Lenin’s New Economic Policy (NEP)

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.

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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

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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.

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Mish & Max Keiser, Economic & Political Predictions for 2012

Here are Mish’s predictions for 2012:

  1. 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.
  2. 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.
  3. 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.
  4. 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).
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

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

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.

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ICAP Testing Trades In Greek Drachma Against Dollar

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 …

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China Housing Bust – Prices in Ordos Fall by 62.5 Percent

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.

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