvent. Study the new paradign and good luck to all to give your families a good life.

  • Tony D

    Both major bond markets have been effectively neutered as a risk to TPTB so this game will go on a LOT longer. People waiting for the “crash” need to recognise that that “those with the gold (TPTB) make the rules” There may be years before this lunacy is resolved. All these CB decisions are doing is giving us certainty of direction (economic collapse) but not the timing. CBs have proven desperate so far and there will be no limits to what they try and do. Europe and the US still have capital controls to be imposed before we get near the end game.
    Patience will be required.


    Hi!, Patrons Of The $ Collapse Et Al:
    Those that set up this fiat system; calling gold a barbaric relic from OUR past etc., don’t want it to collapse per say but on August 15, 1971 the Bretton Woods agreement, that the $ was 1/35th of a troy oz. of gold in an alloy 9/10ths fine, collapsed already and so now the elite (The Paper Aristocracy) have adapted to a contaminated form of Kenesian economics but so far–as always has been the case–they can’t do their contaminations without injecting inflation into their illicit games of money manipulations can they? We the people of the United States are partly to blame, because we haven’t escorted OUR monetary authorities, political authorities, State and/or Federal, back to the Constitutional standard located @ Article 1; Section 10 of OUR US Constitituon which calls specifically for only gold and silver coinage as OUR National medium of exchange in which case Helicopter Ben Bernanke should have NEVER been in business printing paper money substitutes in the first place but now the tick is embedded into our monetary life blood to the hilt, while we the people by OUR own negligence are totally burried in the debts this condition fosters with the tick digging into OUR monetary bodies ever deeper and deeper sucking the life blood from OUR economy evidently until death do us part? To illustrate my deepest point here, how many of you will trade me one of your silver dollars for one of my Helicopter Ben Bernanke $’s one for one? See what I mean folks: you automatically sense the dilution of purchasing power between the two don’t you? Tell your boss that, instead of a $500 paper paycheck per week you’ll instead take 500 silver dollars and see how far he let’s you get into his pockets without feeling taken? A hundred years from today will the Federal Reserve Notes you own still be used to purchase goods and services but you know darn well any silver $’s you have today can be used as far into the future you can think to buy future goods and services right? The paper $ sorry to say folks is acting like all paper money throughout history has acted by dropping in terms of purchasing power towards zero, zilch, nothingness! Daniel Webster said it best: “Of all the contrivances designed to cheat the laboring classes of mankind, none has been more successful than that which deludes them with issues of iredeemable, fiat, I Owe You Nothing, paper money!”
    RUSS SMITH, CALIFORNIA (One Of The Broke States)

  • stymie

    With news like this, is it any wonder most folks would just rather look at Kate Middleton’s hooters on their new iphone5?

  • Jason Carter

    Prediction: Long Wave wins… eventually. Are central banks really stupid enough to destroy their currencies? Won’t the banks that have loaned governments tons of money want to be paid back with currency that has not been completely devalued? Pursuit of inflation will only result in wiping out what’s left of the middle class (in the U.S.) and destabilize the world financial system to such a degree that derivatives one day will = $0.00

    • Giles Harris

      I also don’t get it! How is it that you and I can speculate about what might be in a month or a year from now while the central banks seem to only be able to deal with the next three days? Have they really no concept of cause and effect, and CONSEQUENCE?

    • poorhardworker

      The banks areThe problem won’t be the banks…but more solvent governments coming for payment of our bonds, etc that you have to worry about.

  • Chris

    We should learn that by deepening the debt market, we are actually making the system more risky and catastrophic when it stops working. When the housing market crashed, it is exactly that. The mortgage market was deepened by the introduction of CDOs, CDS, CDO squared. Now we have the bond market which is supposed to have ‘crashed’ or should have lost value. But instead of allowing the market to adjust accordingly, the Fed had stepped in to buy bonds. This will make the problem worse when private investors lose confidence in the bond market. This is a reality and not some airy fairy stuff. The bond market helps to keep inflation under control as excess money flow into it. If it is trashed, this money will flow out and cause alot of damage. It will lead to high inflation, which will harm the bond market further. All asset prices are based on money supply and performance of the economy. As it is, asset prices are already very high. The stock market is artificially high. The bond market is getting risky. Where else can money go to other than the only store of value left, which had been manipulated so that bonds are more favoured. Rebalancing of budget and trade should be addressed immediately and mitigation plans should be made as soon as possible.

  • Willy1964

    Since 1971, when Nixon took the USD off the gold standard the amount of base money increased much less than the amount of credit/debt. So, “printing money” is not main problem.

    • marcel

      exactly right – amazing how few bother to understand this

  • Rich

    Perhaps the long wave theory along with the assumption of fixed periodicity was proven invalid by the market?
    Much more likely is the notion of a critical state followed by precipitous collapse.

  • DR. Charles

    The Problem with the K wave theory (Commodity Wave Theory) is that the downwave as been completed. We are in the beginning of an Up Wave which will take 23 years. We have the first minor recovery wave going from 2012 to 2017 with a top in the Stock Market.(The Bears have missed the jackpot and are crying all the way to Canada with David Rosenberg) This will create a low unemployment of around 7% and low interest enviroment (2%) which will create more jobs (Obama was right) and growth( Wow, Capitalism Works). We will then proceed from a minor downwave from 2017-2020 which will be another mild rcesssion in the upward commodity bull market.(Gold at $5,000) We will have an inflationary commodity market for 10 years and reach an all time high in 2027. This crisis period will begin in 203-2027. This is the real danger.

  • Tony D

    I play a bit of poker and any good player knows you only go “all in” if you’ve got the cards or you think you can bluff everyone at the table……
    Ben, shuffle up and deal !

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  • EDT

    “If taken off central bank life support the American, European, and Japanese economies will
    implode” ….. That’s quite right and don’t expect that life support to ever be withdrawn.

    “Kim Rickards devotes a chapter in his book ‘currency Wars’ that a financial market is more
    like a weather then an car engine….” Robert Prechter devotes an entire book to the idea
    that public mood determines market movement. (But that’s no different than the weather
    so roger that!)

    “Another trait of complex systems is that the timing of their catastrophic failure is unpredict- able”…..so velly solly, but disagree on that entirely. Elliot Wave Theory shows some
    rather convincing evidence that most economic collapses can uncannily be predicted
    accorded to study and observation of previous historical cycles withing the framework of
    the ‘fractal theory’.

    Chicago, Illinois

  • Ken

    The problem with economists is that they expect the Long Wave to play out over a 25-year period. It arises at the time when all of the distortions in the economy are not eliminated by recessions. As a result the Long Waves vary greatly in length. As I see it the long waves have been 1913-1946, 1946-1982. The current wave is now in its 30th year, and will not end until gold and silver prices hit their top and the stock market begins to come alive again as it did in 1946 and 1982.
    It is nice to find an economist who is not as myopic as the ones I have talked to. This seems so obvious that it is difficult to understand why anyone could deny its logic.
    Now the big event facing us, and we are well into it, is the collapse of Western Civilization, which has been in progress for about a century. This is the greatest danger we face, and I’m not too sure that there is anyone intelligent enough to help us avoid it. When Rome went from 100% gold to .5%, the governmental structure collapsed. (The barbarians didn’t conquer Rome; they tried to pick up the pieces.) The dollar since the Fed was established in 1913 has gone from 100% to about 3%, so it isn’t difficult to see that our collapse may not be far away. And the process seems to have accelerated since 1999 when the Glass-Steagal Act was repealed, and a few years later, the so-called Patriot Act effectively repealed the Bill of Rights. Both of these assaults on our democracy, as well as the ballooning of both governmental and personal debt, are signaling, at least to me, that this civilization cannot endure much longer, because the rest of the world is so tied to the U.S. that when it goes, they will soon follow. The same thing happened before. When Rome collapsed, Persia, the Gupta Empire of india, China and the Arab world eventually followed.

    • John Jauregui

      Nicely stated.

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  • Willy1964

    When does one John Rubino stop drinking the kool-aid called “Hyper-Inflation” ? Before we get Hyper-Inflation, we’ll go through “Hyper-Deflation”.

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  • http://www.facebook.com/riley.hammond.121 Riley Hammond

    Just because printing is a lot easier doesn’t mean we should do it! Sometimes we need to put our printing presses away so our economy can survive with what we have. We need to slowly build our economy with the already printed money so we don’t devalue the dollar.

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