Economic Cycles’ Influence on the Currency Market

History always repeats itself, this pattern is present in all the aspects of the civilization development including the economy. The economy cycles were first studied back in the XIX century; in the XX century, there were suggested several theories that changed our opinion on this science and helped us better understand the mechanisms that rule the economy in general and financial markets in particular.

The theory of economic cycles describes several development stages: rise, boom, stagnation, and depression. The most common concepts that are widely acknowledged today are the Kondratiev waves and the Kuznets swings. Thanks to these scientists, we can make more or less accurate forecasts of the economic rises and falls and later use these forecasts in investing.

We’d love to remind you that the RESERVEUM Analytical Group continues finding paths to the ideal currency that would help stabilise the economy and prevent such disasters as market crashes, depression, and hyperinflation — the things too common for the current money system.

The Kondratiev Waves

Nikolai Kondratiev’s model shows that the economy has 45–60 years-long cycles that are shown in the GDR dynamics:

If the yearly GDR growth is around 2–3%, it shows the period of growth and high economic activity. This cycle usually starts when the economy exits a depression period.

The 5–10% growth shows an economic breakthrough and boom. In this period of rapid economic growth, business gains more and more power, infrastructure develops and there is sometimes even a budget surplus.

GDP growth slowing after the boom to 0% (+/- 0,5%) shows the beginning of a stagnation period. It can happen when the boom exhausts all the reserves, the economy slows down and the people’s well-being stops growing.

Even lower rates of GDP show the first signs of depression (recession).

Kondratiev’s theory also has a nice classification of these cycles compared to nature’s cycles — spring, summer, autumn, and winter. These four phases form a wave.

Spring is when the economy exits a long period of depression with some new technology or new political solutions. The main characteristics of spring are:

• higher business activity;
• lower unemployment rates;
• deflation turns into inflation;
• interest rates growth;
• upward trends in the financial markets.

This is the stage when one should invest in the market and real estate because assets are underrated and have a lot of potential.

Summer is the stage of a full bloom of economy. The last summer time in the world’s economy was in the 50s — the 80s of the XX century. Then, the following processes were present in all of the developed countries:

• growing money supply;
• growing interest rates;
• matured stocks market and gradual switch to gold and commodities;
• This stage is perfect for investing in financial assets as the money supply and inflation growth are going to stay high for quite a while.

Autumn, according to Kondratiev, is like the natural autumn: it is the time of harvest when the economy reaches maturity and needs some rest. Here, the following phenomena are worth noting:

• growing loan payouts;
• growing debt of households, businesses, and countries;
• fewer resources for monetisation;
• lower prices on commodities;
• rallies and bubbles emerging in the financial markets;
• higher social, political, and economical tension.

Winter is the period of crisis and depression. Usually, it starts with a fall of indices and capital flow to harbour assets like gold, bonds, and savings. The downfall is followed by a number of bankruptcies because in autumn, people take a lot of loans with collateral of their growing stocks which lose their value in winter.

Despite the depressive nature, this period is popular with currency traders. The capitals are out of stocks and people can find a use for them in the currency markets thus increasing the volatility.

If you are interested in this topic, you can read more in our other articles, like Can Economy Survive Without Money?

Kuznets Swings

Unlike Kondratiev, the American scientist Simon Kuznets based his theory on demography and construction. According to his concept, in 15–20 years, the economy goes through a full cycle connected to migration processes and infrastructure development.

In other words, Kuznets focused his attention on the reasons behind these cycles. He studied the following factors:

• Demography;
• Major construction investments;
• Capital flow;
• Changes in the national income, etc.

The stages that the economy goes through within a cycle look like other theories:

• Rise. Foreign capital inflow creates new jobs that attract migrants.
• Peak. Here, the scientist describes a maximum point where all the business activity stops.
• Fall. Economic indicators show lower results faster.
• Crisis. This is the bottom point where the economy also stops. The characteristics of this period are high unemployment, lower purchasing power, bankruptcies. This is a nourishing soil for the following rise when new investment ideas and solutions to the current problems emerge.

Why did we decide to study economic cycles? As you know, we are developing an ideal currency of the future, and money plays a vital role in the economy. Right now, we wonder if it is possible to tame the economy and manage the whole system with the help of new effective money.

We have some ideas on that, and we could be at the dawn of a new finding that would turn the current understanding of the economic mechanism upside down. You must agree that it would be very nice to just stay in this phase of steady growth forever while the well-being of all participants is increasing, infrastructure, science, and technologies are constantly developing, and falls and crises can be easily forecasted and prevented.

It can be made real with a decentralised money system that would be controlled by a special algorithm — a smart contract. It would constantly analyze the economic processes and issue the amount of currency proportionate to all of the produced goods and services. It prevents the economy from both being overrun by money and lacking it. At the same time, the money is distributed among the system participants to fully satisfy their needs.

The theory of cycles helps our research because it identifies the system’s weak spots and, most importantly, the economy’s dependence on money. In a healthy economy, money should be an effective regulator and set all the other mechanisms to the right rhythm. But while the money is centralised, it will always create asymmetry in the system when some participants store wealth they will never manage to spend while others can’t even satisfy their most basic needs.

If you want such money to become real and change our lives, follow our project. We hope to tell you the good news very soon! If you prefer to not only watch but take part too, join our programme and share your ideas on the protocol of an effective currency.

According to the analysis group findings: reserveum.org