America’s New Government-Controlled Economy

David Reavill
6 min readMar 19, 2023

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General Secretary Gorbachev and President Reagan. The two most responsible for reforming the old Soviet Union’s Economy

I grew up during the Cold War. That period when the United States and the Union Of Soviet Socialist Republics squared off against one another. A time when Americans’ free market economic system countered the Central Planning of the Russians.

Of course, in the end, the Americans prevailed, and much of the credit was given to that free market system that out-produced the Central Planners of the USSR. By 1989, the Soviet Union fell, with all its relics of Central Control. Gone were the 5-year plans of Stalin and Kruschev, and in its place, a new economy under Putin.

Interestingly, the CIA, of all places, kept a record of all the “politically incorrect” jokes of the Soviet era. I am still trying to understand why the CIA kept such a record, but after the USSR fell, they released them. A couple of my favorites include:

A man walks into a shop. He asks the clerk, “You don’t have any meat?” The clerk says, “No, here, we don’t have any fish. The shop that doesn’t have any meat is across the street.”

I love the quirky humor. If you want no meat, you have to walk across the street.

As soon as the US Central Planners took over our economy during the Pandemic, the first thing to appear was shortages. A bureaucrat in far-off Moscow, or Washington for that matter, cannot be expected to know just how much meat or fish to allocate to a local market. Shortages are always part of a Centrally Planned system.

Then there is this joke, which captures the essence of the “pay to play” political system.

Socialist Revolution. The Chairman gives a speech: “Dear comrades! Let’s look at the amazing achievements of our Party after the revolution. For example, Maria here, who was she before the revolution? An illiterate peasant, she had but one dress and no shoes. And now? She is an exemplary milkmaid known throughout the entire region. Or look at Ivan Andreev. He was the poorest man in this village; he had no horse, cow, or even an axe. And now? He is a tractor driver with two pairs of shoes! Or Trofim Semenovich Alekseev was a nasty hooligan, a drunk, and a dirty gadabout. Nobody would trust him with as much as a snowdrift in wintertime, as he would steal anything he could get his hands on. And now he’s Secretary of the Party Committee!”

Power corrupts; absolute power corrupts absolutely.

Politicians cut from the same cloth on both sides of the Iron Curtain. A certain amount of Hubris always comes with the power we give our Political Class. When one can make decisions that control everyone’s life, there is a compulsion to go beyond competence. Thus Congressmen and Senators who couldn’t run a lemon-aid stand suddenly feel that they have the answers to systemic problems of inflation or ingrained Supply Chain issues. It’s not that they have the answers. It is just that they have the power.

It’s why 5-year plan after 5-year plan in the old Soviet Union kept failing. Politicians set unrealistic goals without implementing any infrastructure to manage the process, resulting in a catastrophe.

But while the Soviets had their politicians in Moscow plan their future, here in the US, we allowed the average citizen, the farmer, and the shopkeeper to decide what to produce and when to sell. This economic freedom created the planet’s wealthiest country, allowing America to outdistance the Soviets by far.

But, in one of the greatest ironies of history, America has gone the way of the Central Planners for the past three years. The Covid-19 Health Scare drove politicians in this country to assume absolute power over their local economy. Suddenly State and Local Governments presumed that they had acquired “emergency” powers and could determine those businesses and services that were “essential” versus those that were “non-essential.” And these politicians closed the “non-essential” companies, for many closing their doors permanently.

This power and authority were never presumed to be part of a Mayor or Governor’s role. And just like that, the nation of free markets became the country of “Central Control.” One of the most egregious of these, Governor Gretchen Whitmer, has recently admitted that many of these draconian lockdowns probably did little to curb the Pandemic. Unfortunately, it is too late for her “mea culpa.”

We are also living through a second type of “Central Planning.” It’s Monetary planning by the Federal Reserve. The 12 Fed’s Open Market Committee members recently elected to take the interest rate from zero to almost 5%. The Fed’s short-term interest rate decision influences many interest charges throughout the financial system. And with an increase that’s this stark and dramatic, it has devastated entire sectors of the economy. Real Estate was the first to feel the impact of these higher interest rates. Rates on mortgages immediately rose, which caused the price of housing to fall. The average new home price fell $70k in the last five months alone.

But Real Estate is far from the only sector of the economy suffering. Any financial institution that lives on the “Spread,” that’s, the difference between their cost of funds, and their income, is hurting right now. Chiefly this includes most financial services firms, but primarily commercial banks. Ironic the nation’s Central Bank, the Federal Reserve, is impacting its principal constituents, the commercial banks, more than most other institutions.

By raising interest rates, the Fed raises a Bank’s cost of funds and is the fundamental reason we see so many banks in trouble. Of course, additional factors contributed to some of the Bank’s failures, such as poor or corrupt management. But raising their essential cost of funds certainly contributes to this Crisis.

Rounding out this Central Planing Trifecta of economic woe is the “bail-out.” Just getting underway now, this is how governments, and sometimes industry groups, reward bad behavior.

Silicon Valley Bank

For example, let’s look at what may have happened at Silicon Valley Bank. I’m relying here on news reports, as I have yet to see the regulator filings, but it appears that three factors contributed to the Bank’s failure.

First, in a little over a year, SVB’s cost of funds went from almost nil to nearly 5%. Right away, that kills a bank’s income statement. Next, the Bank made some bad loans, and writing these loans off would drive their income further into the red.

And finally, the Bank took the recommendation of the Federal Reserve and invested its reserves in US Treasuries. A great strategy when your cost of funds was 25 basis points, and the yield on Treasuries was 2% or 3%. But a disaster when your cost of funds exceeds Treasures, and you are locked into the upside-down net for the 3 or 5 years until the bond matures. As any bond investor knows, as the Fed raised interest rates, they drove down the principal value of the Treasury Bonds SVB invested in. It was reducing SVB’s reserve capital and forcing them into bankruptcy.

That’s a brief overview of America’s three-year experiment in Central Planning. During the Central Planning of the Pandemic, the nation experienced the most significant economic decline since the Great Depression of the 1920s and 1930s. While during the Central Planning of the nation’s monetary policy, we are experiencing a growing Crisis in both the real estate and banking sectors.

In short, America’s Central Planning Experiment is going about as well as the old Soviet Union’s…

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David Reavill

David Reavill writer + finance +iconoclast + hiker + Pennsylvania #valueside daily podcast + medium + meditate valueside.com/links