The cross-currents behind these rising and falling trends are attributable not only to the position of the Kondratief Wave of approximately 60 years but also to several short-term cycles of under 20 years duration that are frequently at cross-currents between the year 2000 and 2014 (when the current 120-year Kress cycle and K-wave are due to bottom). But more than that, retroflation is a high-stakes endgame that all of us are participants in, a game that is drawing closer to its culmination later this decade.
Succinctly stated, retroflation can be defined as the tendency toward inflation within the larger scope of K-wave deflation. It's like having an air mattress of inflatable raft with a slow leak in it. The tendency of the mattress, when left alone, is to steadily deflate until it loses all the air within. But if you have a pump you can fight this slow, steady leak by constantly pumping to make sure the air mattress keeps its form (or something that closely resembles it). Sometimes, if you pump vigorously enough, you can even keep it pretty close to the maximum allowable air limit despite the leak (although this usually doesn't last too long). The market analogy to this would be the vigorous money pumping operations of the 1930s and, more recently, the post-9/11 reflation efforts.
What happens when you try to over-inflate an air mattress that has a hole in it? You end up making the hole even bigger. In order to avoid this you have to know when to stop pumping before you create greater damage. The Fed is involved in this game even now as it has clearly stepped off the accelerator a touch since last year since it obviously fears the impacts over-inflating an economy that is still under the influence of the falling K-Wave. But if you're crafty and time it just right, you can alternatively inflate/deflate/reflate for quite a while (not to mention some timely patch-work maneuvers here and there) before the game no longer works and implosion becomes unavoidable. This is the game the Fed and the financial powers-that-be find themselves playing.
Speaking of game, have you ever read the book "Games People Play" by Dr. Eric Berne? It was a best-seller back in the '60s and was the explanation of the author's work in what was called "transactional analysis" or game theory. The author, a psychiatrist, theorized that for most people - children and adults alike - life is little more than a type of game that is "played" with an unspoken code of rules for whatever game is being played. He cataloged and codified several different types of games and classed them under different headings (e.g., social games, marital games, etc.) He even described one life game called "Debtor," which in some countries (namely America) is actually a way of life (in the author's own words), involving going into debt as a "game" for long periods of time (sometimes an entire lifetime). Much could be said about this but I'll leave off for now...
But the crux of what Dr. Berne was trying to convey was that everyone has their game - including those in high authority such as central bankers and heads of state. Could it be that the Fed truly is playing what they view as just one big game with the U.S. economy? It's mind-boggling to consider, but I see that Dr. Berne's examples could easily fit much of the Fed's operations on a daily basis.
Is the Fed purposely "playing the game" with its interest rate policy (a policy which George Brockway contends in "The End of Economic Man" leads directly to inflation)? If you analyze the official statements made by the Fed in reference to bringing inflation under control and then note that the effects of its policy are usually the opposite of the state goals, the answer to this question must be an emphatic "yes"! Deception and camouflage, after all, are part of every serious gamesmanship.
In an inflation-driven market/economy like the one we've had the past couple of years you can see spill-over effects from inflation in many areas, some of which are completely unrelated to finance. Psychically, consumers tend to upward adjust to inflation in their everyday lives.
The trend from compact, fuel-efficient autos in the 1970s gradually gave way toward the bigger, and more fuel inefficient SUVs of today. Then there is the recent trend toward super-sized hamburgers now available at most fast food restaurants. Trying to buy a "normal" sized hamburger anymore is just about impossible now that "Super Burgers" are being sold at several well-known fast food joints and are equal to at least two of the old regular sized burgers. Even the food services industry has seen the effects of inflation.
Resume' inflation is quite common today and has, according to observers, become a national epidemic. This problem recently came to light in the wake of the hurricane relief efforts as FEMA's top official was accused of having overstated his experience as a disaster expert, according to recent press reports.
R.J. Rushdoony, in his book "The Roots of Inflation," noted this very phenomenon of the tendency toward persistent expansion all across the board in nations governed by inflationary monetary policies. He writes, "The fuel which fires inflation is the desire to contract debts, and, at the same time, avoid at least partial repayment on debts." He noted further that the "inflationary mentality is geared to consumption, no production." Both these statements surely explain the ever-increasing appetites and tendencies toward expansion among consumers and corporations alike. It also accounts, at least partly, for the erosion of the country's industrial base.
The tendency to constantly inflate everything (including credit) in the face of K-wave deflation is relentless all over the world, but especially here in the States. In an inflation-driven economy like ours where retroflation is the rule, the tendency toward inflation spills over even into the job market. Retroflation means inflation, followed by deflation - but only so long as needed to clear the way for further re-flation. It's truly a vicious cycle and one that's drawing ever closer to completion as we approach the fateful 2009-2010 timeframe.
Then there is of course the very prominent example of housing styles. Here on Topsail Island, if you take a long stroll down the beach and observe the various houses along the way, you can always tell which ones were built in the 1950s and 60s. These structures are slightly distinct compared with the dominant architectural style and sizes of the '70s and 80's. But the houses built in the '90s begin to stand out as bigger and bolder, and the ones built in the past 3-5 years are flat out garish and inordinately huge (McMansions as they're sometimes called).
But another observation that can be made about these super-sized houses of recent years is that they're construction is much cheaper and flimsier by comparison to the low-to-the-ground, solidly built houses of the 1950s through 1970s. During the last major hurricane in 1996, the large but flimsy homes were those most likely to have been damaged or destroyed, while the old reliable, low-to-the-ground 1950s houses survived. That's another thing that can be said about retroflation - even as it beefs everything up in size, it makes up for it in lack of quality.
So how can you survive the endgame of retroflation? From the individual's standpoint, one must resist every temptation toward expansion beyond one's means, including present income and future expectations. From the standpoint of a small business it might mean resisting the expansionary impulse unless absolutely necessary and economically viable. It's far too easy to try and expand by building bigger offices or investing in new (and mostly unneeded) equipment when the tide is up and the money is rolling in. But just remember, every business has its up-cycles and down-cycles, and if a business foolishly rushes to expand it could be setting itself up for a fall at just the time the cycle peaks and turns down.
Retroflation means that there will be greater and ever-increasing volatility in the various strata of the business and financial world and larger economy until we reach ever closer to the fateful 2009-2012 transitional season. That's why resisting the expansionary/inflationary tendency has never been more important than it is now.
Adjustments can be painful at first, especially after a protracted period of inflation. Buy they are beneficial as they are necessary in the long-run. For the individual/consumer, it may mean scaling back insalubrious appetites and excess spending in several different ways. But for many, surviving the endgame of retroflation will mean adjustment to some degree or another. It also means discerning between the words and the actions of the "game masters" who control the outcome of this ever-changing endgame.
September 10, 2005
Clif Droke is the editor of the daily Durban Deep/XAU Report, a technical forecast and overview of several leading gold stocks, including DRDGold and the QQQQ available at www.clifdroke.com. He is also the author of numerous financial books, including most recently "Durban Deep: Past, Present & Future."