The Soviet Union's intractable economic problems:

  No, I didn't foresee the peaceful breakup of the evil empire. However, I did know that five decades of autocratic socialism had to leave the Soviet economy in ruins. I did foresee the time coming when Soviet despots, like so many other lesser despots of that time - and today - would simply have to reduce tensions enough to establish normal business relations with the West. The all powerful dollar, when saved from inflation, was the most powerful strategic weapon of the conflict.

  The Miami Review:

  (3/27/72), p. 1 and 16)

  "Russia's winter wheat crop has been severely damaged and her sugar beet and sunflower seed harvests have been poor. She has been forced to make substantial agricultural purchases in western markets. This expense, coming on top of her increasing Cold War expenses in Vietnam, Cuba, Egypt, Chile, Bangladesh, and elsewhere, might just be more than she can conveniently handle."

  Even at that early date, it was already obvious that the Soviet Union's economy was in far worse shape than ours.

  (From my carbon dated 3/2/81)

  "The Kremlin's primary problem is, of course, economic. All the problems that afflict the U.S. economy because of government interference and stupidity afflict the Soviet economy in spades. The velocity and viciousness that inflation has brought to the business cycles of capitalist nations are mere minor irritants compared to the effects of rapid economic fluctuations on the comparatively inflexible socialist economies.
. . .
  "Financially, Russia is bleeding from many wounds. Her agriculture is a disaster. She must maintain a huge army on her Chinese border, and must both support and control her restive East European empire. Foreign policy initiatives in Southeast Asia, Afghanistan, Cuba, Central America, and Africa constantly drain vital financial reserves. Among all Russia's allies, only Libya and Iraq pay their own way.

  "There is thus every reason to expect that the Kremlin may at some time in the near future look with favor on arrangements that can ease Russia's financial burdens. It may be that the Kremlin's economic worries are actually beginning to outweigh its imperial ambitions. (BINGO TO THE MAX!) The Western World also is in no financial shape for a renewed arms race.

  "Of course, the Kremlin will bargain hard, and care must be taken in these negotiations. However, mutually beneficial arrangements, whose fulfillment will be in the interest of both sides, may actually now be possible. This is a possibility well worth exploration."

  (From my carbon dated 6/8/81)

  "After more than three decades of Cold War, however, our defense industry and military are anything but lean. The military is fat with fancy facilities and expensive weaponry, and top heavy with brass; the nation's defense industry is overstaffed and laden with expensive overhead costs and bloated wage and salary scales. Defense procurement regulations have become a wasteful maze of technical, political, and ideological requirements. Like the proverbial two-legged dog, the wonder isn't that it stumbles, the wonder is that it moves at all.

  "This is the nature of the organization that will preside over a great arms buildup that must secure the nation's defense without crippling its struggling economy. Fortunately, the Russian's are anything but ten feet tall; their defense industry and military are even less efficient and labor under even greater difficulties."

  (7/17/81, pp. 6 and 7)

  "The Cold War, hopefully, won't be settled in one climactic battle. It will drag on, draining the resources and political will of the combatants. Under such circumstances, economic factors will obviously play a predominant role. (BINGO)
. . .
  "Events in Iran highlight something that has occurred in many other places supposedly 'lost' when despots unfriendly to the West came to power; unless a nation is physically occupied by Russian troops, the politics of its rulers usually don't matter. The West has the economic muscle; almost all nations have to do business with the West on terms familiar to ordinary Western commercial practice.

  "Allende in Chile had to sell his copper to the West; a host of unfriendly OPEC regimes, some of which are allies of Russia, must sell their oil to the West; Russia herself provides the West with such scarce strategic metals as titanium and platinum as well as with oil.

  "This economic reality will continue unless and until the inflation of the dollar and other primary Western currencies destroys the West's commercial vitality. (BINGO)
. . .
  "Sound currencies and capitalist markets are the most effective Cold War weapons in the Western arsenal. (BINGO TO THE MAX!)

  "With a few exceptions, such as Cuba and North Vietnam, leftist and other unfriendly Third World despotisms pose few dangers to Western interests; with a few exceptions, such as Libya and Iraq, Russia's allies are financial liabilities for Russia.

  "It is clearly in our interests to increase the financial burdens Russia must bear as the world's last great imperialist power.
. . .
  "Occasional reverses are to be expected. Ironically, many of these reverses can turn out to be advantageous to the West. Russia's Third World 'victories' in such places as Cuba, Afghanistan, Ethiopia, Angola and Vietnam have imposed significant financial burdens on Russia's already over strained economy. This strain can and should be increased by the provision of modern small arms to insurgents in these nations.
. . .
  "Cambodia and Laos, Ethiopia and Angola, and Afghanistan are places where a little assistance to existing insurgences can impose increasing drains on Russia and thus impose real limits on her imperial designs."

  Reagan strove mightily to do this, but Congressional Democrats frequently took Russia's side and strove to block him.

  (From my carbon dated 1/7/82)

  "It would not surprise me a bit if a strategic arms limitation breakthrough occurred sometime in the near future. Moreover, despite flagrant treaty violations with respect to the use of deadly chemical and biological warfare agents in Southeast Asia and Afghanistan, Russia might actually be disposed to comply with the terms of such a treaty. Russia needs it even more desperately than we do.

  "Russia's economy is in much worse shape than our own. Subject peoples throughout her vast empire are increasingly restive, and a substantial number of proxy conflicts around the globe demand increasing allocations of scarce resources to build up and sustain conventional warfare capabilities. Expensive strategic weapons systems can't help subjugate Polish workers or subdue anticommunist African guerrilla fighters.

  "Any substantial agreement on strategic arms control would make possible truly substantial cuts in government expenditures, turn the economic situation around, and touch off a major boom in the stock market." (BINGO TO THE MAX!)

  A decade later, with the demise of the "evil empire," all this would come true.

  (10/25/82, p. 5)

  "A stable dollar easily becomes the predominant weapon of the Cold War and the most potent force behind American diplomacy. A strong military defense is obviously needed to deter overt Russian aggression. However, oil keeps coming from OPEC suppliers, even from such ideological adversaries as Libya, Algeria, Iraq, Iran, and Angola, not because of our strategic missiles, but because of the dollar. East European satellites strain at the ties that bind them to Russia not because of the military might of NATO, but because of the irresistible attractions of the hard-currency commerce of the Western World. The attraction of the dollar, not the United States Navy, kept supplies flowing from Latin American nations, and from Argentina as well, during the Falkland Islands conflict. If Russia remains the very model of a reliable supplier of such vital resources as titanium and oil, you can be sure that its hunger for the dollar is a far greater factor than its fear of the United States Army.

  "Liberal policies involving renewed acceleration of the printing presses to artificially force interest rates down can't possibly relieve current economic problems for more than a few months. What they can do is to quickly reignite inflation (despite continuance of high levels of unemployment and unused capacity), make all existing problems much worse, undermine the dollar, and once again leave the Western World's commerce naked in the face of the world's continuous flow of political and military storms.
. . .
  "The major difference between the commercial and ideological vulnerability of the early 1970s and the seeming invulnerability of the early 1980s is the renewed stability of the dollar."

  (From my carbon dated 8/29/84)

  "Under Carter-Mondale, Uncle Sam was a wimp, and the Russians exploited the situation in every direction.
. . .
  "The Reagan Administration has had some bad foreign policy defeats, particularly with the idiotic effort launched in Lebanon, and has had few substantial victories. But Russia has definitely been thrown on the defensive during these last few years.

  "In addition, the World's collection of petty despots has declined somewhat, and those that remain include fewer of the aggressive types. Even the aggressive despots that remain now cause far less trouble than when Carter-Mondale were the wimpy leaders of the Western World. Whether the public perceives it or not, there is no doubt that the Western World is far safer today than in 1980.

  "The military buildup, however, remains terribly wasteful, unbearably burdensome, and obviously unsustainable. The only real hope here is that, after the elections, the Russians, beset with their own intractable economic problems, will become more reasonable with respect to arms control. (BINGO)

  "The cost of the arms buildup has had one positive effect. Both the Russians and the United States are currently spending far too much on weapons to be able to afford any substantial outbreak of actual military conflict." (BINGO TO THE MAX!)

  In fact, Gorbachev has confirmed that the enormous cost of the Cold War had become unsustainable for the battered Soviet economy, finally convincing the Kremlin leadership that an end to the Cold War was essential.

  The inherent weakness of the oil cartel:

  By the end of 1973, it was already clear to me that the oil cartel depended on the stupidity of the United States Government for its strength and effectiveness. The cartel does continue to exist today, but without any real power over prices.

  (10/5/73, pp. 1 and 8)

  "The government wants substantial additional supplies of clean fuel, produced and delivered without environmental damage, at no increase in cost and without any widening of profit margins in the industry. This they want in the face of a series of dollar devaluations, a raging inflation and record-high financing costs. One doesn't have to be a genius to predict failure for this misguided effort.
. . .
  "The economic lesson is simple. Prices that are free to rise will mean more efficient use of raw materials and healthy profit margins that will assure adequate financing for new production and environmental safeguards. Price controls will assure continuance of wasteful practices, squeeze profit margins and render inadequate financing for future needs and environmental safeguards. Government price controls can make the feared shortages a reality." (BINGO)

  (From my carbon dated 12/15/75)

  "'Expenses rise to consume income available!' is one of those satirical 'laws' that all too often prove true. Government is generally obedient to this law, often not only spending all income available but also consuming reserves of credit as well. Consider, as a prime example, what is happening to the nations of the oil cartel.

  "Except for sparsely populated cartel members such as Kuwait and Saudi Arabia, just about every member of the oil cartel has succeeded in increasing spending rates to points exceeding the fantastical earning rates of their oil exports. Even Iran is now being forced to cut back from some of her grandiose spending plans. The expected shift of capital from the Western nations to the oil cartel nations could easily become the non-event of the last third of the twentieth century. (BINGO)

  "However, the statesmen of the Western democracies, in their infinite wisdom, and in preparation for upcoming elections, have been doing everything possible to save the oil cartel nations from themselves. The political leaders of the United States and England have been engaged in a fierce two year struggle to prevent the oil companies from supplying the world with enough oil to break the cartel. Moreover, in preparation for 1976, the United States and several other Western nations can be expected to accelerate the rate at which they are expanding supplies of money and credit. This will cause another inflationary surge in demand that could conceivably save the oil cartel from destruction. (BINGO)
. . .
  "It is likely that, when the dust settles, the oil cartel nations will have provided the world with further proof, if any is still needed, that governments are ineffective as capital formation or capital management agents, and that only private economic entities and entrepreneurs, for all their many weaknesses, can be entrusted with the vital tasks of saving income and forming and managing the vast amounts of additional capital needed to provide the material demands of future generations." (BINGO)

  (9/27/77, pp. 1 and 6)

  "There is nothing more certain in economics than that cartels of producers who artificially boost prices substantially above open market prices must eventually be destroyed by adverse market forces.

  "No matter how strong the cartel may seem in the beginning, no matter how easy the price manipulation may initially appear, all such cartels eventually suffer the same fate.

  "It may take years, even decades, depending on the strength of the cartel and the extent to which prices are boosted above market levels, but high prices must eventually bring forth irresistible market forces while the cartel's powers waste away to nothing.
. . .
  "The oil cartel will not have the strength to survive the next recession." (BINGO)

  The oil cartel continues to exist, but more as just an association of producers without much pricing power.

  "Indeed, if it were not for decades of inflationary policies pursued by the United States, the oil cartel probably would not even have gotten off the ground.
. . .
  "Moreover, it is only the stupidity of the governments of England, Canada and the United States that has permitted the cartel to live this long."

  (From my carbon dated 8/9/78)

  "The excessively sharp price increases of 1973 would have floundered to a substantial extent during the recession that followed. However, the United States government, through price controls, obstructionist regulation of its energy industries, and continued inflationary fiscal and monetary policies enabled the OPEC nations to sustain their high prices. Nevertheless, despite the incredible stupidity of this nation's energy policies, the market mechanism has been responding well. Subsequent oil price increases have been limited to levels substantially below the prevailing rates of inflation, and an increasing glut of oil and gas supplies has been brought onto the world market.
. . .
  "All of this is so simple, so basic, that it could only be overlooked by those in the United States government, and especially in the Department of Energy, determined to make a career out of the mythical energy crisis. Their fall-back position is that all these energy finds are finite; even if there will be no shortage in ten or twenty years as previously feared, the shortage has not been permanently overcome, it has merely been put off for 50 to 100 years. They now claim we must undertake massively expensive crisis programs to deal with the ultimate shortage.
. . .
  "It is even more ridiculous and wasteful for our government to try to solve the technological problems of the twenty first century than it would have been for those who depended on the horse and buggy during the nineteenth century to worry about the technological problems of the 1970s."

  (8/20/79, pp. 1 and 2)

  "There are, of course, obvious flaws in the energy market. However, it is only the United States Government, with its debilitating array of existing and threatened special taxes, and controls on prices, allocations and production, that stands in the way of the efficient exploitation of this needed energy.

  "As with so many economic problems, the Government is not the solution, it's the problem.
. . .
  "Even the recent decision to phase out some price controls will be more than offset by the disincentives of remaining price controls, new and threatened taxes and regulations, and the massive misuse of energy industry capital in futile attempts to stimulate the production of synthetic fuels.
. . .
  "OPEC will retain control over energy prices as long as the United States permits its inflation to continue, and as long as the World uses dollars to buy oil. Washington's infatuation with energy taxes and regulations also provide substantial support for the OPEC cartel.

  "The shortage is not of energy, but of economic intelligence in Washington."

  (4/22/81, p. 5)

  "The U.S. Government created the energy crisis of the 1970s. Now, with deregulation of the energy industry and the steady reduction in money supply expansion rates, the energy crisis is dissolving before our eyes.

  "The 1980s could well be a decade of energy surplus and, in the absence of further government stupidity, there should be no problem with energy supplies for the foreseeable future. (BINGO)
. . .
  "The economic world immediately changes when the Fed's printing presses stop. Suddenly, oil and all other commodities brought to market at today's prices become worth more than oil or other commodities left in the ground to be produced at tomorrow's lower prices.

  "Even if the printing presses are just slowing down and prices remain stable or increase at rates less than basic interest rates, money earned today and invested at interest becomes worth much more than commodities that are held in storage and that earn no return.
. . .
  "With either a recession or non-inflationary prosperity, the only two possibilities if the Fed stops its printing presses, OPEC will lose control over energy prices this year. Since the dollar immediately becomes more valuable than oil or gold or any other commodity once the Fed's printing presses are stopped, it is the United States that is in control.

  "All those of little faith, who had so little understanding of capitalism as to doubt that it can easily handle the simple supply and demand problem of energy production, are going to look mighty foolish; all those, like the U.S. Government, who have been investing in the 'energy shortage,' are going to lose a lot of money; and, all those who now begin investing in economic activities that have been retarded by the 1970s energy shortage are likely to do quite well in the 1980s." (BINGO TO THE MAX!)

  (From my carbon dated 7/1/82)

  "The strength of the dollar is another triumph for Reagan and Fed steadfastness. The dollar is once again strong enough to shield the United States from the economic and diplomatic shockwaves of minor conflicts around the world; it is once again the most potent strategic weapon of the Cold War. Two years ago, conflicts like those in the Falkland Islands and Lebanon would have sent gold prices soaring. They would have subjected the United States to intense diplomatic pressures from Latin America and Middle Eastern suppliers who were amassing more dollars than they needed, and rendered all prior forecasts obsolete. Today, any disruption that doesn't affect a nation at least as vital as Saudi Arabia is easily absorbed by the dollar's growing strength. With her current production now well below 7 million bpd, even Saudi Arabia is losing its status as an irreplaceable supplier." 

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   Copyright © 1999 Daniel Blatt