Contributor Since 2017
Author of #1 rated book on commodities "Mastering Uncertainty in Commodities Trading" and contributing editor at ZeroHedge. I am the creator of I-System Trend Following (ISystem-TF.com) and publisher of I-System TrendCompass daily reports. I've worked as a market analyst, researcher, trader and hedge fund manager since 1996. Over that time I've outperformed the DowJones Credit Suiss Blue Chip index of Managed Futures funds (2007-2013, audited) and the EurekaHedge tail risk index (2012-2019). I can be reached at firstname.lastname@example.org or email@example.com
So far, the dreams of 1,000-year empires and stable world domination have eluded the ruling elites throughout history and across the globe. Empires arise, sustain themselves for a century or two and then rapidly decay and collapse. The collapse may appear relatively fast and obvious in hindsight, but in reality it spans decades, may appear as a series of temporary crises and only become obvious very late into the slow-motion train wreck.
Nonetheless, the fatal imbalances that corrode an empire’s political, economic, and social foundations do become discernible well in advance of the ultimate collapse. As a rule these imbalances emerge as consequences of too much war and too much debt. As they decay, empires always degrade their own currency in the process of extracting wealth from the population to funnel it toward the ruling oligarchy and the military. In ancient times this was done by diluting gold or silver content of the coins in circulation. In modern times, it is done through inflation of the currency.
The most recent instance of this process was the collapse of the Soviet Union through the decade of the 1980s. Soviet Union was a global superpower counting nearly 300 million people and an empire spanning over 40% of Eurasian land mass. In addition to a large, well educated population and broadly diversified industrial base, USSR controlled a formidable treasure trove of natural resources containing some of the world’s most abundant reserves of natural gas, oil, coal, iron ore, tin, lead, gold, silver, palladium, platinum, diamonds, timber, rare earth minerals and arable land. In the post World War II period the USSR developed rapidly and its population even enjoyed a period of relatively high prosperity during the 1960s and 1970s. However, economic growth started to slow down in the late 1970s and from 1977 until its final collapse in August of 1991, Soviet economy experienced an accelerating economic deterioration leading to the worst post-war economic depression.
In spite of the many obvious differences between the USSR and the United States, many of these differences are in fact rather superficial while similarities and parallels may be more structural and relevant. Soviet government was able to stave off economic collapse and hyperinflation because it had full control over wholesale and retail prices and over the central bank’s monetary policy including money supply and interest rates.
However, controlling all the levers of state power did not exempt the Soviet state from fundamental principles of economics. When price controls were finally abolished on 2nd January 1992, inflationary pressures burst through the open dam and prices of industrial and consumer goods recorded an almost immediate 500% jump. Within the year, inflation reached 2,500%. The inevitable readjustments, delayed over decades of central planning and misallocation of resources, plunged the nation into one of the deepest and longest economic depressions ever recorded.
Today, the economy of the United States is similarly mired in a profound crisis, and unresolved economic imbalances: the empire is overstretched militarily, “defense” spending and budget deficits continue to grow, and budget shortfalls are being covered by printing money out of tin air. While the American government doesn’t practice central planning or price controls, the Federal Reserve has effectively taken over this role by manipulating interest rates and commodity prices. As in the Soviet Union, Fed’s meddling resulted in massive misallocation of resources – as one author wrote, an economy of zombies an unicorns.
There can be little doubt that American economy is more robust than that of the late Soviet Union. But history is clear on this: no empire – regardless how powerful – is exempt from the laws of economics. We can expect more economic pain ahead as the empire’s foundations continue to erode. One very likely outcome of the coming crisis could be the collapse of the currency and an acceleration of inflation.
Alex Krainer is a hedge fund manager and commodities trader based in Monaco. He published a 5-star rated book titled, “Mastering Uncertainty in Commodities Trading”