"Inflation: Lessons From Last Empire's Collapse"
by akrainer
"So far, the dreams of 1,000-year empires and stable world domination have eluded the ruling elites throughout history and across the globe. Empires arise, sustain themselves for a century or two and then rapidly decay and collapse. The collapse may appear relatively fast and obvious in hindsight, but in reality it spans decades, may appear as a series of temporary crises and only become obvious very late into the slow-motion train wreck.
Nonetheless, the fatal imbalances that corrode an empire’s political, economic, and social foundations do become discernible well in advance of the ultimate collapse. As a rule these imbalances emerge as consequences of too much war and too much debt. As they decay, empires always degrade their own currency in the process of extracting wealth from the population to funnel it toward the ruling oligarchy and the military. In ancient times this was done by diluting gold or silver content of the coins in circulation. In modern times, it is done through inflation of the currency.
The most recent instance of this process was the collapse of the Soviet Union through the decade of the 1980s. The Soviet Union was a global superpower counting nearly 300 million people and an empire spanning over 40% of Eurasian land mass. In addition to a large, well educated population and a broadly diversified industrial base, USSR controlled a formidable treasure trove of natural resources containing some of the world’s most abundant reserves of natural gas, oil, coal, iron ore, tin, lead, gold, silver, palladium, platinum, diamonds, timber, rare earth minerals and arable land.
In the post World War II period the USSR developed rapidly and its population even enjoyed a period of relatively high prosperity during the 1960s and 1970s. However, economic growth started to slow down in the late 1970s and from 1977 until its final collapse in August of 1991, the Soviet economy experienced an accelerating economic deterioration leading to the worst post-war economic depression.
• GDP growth: from 1979 through 1982, GDP growth slowed to about 1.4%, picked up slightly, to about 2% in 1983/84 but then declined again, dropping close to zero during most of the 1980s
• Defense spending: defense spending was overstretched at the expense of civilian production; it had grown by 50% from 1965 to 1981, from 45 billion roubles to over 80 billion, bringing the country’s defense burden to nearly 13% of the GDP.
• Constraints to growth: Mikhail Gorbachev’s efforts to institute reforms of the system and reignite growth were constrained, particularly on the energy front. As the demand for energy grew, cost of offsetting the declining oil production started to rise rapidly.
• Budget deficits: Soviet government spending rose a record 30 billion roubles in 1986 and another 18 billion roubles in 1987 while tax revenues grew only 5 billion roubles. This gave rise to a six-fold increase of the nation’s budget deficit from 1984 to 1987, to 7% of the GDP. CIA’s analysts expressed dismay to find that, “Moscow is essentially financing its deficits by printing money from thin air.”
• Inflation: while inflation held steady at around 2.2% during the five years from 1982 to 1987, in 1987 it shot up to 9% and continued to creep up during the remainder of the decade.
In spite of the many obvious differences between the USSR and the United States, many of these differences are in fact rather superficial while similarities and parallels may be more structural and relevant. The Soviet government was able to stave off economic collapse and hyperinflation because it had full control over the wholesale and retail prices and over central bank’s monetary policy including money supply and interest rates.
However, controlling all the levers of state power did not exempt the Soviet state from fundamental principles of economics. When price controls were finally abolished on 2nd January 1992, inflationary pressures burst through the open dam and prices of industrial and consumer goods recorded an almost immediate 500% jump. Within the year, inflation reached 2,500%. The inevitable readjustments, delayed over decades of central planning and misallocation of resources, plunged the nation into one of the deepest and longest economic depressions ever recorded.
Today, the economy of the United States is similarly mired in a profound crisis, and unresolved economic imbalances: the empire is overstretched militarily, “defense” spending and budget deficits continue to grow and are being covered by printing money out of tin air - a process that's now entirely spun out of control. While the American government doesn’t practice central planning or price controls, the Federal Reserve has effectively taken over this role by manipulating interest rates and commodity prices. As in the Soviet Union, the Fed’s meddling resulted in massive misallocation of resources spawning a large economy of zombie corporations and unicorns.
There can be little doubt that the American economy is more robust than that of the late Soviet Union. But history is clear on this: no empire, regardless how powerful at its zenith, is exempt from the laws of economics and we should expect more economic pain ahead as the empire’s foundations continue to erode. One very likely outcome of the coming crisis could be the collapse of the currency and an acceleration of inflation."
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