Lenin’s New Economic Policy (NEP)

December 29, 2011 · Posted in Global Economics, History · Comment

Lenin’s NEP was an instructive chapter in economic history:

Allowing some private ventures, the NEP allowed small animal businesses or smoke shops, for instance, to reopen for private profit.

(…)

Rather than repossess all goods produced, the Soviet government took only a small percentage of goods. This left the peasants with a marketable surplus which could be sold privately

(…)

The state, after starting to use the NEP, migrated away from Communist ideals and started the modernizing of the economy, but this time, with a more free-minded way of doing things. The Soviet Union stopped upholding the idea of nationalizing certain parts of industries. Some kinds of foreign investments were expected by the Soviet Union under the NEP, in order to fund industrial and developmental projects with foreign exchange or technology requirements.

The results:

Agricultural production increased greatly. Instead of the government taking all agricultural surpluses with no compensation, the farmers now had the option to sell their surplus yields, and therefore had an incentive to produce more grain. This incentive coupled with the breakup of the quasi-feudal landed estates not only brought agricultural production to pre-Revolution levels but surpassed them.

The only problem with the policy was that the state still maintained control over significant other aspects of the economy, leading to the usual problems of interventionism:

While the agricultural sector became increasingly reliant on small family farms, the heavy industries, banks and financial institutions remained owned and run by the state. Since the Soviet government did not yet pursue any policy of industrialization, and did not allow it to be facilitated by the same private incentives that were increasing agricultural production, this created an imbalance in the economy where the agricultural sector was growing much faster than heavy industry. To keep their income high, the factories began to sell their products at higher prices. Due to the rising cost of manufactured goods, peasants had to produce much more wheat to purchase these consumer goods. This fall in prices of agricultural goods and sharp rise in prices of industrial products was known as the Scissor crisis (from the shape of the graph of relative prices to a reference date). Peasants began withholding their surpluses to wait for higher prices, or sold them to “NEPmen” (traders and middle-men) who then sold them on at high prices, which was opposed by many members of the Communist Party who considered it an exploitation of urban consumers.

And when government intervention in free markets creates problems, what do bureaucrats always inevitably pursue as panacea? Right, more government intervention:

To combat the price of consumer goods the state took measures to decrease inflation and enact reforms on the internal practices of the factories. The government also fixed prices to halt the scissor effect.

Naturally, a policy that increases the wealth of the common man is a thorn in the side of tyrannical sociopaths, thus Josef Stalin ended the NEP in 1928 with the Soviets’ first 5 year plan.

Tags: NEP, new economic policy, russia

Mish & Max Keiser, Economic & Political Predictions for 2012

December 29, 2011 · Posted in Global Economics · Comment

Here are Mish’s predictions for 2012:

Severe European Recession as the sovereign debt crisis escalates: Austerity measures in Italy, Greece, Spain, and Portugal plunges all of Europe into a major recession. Spain and Portugal will follow Greece into an outright depression.

Political Crisis in Europe: French President Sarkozy loses to socialist challenger Francois Hollande. German Chancellor Angela Merkel’s coalition collapses. The Merkozy agreement is either modified to do virtually nothing or is not ratified at all. This chain of events will not be good for European equities or European bonds.

Relatively Minor US Economic Recession: The US will not avoid a recession in 2012. Retail spending ran its course with the tail-off into Christmas of 2011. The Republican Congress has little incentive for fiscal stimulus measures in 2012 so do not expect any. However, with housing already limping along the bottom in terms of construction and investment (not prices), a US GDP decline will not be severe. The US may see a recession even if GDP barely drops. Certainly the US recession will be far less severe than the recession in Europe and Australia.

Major Profit Recession in US: Profit margins in the US will be torn to shreds as businesses will be unable to reduce costs the same way they did in 2008 and 2009 (by shedding massive numbers of employees).

Global Equity Prices Under Huge Pressure: Don’t expect the same degree of reverse decoupling of US equities we saw in 2011. The US economy will be better than Europe, but equities globally will take a hit, including the US. Simply put, stocks are not cheap.

Fiscal Crisis in Japan Comes to Forefront: Japan’s fiscal crisis and debt to the tune of 200+% of GDP finally matters. The crisis in Japan will start out as a whimper not a bang, but will worsen as the year wears on. If Japan responds by monetizing debt, not a remote possibility at all, Japanese equities will massively outperform in nominal and perhaps even in real terms. “Real” means “yen-adjusted”, not “inflation-adjusted” terms.

Few Hiding Spots Other than the US Dollar: US treasuries and German bonds were safe havens in 2011, but with yields already depressed don’t expect huge gains. Expect to see a strengthening of the US dollar across the board against all major currencies. Moreover, cash (one the most despised asset classes ever), may outperform nearly everything, even if the dollar goes virtually nowhere. Hiding places will be few and far between for much of 2012.

US Public Union Pension Plans Under Attack: States finally realize the need to rein in pension plans much to the dismay of public unions. Social and economic tensions in the US rise.

Regime Change in China has Major Ramifications: China will start a major shift from a growth model dependent on housing and infrastructure to a consumer-driven model. The transition will not be smooth. Property prices in China will collapse and commodity prices will remain under pressure.

Hyperinflation Calls Once Again Will Look Laughable: Unless there is a major disruption in the Mideast (which I do not rule out by any means), oil prices will drop and food prices will follow. If so, we will once again see silly talk from the Fed about preventing “unwelcome drops in inflation”. As always, the deflation key is not prices at all but rather credit and credit marked-to-market. Expect credit in all forms to come under attack and expect junk bonds take a hit as well. By the way, regardless of what happens to oil prices, hyperinflation calls will look silly.

As always, out of all the experts out there, Mish’s predictions are probably the ones I would pay most attention to.

Tags: 2012 predictions, china, europe, gold, mike shedlock, mish

Finland, Netherlands, and Irelend Thwart Franco-German Plans; New Euro Accord To Include 23 Countries – For Now

December 9, 2011 · Posted in Global Economics · Comment

Merkozy plans are dead on arrival as a A rebellion by Finland, the Netherlands and Ireland is threatening to torpedo the Brussels summit plans:

Hours before leaders arrived in Brussels , the Finnish parliament ruled that treaty changes proposed for the European Stability Mechanism (ESM) were “unconstitutional”.

The summit was further put at risk with news that after failing stress tests, European banks need to raise €115bn (£98bn) in fresh capital to satisfy regulators.

Finland’s grand committee said decisions made by the ESM – the eurozone’s permanent bail-out fund set for launch in 2012 – had to remain unanimous, and not changed to the “qualified majority” that French president Nicolas Sarkozy and German chancellor Angela Merkel have agreed.

The Finns are backed by the Netherlands, which fears proposals to withdraw veto powers from the ESM is an erosion of democracy and would make it vulnerable to funding bail-outs without recourse. Meanwhile, the Irish want to block plans for the “convergence and harmonisation” of the eurozone’s “corporate tax base”.

And this just in – New euro accord to include 23 countries:

The president of the European Council said Friday that a new intergovernmental treaty meant to save the euro currency will include the 17 eurozone states plus as many as six other European Union countries — but not all 27 EU members.

The failure to get agreement among all the members of the European Union at a summit meeting in Brussels reflected in large part a deep split between France and Germany on the one hand and Britain on the other. France and Germany are the two largest economies in the eurozone; Britain does not use the euro as its currency.

French President Nicolas Sarkozy said early Friday he would have preferred a treaty among all the members of the European Union. But that could not be achieved, he said, because the British proposed that they be exempted from certain financial regulations.

“We could not accept this” because a lack of sufficient regulation caused the current problems, Sarkozy said. The new intergovernmental accord should be ready by March, he said.

Note Sakozy’s assumption that anyone who hears him talk is a complete moron. The Euromess is a complete and total result of bureaucratic regulation from all angles, to assume people can’t see that is to assume that people are literally mentally challenged.

And then to bring it up against the British who avoided this bureaucratic mess precisely by staying out of Euro currency regulations … that, my friends, truly takes the full force of arrogant, negligent, and shameless statesmanship that only a Nicholas Sarkozy could display.

Anyway, the number of future member stats is already down to 17+6, the Euro has officially begun to crumble. Expect more states to quit this failed experiment until it finally disappears where it belongs: the dustbins of history.

Tags: euro, europe

ICAP Testing Trades In Greek Drachma Against Dollar

November 28, 2011 · Posted in Global Economics, Monetary Economics · Comment

The WSJ reports ICAP Testing Trades In Greek Drachma Against Dollar:

NEW YORK (Dow Jones)–ICAP Plc is preparing its electronic trading platforms for Greece’s potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.

ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.

The firm has been testing systems that would allow dealer banks to trade the drachma against both the dollar and the euro, the ICAP executives said, cautioning that the measures taken in recent weeks were precautionary. They said the currency pairs would not be accessible for trading unless required by market events, and may never be used.

“What precipitated this were customer concerns about what would happen if a country pulled out of the common currency,” said Edward Brown, executive vice president in business development and research at ICAP.

The U.K. Chancellor of the Exchequer George Osborne said Sunday that the government has stepped up its own planning measures in recent months to be prepared for a possible collapse of the euro zone. The U.K. isn’t a member of the euro zone, but it is home to Europe’s financial hub and is the world’s biggest currency-dealing center.

It’s good to be prepared for the likely …

Tags: drachma, euro, euro breakup, eurozone

China Housing Bust – Prices in Ordos Fall by 62.5 Percent

November 25, 2011 · Posted in Global Economics · Comment

From China Financial Daily:

Living in the edge of the Ordos storm , Ordos was beset with a different version of real estate lending Wenzhou panic . For example, local ” Jinxin Han Lin Yuan ” project , its second-hand house prices are around 10,000 yuan, while the market price now only is 3750 yuan.

Tags: china, china housing bust, china property bubble, chinese bubble, chinese economy

Gordon Chang: Chinese Government Collapse is Imminent

November 19, 2011 · Posted in Global Economics · Comment

Tags: china, chinese economy, chinese government collapse

Credit & Money Supply in the USA and China

November 19, 2011 · Posted in Global Economics · Comment

As explained before, inflation and deflation within a certain territory are defined as increase and decrease of the total volume of money plus credit in that territory.

Total Credit Volume

Probably the best approximation on the development of total credit outstanding in the US is the Federal Reserve’s so called Flow of Funds report’s data series “Total Credit Market Debt Owed“.

The long term series shows us the historical relevance of 2008’s credit event:

As I predicted before, I believe that the US has reached peak credit in 2009 and is now on a long term path of credit contraction. I would consider the 2010 bump an anomaly, one that was brought about and fueled by massive and unprecedented government stimulus and bailout programs, and a general yet tentative mood of things potentially looking up again.

As I also predicted, it will be those stimulus and bailout programs that will be aggravating the agony and sluggishness, and prolonging the duration of this necessary correction:

Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.

Zooming in, we can see that as of Q2 2011 (the latest quarter available in the data series) it looks like all these countermeasures have run out of steam and total credit has begun contracting again, from around $52,650 billion to around $52,550 billion, a contraction of roughly $100 billion:

Money Supply

I have recently come to realize, mostly based upon this article that the Treasury’s Supplementary Financing Program really seems to be nothing but another sort of checking account that the federal government holds at the Fed, in particular it is actual spendable money, not just a reserve balance that would still need to be loaned out in order to become spendable money. And as you can see, the Treasury does spend the money, since it obviously regularly draws upon that account, to the point where now the balance on there is zero again. Thus I will from now on include it when adding up the different components to come up with theTrue Money Supply.

Based on that we can see that the true money supply is currently at $2,592 billion, and that so far its been able to maintain its growth through 2010 and 2011 for the most part:

The growth rate is currently at around 6.19% and has been recovering from a low 1.28% around April:

During the period from Q1 to Q2 2011, which is the one we observed credit growth for above it has risen from $2,417 to $2,458, so by about $41 billion, which is less than the volume of credit contraction. And since then through now the money supply has roughly risen by another $140 billion (we’ll have to wait for the Q3 Flow of Funds report to see by how much this may or may not have been counteracted via credit contraction).

Overall it seems as though it is still a pretty close call between inflation and deflation, with inflation having certainly been the dominating force during 2010 and maybe also 2011, but slowly coming to a halt as credit expansion seems to have come to an end at this point.

We’ll have to wait and see what the next few months bring.

Money Supply in China

M1 in in China has most recently begun to fall:

The growth rate has now slowed to around 10%, coming closer to that in the US:

Money supply in China is slowing most likely as a result of contracting credit as a correction from prior government stimulus malinvestments.

As I said before, the Chinese housing bust is underway, the Chinese economy is headed for a severe recession, and that’s what the slowdown in the money supply growth rate may very well be indicating at this point.

Tags: china, credit, money supply, US

The European Stability Mechanism (ESM) – A Treaty of Debt

October 30, 2011 · Posted in Global Economics · 1 Comment

So long as people give moral justification to organized aggression, namely the concept of government, there will be governments. So long as there are governments they will grow and grow until they completely cripple the economy they are leeching on or until they become unable to meet obligations entered into, triggering a reset.

In the long run, government power always tends towards centralization, with more and more power consolidated with fewer and fewer people, with less and less representation of the governed in the process.

It is true that, prompted by public ire from past failures, bureaucrats have throughout history devised methods to try and limit and balance state power through things like constitutions, bills of rights, balance of powers, parliaments, etc. What these measures have accomplished has been to slow down the growth, centralization, and overreach of the affected governments, but they have happened nonetheless, and with catastrophic results in many respects one could argue (1.4 million dead Iraqis might agree with me, just to bring up ONE example).

This is why even a limited government is so dangerous, because all the wealth and economic growth it brings about simply supplies more potential tax loot and thus sets the stage for more and more taxation and indebtedness, and an all the more gigantic and imperialistic state. (This is, by the way, why in the long run, after having suffered from repetitive government depredations again and again, at some point people will have to accept the validity of voluntaryism.)

These are the theories that I have been working with for years now, and there is plenty of historical evidence over the past millennia to corroborate them. The most prominent current example is of course the federal government in the United States, which has grown from a tiny government (about 7% of US GDP back then with lots of sovereignty for individual states) to the largest, most powerful, and most imperialistic government in the history of mankind, with more and more power being centralized in Washington, with Democrats and Republicans complicit in skillfully supplying their respective reasoning in their respective areas of public policy in order to consolidate power in the fields of social and military policies, respectively.

Another contemporary example is of course the European Union. Brussels represents what Washington has been in US history. Each individual crisis has been supplying and will continue to supply Brussels bit by bit with ammunition to expand its powers over member states in their endeavor of building a European Empire.

The ESM that is being discussed now fits right into this pattern and you can find out more about it in this informative clip:

Tags: esm, eu, europe, european stability mechanism, european union, eurozone

Chinese Property Owners Smash Showroom in Protest over Falling Prices; The Chinese Housing Bust is Underway

October 29, 2011 · Posted in Global Economics · 1 Comment

Disgruntled over falling prices, Chinese property owners smashed a showroom:

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

Property ownsers protest in China

That’s 25% overnight, mind you!

MarketWatch notes that the bubble has begun to burst:

Take a look at the Chinese situation. The bubble has been as big as any we’ve seen.
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Ten years ago, homes in Shanghai sold for about six times an average family’s income. Today that’s 13 times. Shenzhen has gone from five times to 14 times. These are off-the-charts absurd ratios. This is a bona fide mania.

And it works fine until the music stops.

Where are we now?

Prices have started falling. Now, fewer than 46 of 70 major cities saw prices stall or decline in September, reports the National Statistical Bureau. As recently as January the number was just 10.

And the FT writes China property developer warns on price falls:

A 30 per cent drop in property prices would precipitate a collapse in fixed investment in China and the country’s investment-driven economy would experience a so-called hard landing after years of annual growth above 9 per cent, according to UBS economist Wang Tao.

There will be no magic cure for China’s housing, stock, and credit bubbles. Prepare for a hard landing in China and thus a hard landing in stocks and commodity prices (except gold) …

Tags: china, china property bubble, housing in china, real estate china