Guest post by Vedran Vuk of Casey Research
Communism screwed up the world. No, I'm not referring to the politics of the 20th century, but rather the reverberations still felt today - particularly in regard to rising commodity prices and oil. We often think about communism as a local intervention in the economies of Russia, China, and other places, but in reality, it was a worldwide market intervention.
Let me explain the problem by discussing economic theory in other examples. When a government artificially lowers prices, the wrong signal and incentives are sent to the market. College education is a good example at present in the US. The government provides relatively cheap state schools and makes education even more affordable with student loans. As a result, some people choose career paths that they otherwise might not. If each student had to pay $40K per year in tuition, I can guarantee that the number of art, sociology, and political science majors would fall through the floor. When tuition is a couple of hundred dollars at the community college or a couple of thousand at the state school, we can afford the luxury of more whimsical degrees with higher degrees of risk.
The same thing happens with interest rates. When the Fed artificially lowers interest rates, businesses begin projects that might not otherwise make sense. With piles of money flowing through the system thanks to the central bank, prosperity appears much greater than it really is. This illusion fools businesses into expanding, even though the total wealth of society has not increased. But when rates start to rise, AKA "the punch bowl is taken away," many of those businesses bust. In short, businesses formed under artificial incentives often can't stand up over the test of time.
So what does this have to do with communism? That unfortunate form of government suppressed the demand for all sorts of goods. While China and Russia were stuck in economic chaos, they curbed the economic potential of nearly a billion people who would have otherwise been producing wealth and consuming commodities to do so. What did that mean for us? Everything was much, much cheaper than it otherwise might have been - especially oil. Consider that just 30 years ago, oil was in the teens. Now, the new normal seems to be the $100 mark. Furthermore, China's presence is being felt everywhere in commodity markets from oil to copper to even gold.
Just like low interest rates encourage wasteful projects, the artificially low commodity prices - particularly oil - did the same thing. Just look at the auto-focused structure of American cities, which barely have any mass transport and where the suburbs are endless miles outside the city centers. Cities such as Los Angeles and Houston were not built with the assumption of $200 or higher oil prices. They were built on artificially lower demand for oil - a low demand created by communist-crippled economies elsewhere. Just like a real-estate investor leverages himself in hopes of a perpetually booming market, we have pushed our cities to the limit assuming an endless supply of cheap oil. In both cases, the interventions of world governments were pushing people in the wrong direction.
The high growth from emerging markets didn't happen merely by chance It's the catching up process of countries finally freed from communist regimes. If China had more economic freedom 50 years ago, I can guarantee that it wouldn't have today's astounding growth rates. It would have already become a modern economy decades ago. When the communist regimes ended, the event was like a bursting dam. Unfortunately for us, we had built a lot of infrastructure in the flood plains expecting that dam to hold forever.
Can you imagine a world where communism had never existed? We would have been faced with more realistic prices and assumptions about commodity supplies much earlier. If China started growing 70 years ago, I don't think that our cities would look the same way at all. Can you imagine if people back in 1946 started to be concerned about oil running out, rather than the past few decades? I can assure you that every US city would have had a decent mass-transit system, urban sprawl wouldn't be so large, and alternative energies would likely be decades ahead of their current progress.
Communism wasn't just an episode in history - it's something that continues to impact our daily lives, whether it's the location of one's house or the commute to work or prices at the store. Much like WWII gave us the baby-boomer generation (which could cause a fiscal crisis down the road), communism will continue to send rippling effects through the markets that will last for the rest of our lives.