Macroeconomics and the Soviet Collapse

http://www.aei.org/publications/pubID.25991,filter.all/pub_detail.asp

I found this gem. Yes, it's from a neoliberal think tank, and yes it was written by the most prominent neoliberal reformer in post-Soviet Russia.

But it discusses that the real reason for the fall of the Eastern Bloc and the Soviet Union itself was something much more banal: oil.

Soviet grain production had stabilized in the 1960s, and there were no increases in grain output even when the population was growing.



Therefore it had to import grain from western nations, and needed exports to earn hard currency.

Countries like Japan were able to pay its food imports with high quality consumer goods. But because Ladas don't sell well in the west, Russia had to sell oil.

By the 1970s investment in oil produced diminishing returns.



Luckily, high oil prices provided enough money to pay for the increasing grain imports.



In 1985, the Saudis started pumping more oil, crashing the price of crude and causing the Soviets to earn less and less. It didn't help that peak oil was reached in 1987.

Compare this with the period when the flow of gold from South America's mines into Spain started shrinking. Spain quickly took on debt and went broke.



At that time the Soviet credit rating was still strong and thus could borrow money.

By 1989 its credit score had become trashed, and no bank would lend a dime. Any more money would come from western governments, with political strings attached.

Dissidents in East Germany and Poland knew this would be the perfect time to agitate, since if the Red Army crushed protesters the west would refuse any aid. And so the Berlin Wall fell.



So there you have it. The fall of the Berlin Wall and end of the Soviet Union wasn't caused by Gorbachev's perestroika policy or people rediscovering freedom.

It was simple macroeconomics.

If low oil prices, peak oil, and debt caused the end of the Soviet Union (an oil exporter), what will *high* oil prices, peak oil, and debt do the the United States (an oil importer)?

Are they on the same level of magnitude?

Something to think about...

For two years, the dollar has gone down and commodities (oil, gold, silver) have gone up. Recently the oil/dollar inverse relationship has broken down. What does it mean? The Fed has shot it's wad so I can understand the dollars firming, but given the recession, the high inventories and other mitigating circumstances; why is oil still going up? I can't figure it out, but the markets seem to be turning negative.