In the 1920s the Russian economist Nicholas Kondratieff discovered a pattern of recurring 50-year megacycles in the economies of Germany, France, Great Britain, the United States and presocialist Russia. Each cycle is characterized by four distinct phases—(1) a growth period culminating in an inflationary peak, (2) a short-lived primary depression, (3) a plateau phase and (4) a long period of economic stagnation including a secondary depression.

The U.S. has experienced three complete Kondratieff cycles—from the 1780s to 1843, 1843 to 1896 and 1896 to 1940. The first phase of each cycle has lasted an average of 27 years, only to be followed by a one-year second phase—a primary depression. The third—plateau—phase, lasting four to eight years, has typically failed to regain the levels of growth that preceded the primary depression. The fourth phase—economic stagnation—has averaged 19 years and been characterized by at least one major secondary depression. On average, recessions during the stagnant phase have lasted a year longer than recessions during the growth phase.

M.I.T. professor Jay Forrester has concluded that the Kondratieff cycle can be explained by capital investment. During the growth phase, demand is imposed on the capital goods sector by both the consumer durables sector and the capital goods sector itself. At the peak, a labor shortage encourages capital intensive production, which puts even greater demands on the capital goods sector. The plateau phase fails to exploit the capacity created during the growth phase, while a relative reduction in labor costs, encouraging a shift back to greater use of labor, further diminishes the need for new capital goods. The stagnant phase is marked by a secondary depression and a rapid collapse of the capital goods sector. Accumulating physical depreciation then sets the stage for the next growth phase.

It appears that the U.S. is now in the midst of the third phase of a fourth cycle that began in 1940 and will possibly end sometime in the 1990s. Investors who consider only the economic experience of the post World War II era may find they have been reading a dangerously short history book.