It was revealed this week that Citigroup’s proprietary trading team is being wound down after the Volcker Rule had excessively restricted it; its head Anna Raytcheva had spent her early years in communist Bulgaria. Moreover, her boss Mark Tsesarsky was brought up in communist Ukraine. That’s not a coincidence; it is highly significant that an upbringing in a centrally planned economy gives you a big boost in today’s capital markets. The ultra-Keynesians in the world’s central banks and governments have in the last decade distorted the world’s economy to such an extent that the old rules of capitalism no longer work at all, while the directives of a Gosplan provide better pointers to making money.
Under the Gosplan system, the state planning agency decided what would be produced each year, and orders were sent to factories to produce it. Naturally, the figures of production were falsified, so each successive Gosplan tended to be more inaccurate than the previous ones. Massive investments were undertaken because the head of Gosplan or some senior minister thought they were necessary, so steel was overproduced under Stalin and Moscow filled up with 5-story apartment blocks even though the populace did not like living in them. Consumer goods, thought unimportant, were in extremely short supply.
Although Soviet productivity growth was good in periods of recovery from revolution and war, once stability was achieved it began to decline, so that by 1985 the head of Gosplan, Nikolai Baibakov, was fired by Mikhail Gorbachev in a vain attempt to get the economy moving again. Baibakov, who lived until 2008, disapproved of the free market, believing it was only the wind in the sails of the economy, while central planning was the rudder.
If you wanted to be rich and successful under the Gosplan system, you produced what the plan ordered, whether or not there was any market demand for it.
In today’s economy central banks artificially hold down interest rates so they are far below the inflation rate, and bear no relationship to the time preference for money of a free market. By doing this the world’s central banks direct investment to fixed assets such as real estate, while the creations of their extreme monetary policies, the hedge funds and private equity funds, pump up values in the tech sector. Each year the market becomes more distorted, so that the goods and services produced deviate more wildly from what the free market would demand.
Just as Gosplan dictated massive unproductive investments in sectors favored by the nomenklatura, so today’s economy produces massive unproductive investments in sectors pushed by the artificial monetary policy, the hedge funds and private equity funds that exist because of “funny money” or indeed, as in “alternative energy” by politicians themselves, just as in the old Soviet Union.
As with the Gosplan system, the misdirection of investment through “funny money” produces productivity decay over time. Much to the surprise of conventional commentators, U.S. second quarter productivity again recorded a decline, both against the previous quarter and against the corresponding quarter a year ago. This appalling performance, which if it continues will condemn us all to eventual impoverishment, is only too reminiscent of the Soviet economy’s performance during the dismal Brezhnev years of the late 1970s and early 1980s. Of course, just as in the Brezhnev Soviet Union, we can expect this clear evidence of economic malfeasance to disappear shortly as the statistics are cooked, as they have been already in the inflation series.
Finally, as in the Soviet Union, you make money in this economy by doing what the government wants you to do. You must set up a hedge fund or private equity fund, borrow money at a below-zero real cost, and then invest in real estate, tech “unicorns” or government-favored “alternative energy” projects. None of these investments are especially profitable, if they are profitable at all, but their value keeps rising (or they are subsidized into profit). Thus by investing in them fund managers can record a steady increase in asset value on the books and pay themselves bonuses in real cash money based on the increase in net asset value.
As for the housing finance sector, in which Ms. Raytcheva and Mr. Tsesarsky achieved their greatest triumphs, that does not even pretend to bear any relation to the free market. Home mortgages receive an entirely unnecessary government guarantee, and are then distributed by Fannie Mae and Freddie Mac, two institutions straight from central casting of the Soviet system. If those institutions betray any remnants of free market thinking in turning down borrowers with inadequate incomes and no down payment, the FHA is available with a gigantic spigot of taxpayer money to fill the gap with few if any questions asked.
At this point, the similarities of our economy to the Gosplan system are greater than its differences from it, and certainly greater than its similarities to a true free market. It is thus little surprise that the most successful operators at the quarry-face of the market itself, making money out of its fluctuations for the country’s largest banks, spent their formative years in centrally planned economies. There they learned subconsciously how business was done and money was made in a system in which investment was directed by government agencies. Yes, they got fancy degrees from Western colleges afterwards, but their traders’ instincts were formed under Gosplan, or their local versions of it, and those instincts have served them well.
The current system was not devised by Communists, but it was devised by extreme monetary and fiscal Keynesians, whose outlook is as close to Communism as makes no difference. Keynes himself was highly sympathetic to Communism in the 1930s; more important, he denied the incentive effects of interest rates on savings and investment. To Keynesians, interest rates and money itself are things which enlightened policymakers can adjust at their whim to suit their policy preferences.
Hence current monetary policy is Keynesian, in the sense that it is determined by bureaucrats in the light of their beliefs about appropriate policy. The free market, or markets in general, have nothing at all to do with it. Traditionally, this kind of fooling around was prevented by the outbreak of serious inflation, causing popular discontent that forced a return to sensible policies. This time around, the inflation has not appeared, much to the loss of the global economy in general and savers in particular. (Savers would far rather suffer a relatively short burst of inflation, which they could hedge through buying gold, real estate and other “hard” commodities than sit through a decade of negative interest rates, which eliminate all possible safe havens and erode the value of their savings year by year.)
In any case, the policy instinct that causes governments to set interest rates as low as they can fix them, while making no serious attempt to balance government spending against revenues, is the same as that which caused Comrade Baibakov to make such an appalling mess of the Soviet economy for the 20 plus years he was in charge of Gosplan. (1955-57, 1965-85; he was fired the first time because he objected to Nikita Khrushchev’s mild de-Stalinization.) To our monetary and fiscal masters, the free market is the unimportant wind in the sails of capitalism; they as planners provide the all-important infinitely wise rudder steering the economy in the direction they want it to move.
The adulation of Ben Bernanke after the financial crash of 2008, and the breathless attention to every comma in Fed speeches today indicates that this attitude is more or less universal among the media and the chattering classes. In reality Baibakov and Bernanke produced nothing, they simply diverted the direction of their respective economies from the economically optimal path into channels chosen by themselves. By doing so they caused immense wealth to flow into the pockets of a few politically favored elites, while impoverishing the mass of the population.
The rise of populism in both the U.S. and Europe suggests that the populace as a whole has caught on to the scam which policymakers have perpetrated upon them, replacing their more or less free market with a far less efficient centrally planned mess. In the Soviet Union, it required the services of Lavrenti Beria and the Siberian prison camps to hold down a population impoverished by the ineptitude of Baibakov and his associates. As the failures of current monetary and fiscal policies become more obvious to the populace, we should expect a move towards similar controls here.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)