Cycles have been during the 19th and 20th centuries in the center of a broad category of economic debates and research. The major critic we can make to a lot of these theories is the subjectivity and the absurd need to measure cycles from ideological concepts. In 1933, Ragnar Frisch proposed a formidable approach to economic cycles. He has tried to determinate main structural cycles.
His demonstration is probably one of the greatest advances in the cyclical approach of economic trends. Nowadays, cycles are forgotten by a wide majority of economists, central bankers, and politicians. The political economy has undermined our conception of human processes where economy could be manipulated to the extent of the government. It is crystal clear that the understanding and predictive capacities of cyclical approach are not sufficiently considered.
About cycles, Ragnar Frisch (1895-1973) has proposed an interesting demonstration. He has firstly differentiated global consumption on one part with global production on the other part. He adds in his demonstration an approach of depreciation of global demand due to limited money and depreciation of global capital production due to its utilization. He then measures the activity (z) utilizing both consumption (x) and production (y) parameters. By resolution of this three-main-parameter equation, he obtains different periodicities.
As a result, he noted a primary cycle of 8.6 years, a secondary cycle of 3,49 years and a tertiary cycle of 2,2 years.
After his demonstration, he precises:
« I believe that the theoretical dynamic laws do have a meaning-much of the reasoning on which they are based are on a priori grounds so plausible that it is too improbable that they will have no significance. But they must not be taken as an immediate explanation of the oscillating phenomena we observe, They only form one element of the explanation: they solve the propagation problem. But the impulse problem remains.
[…] The presence of these cycles in the solution of our theoretical system is of considerable interest. The primary cycle of 8·57 years corresponds nearly exactly to the well-known long business cycle. This cycle is seen most distinctly in statistical data from the nineteenth century, but it is present also in certain data from the present century; in the most recent data it actually seems to come back with greater strength. […] »
Apply a frequency logic on financial panics and you will find the same regularities : 1683, 1711, 1720, 1731, 1745, 1763, 1772, 1783, 1792, 1814, 1818, 1825, 1857, 1866, 1869, 1871, 1872, 1873, 1884, 1890, 1893, 1895, 1896, 1899, 1901-1903, 1907. A 224 years difference shows 26 panics, what imply a 8.6-year frequency as well (226/24). It has been the approach of Martin Armstrong at the end of the 20th century. Furthermore, the utilization of this periodicity in the global cyclical modelization formulas requires Pi (3.1415…). As surprising as it seems: 8.6 = (1000 days * 3.14)/365.2.
From a personal point of view, I am studying financial cycles since almost 3 years. Surprisingly, the work of Frisch is simply revelator of the main forces directing markets and human decisions !… I have spent hundreds of hours in the temporal analysis of markets. With few hesitation, almost all financial strategic periods and regularities are deduced in this mathematical demonstration of economic cycles. It is particularly true for periods of 8,6 ; 4,3 ; 2,15 ; 2,2 ; etc. There is a fractal, cumulative and complex dynamic nature in financial processes. These cycles can be divided in 4, 6 or 12 other periods, leading to some interesting regularities, whose 261-265 days (0.71y) for example.
Other studies led to the conclusion of the existence of a complex dynamic system of cycles. Cycles occur on an infinity of time scales, with periods each time different. If I refer to Ragnar Frisch writings, cycles react like a pendulum moving like a cumulation of shocks movements, creating a complex dynamic system. This system works with an average and directing frequency determined by a natural confrontation of two opposed and complementary forces: here “offer” and “demand”.
By Thomas Andrieu | AUTHOR AND REDACTOR
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