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June 27, 2004

Mirror:Mirror - The Command Economy Takes Hold
by Warren Pollock

Working from a very low economic baseline, the Chinese command economy accomplished some very incredible things. Scarce resources were centrally allocated by the government into an economic master plan. The command economy was somewhat successful in meeting basic needs like feeding large numbers of people and addressing issues like population control. Ultimately however, command economies prove to be so inefficient that they fail under their own weight.

Economic systems fail when the majority of people realize that political promises have been broken. Capitalism and Communism are two different philosophies. Ironically they share the same core political promise;

The economic life of the USSR is determined and directed by the State National Economic Plan, with the aim of increasing public wealth, of steadily raising the material and cultural standards of the working people, and of consolidating the independence of the USSR and strengthening its defensive capacity.

The command system in China was close to failure, and we all witnessed the command system in the Soviet Union fail catastrophically. To the Chinese leadership the Tiananmen event, and the Soviet experience, provided politicians with the pragmatism they needed to implement free market reform. It was preferable to have political stability at the expense of ethos.

In both places, reform reduced the footprint of the command economy and the economic system became more productive and effective with more winners than losers. Russia blocked change and experienced a dislocation China slowly bended to the inevitable and has been able to manage the dislocations.

In both cases, as standard of living improved the demand for revolution went out the door. A risk remains in that new expectations were formed. Is it physically possible to meet the expectations that More people in China have? People in China are expecting to have higher levels of consumption, better housing, and access to reliable electricity. Is this realistic given global resource constraint and contention?

Mirror Mirror¹: The US has been moving from a free market to a command economy. Politicians don't want to break the basic promise. Would you, as a politician, like to tell people that the American Dream needs to be redefined to a global world?

Everything has and will be done to support the impossible! Inefficiencies and divergences are creeping in as command dominates the free market. Market mechanics are harder to explain.

What are people going to do in the US if expectations are not fulfilled?

In China people had limited expectations, both at the time of revolution and at the time of reformation. The same could be said regarding expectations at the dawn of Soviet Revolution and again at the inflection point of collapse. The US has a huge standard of living and greater expectations.

People won't revolt when they can happily own, benefit from, and acquire property. If you are "debt heavy" do you really own anything? If you are a saver are you rewarded or punished? Basically, I believe the "Virginia Declaration of Rights" by George Mason, had it correct in the first place and for political reasons the US constitution got it wrong.

The "Virginia Declaration of Rights" by George Mason, had it correct in the first place. That all men are by nature equally free and independent and have certain inherent rights, of which, when they enter into a state of society, they cannot, by any compact, deprive or divest their posterity; namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.

More question than answers;

Control of information was a big factor in managing the expectations within a closed society. In our society, are events being used to justify constraints in information flow?

Will outside forces drive change by influencing events and elections to highlight the unattainability of expectation?

What kind of events, or transition will we have? Inflation, Deflation, Both, Revolution, Fascism?

Will gold ownership provide a hedge? I think it will.

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Zero Down for the American Dream - Ron Paul

The House Financial Services committee on which I serve often passes legislation that wastes taxpayer dollars, harms the economy, and egregiously violates the Constitution. The "Zero Downpayment Act" recently passed by the committee is a striking example of a bill that does all three.

This legislation is considered completely noncontroversial by both political parties, and will breeze through the full congress later this summer with the blessing of the administration. Nobody in Washington thinks twice about another welfare scheme that further entrenches the something-for-nothing mentality so prevalent today in America.

The Zero Downpayment Act, as its names suggests, creates a federal program that allows some homebuyers to obtain federally-insured mortgages without making a down payment. "Federally-insured" really means taxpayer-insured, as taxpayers like you foot the bill for defaults. So while Congress congratulates itself on yet another program that supposedly helps the poor, it is taxpayers who pay for the inevitable defaults.

Every mortgage banker knows that even a modest downpayment greatly increases the likelihood that a buyer will pay his mortgage as promised. A buyer who has consistently saved money for a down payment is by definition a better credit risk, and it's harder to walk away from an obligation if it means losing a sizable amount of hard-earned money. A downpayment measures a buyer's willingness and ability to make sacrifices in order to reach a goal and improve his standard of living. Banks used to recognize hard work and thrift as indicators of creditworthiness, and in a free market would demand a significant down payment for virtually all homebuyers.

But as with all federal intervention in the economy, housing welfare distorts the mortgage industry and makes ordinary Americans poorer. Banks, of course, love federal mortgage programs- after all, the risk of default is transferred to American taxpayers. The lending mortgage banks get paid whether homebuyers default or not, and what business wouldn't love having the federal government guarantee the profitability of its ventures? Between the Federal Housing Administration, which is the largest insurer of mortgages in the world, and the government-created Fannie Mae and Freddie Mac corporations, the mortgage market is hopelessly distorted. Millions of mortgages in this country are federally insured, and the tax bill for defaults could be astronomical if the housing bubble bursts.

Despite the congressional rhetoric about helping the poor, federal housing policies often harm poor people by pushing them into houses they may not be ready to buy. Given the realities of insurance, property taxes, maintenance, and repairs, many low-income buyers lose their homes and destroy their credit ratings. Easy credit and low interest rates, courtesy of the Federal Reserve, have dramatically increased housing demand and artificially increased prices. Zero down payment schemes do the same thing by pushing renters into the housing market. This increased demand actually serves to price many poor Americans out of the housing market indefinitely.

The American dream cannot be lived courtesy of taxpayer handouts. The experience of working hard, saving for a downpayment, and buying a home is the essence of the true American dream. Eventually the beneficiaries of government programs stop thinking of themselves as independent citizens, and start viewing themselves as wards of the state. It is impossible to maintain a free society when more and more people look to the state to provide what Americans used to provide for themselves.

¹Editorial Reviews Amazon.com When their mission to secure a mineral trade ends in failure, a freak ion storm catches Kirk, McCoy, Uhuru, and Scotty in mid-beam-up and sends them to a parallel dimension where Federation leaders are as ruthless as the Klingons, and Star Fleet promotions are attained by assassination. They find themselves on an alternate Enterprise, peopled with evil counterparts to the individuals they know (all attired in glittery, glam-rock uniforms), including most famously an evil, goateed Spock whom Kirk must convince to overthrow the empire. Kirk and his landing party try to fit in with this crew of villains who are threatening with annihilation the planet where the mineral trade went sour, while searching for a way back to their world and fending off assassination attempts.

Warren Pollock
The Macroeconomic Newsletter

This generalized publication seeks to discuss macroeconomics, technical analysis, investing theory, politics, news, and markets. This newsletter does not provide specific advice to any individual. Its our recommendation and opinion that individuals should seek the counsel of a licensed financial adviser who can design a plan appropriate to specific financial conditions, objectives, and risk tolerance. The publishers of this letter may purchase, hold, and dispose of positions in financial instruments discussed herein at will. The newsletter is published to its subscribers on a regular basis. unattainability of expectation?

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