That funny Russian bloke

It’s terribly bad form when you’re at a party and get chatting to a complete stranger who is determined, come what may, to give you highly dubious financial advice – and, what is more, pick holes in every single financial decision that you have made since you were about 12. She didn’t ask for my opinion at all, or even take steps to find out anything about me or whether I know anything about finance. I think she just wanted to talk.

In the middle of our thankfully rather brief conversation, it emerged that we had made a really, really, really stupid financial error when we purchased our house. “I’m very sorry for you but that’s the way it is,” she said gleefully, which is why the conversation was as brief as it was.

I tried to understand something of her economic arguments, to persuade myself that they weren’t really as flawed as I feared they were. From what I could surmise, they were all to do with this book she’d read. About that 60 year economic cycle or something. It’s just that the entire world economy goes haywire every so often and there’s nothing you can do about it. That’s just the way it is.

She was talking about, though she never named him, that funny bloke from Russia. The fact that she chose to link this economic cycle with our decision to purchase a house – a long term investment that almost always beats inflation, especially with the world’s population having just hit seven billion and rising – remains a mystery.

Nikolei Kondratiev, born in 1892, was a Russian economist whose claim to fame was to theorise that capitalist economies have a cycle of between 40 and 50 years of boom, followed by a prolonged period of bust. Then there’s a war.

The interesting thing is that, unlike the 11-year cycle of growth-then-recession, not every mainstream economist accepts the existence of this cycle; there’s just not sufficient data. Worryingly, though, the cycle (if it exists) does seem to correspond with conflict, aggression and war.

Take the 1870s and 1880s, when there was a drastic economic downturn. Shortly afterwards, Europe’s colonial powers, which were badly afflicted by the economic collapse, marched off to Africa for a bit of healthy pillaging, looting and country-making. They may have slaughtered a few African natives along the way.

Then, following the 1930s Depression… well, that sentence doesn’t even need an ending.

There are a number of theories about why the Kondratiev cycle might exist, but perhaps one of the most plausible is the generational one. This would also explain why the cycles seem to be getting longer. It was over 70 years since the Great Depression and, if one is to believe the Kondratiev theory, we may very well be in the midst of this cycle now. The fact is that politicians, policymakers and even economists tend to have a very short-term memory.

This is worrying.

All week, I have been speaking with asset managers and senior investment officers of large life insurers. Their views on European government bonds is telling. They no longer regard them as the safe haven they were before. They would prefer to sink their funds into emerging market debt, which not only offer pretty decent returns but actually come with a better guarantee that the governments might be able to repay their loans.

Oh, how the tables have turned. The shift of power in the world has never been more obvious.

The problem is that the European politicians are still living in the past, continuing to believe in European solidarity when it was clear right from the start that this never existed – at least not on the level that they wanted.

The euro is about to blow apart. This isn’t idle speculation but an honest appraisal of what we are now witnessing: the beginning of the end – or perhaps even the middle of the end. The only thing that could save the flawed euro project is if the European Central Bank (ECB) could be given free reign to act as a lender of last resort for Italy and Greece and all these other countries that have got into such a financial muddle. But Angela Merkel, who still remains married to the euro project, is dillying and dallying, and that is only going to cause more pain. Germans are so reluctant to allow the ECB print more money because, within their collective conscience, they recall the pre-war hyperinflation caused by just such central bank meddling, when a wheelbarrow of deutschmarks were needed to buy a loaf of bread. But eventually, I am certain, Merkel will have no option but to cave into pressure to let the ECB take control of the situation. The only other option would be a complete and disruptive break-up of the euro – and no European politician really seems to entertaining this idea. Yet.

In my view, the euro must be allowed to break up in an orderly and planned manner. Unless this happens, things are going to get really ugly.

What is astonishing about this whole sorry situation is that it has really got to the stage that it has got to. Watching a completely unelected government being appointed il parlamento italiano is unbelievable. It is almost like watching something from a movie set, but a great deal scarier. I write about Africa all the time. What would Europeans think if they saw South Africa, say, tell members that an unelected puppet dictator should be put in charge of an African country, just because their policies were a little bit friendlier to the continent as a whole than someone that the people had actually voted into office. There would be uproar.

Ms Merkel and others: we have just lost the last remaining shred of democratic legitamacy that we had to tell Africans and others how to run their lives.

What is absolutely astonishing is how effectively the elected politicians – what few remain – have completely ballsed up the entire world’s economy. Perhaps these cycles do exist and are always going to happen every 40-60 years. But if that is the case, it is only because politicians are so terrible at remembering what their forefathers did.

The situation was always going to be bad. But, really, did it have to get this bad?


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