Empire of Dirt

You could have it all
my empire of dirt
I will let you down
I will make you hurt

Hurt, by Trent Reznor
of Nine Inch Nails

“What I don’t understand,” Elizabeth began a conversation on our last day in Rome, “is why the barbarians — the Huns, the Goths, and the Vandals and so forth, wanted to destroy the empire? They could see that people lived better inside the empire than outside… I mean, they had central heating, warm baths, art…and just look at all those beautiful buildings. Wouldn’t it have made more sense for them to join it, rather than tearing it down?”

We had no answer, save resignation.

“Yes, well, you might as well ask why the Romans went to all the trouble to build up their empire in the first place? Wouldn’t it have been much more reasonable to enjoy life here in Rome… ?”

And here we offer readers a history of the rise and fall of the world’s greatest empire as brief as the latest Italian underpants.

Fall of the Roman Empire: Rise of the Roman Empire

In the 8th century B.C. Rome was nothing more than a collection of villages along the Tiber, inhabited by a collection of tribes, principally Latin, Sabine, and Etruscan. Gradually, these ‘Romans’ grew in number and power — and went to war with almost everyone. In a celebrated early incident, perhaps only legendary, they invited their neighbors, the Sabines, to a feast…and then stole their women. The Sabine men did not celebrate; instead, they took offense and nursed a grudge. But there was hardly a tribe, kingdom or empire in Europe, North Africa or the middle-East with whom the Romans did not pick a fight. After the Sabine war, there were wars against the Albii, the Etruscans, the Volcii, Carthaginians, Etruscans again, the Latin league — and this is only a partial list — the Volsquii, the Equii, the Veieii, the Gauls, Samnites, more Gauls, Epirians, Carthaginians again, and more Gauls, Macedonians, Syrians, Macedonians again, slaves in Sicily, Parthians…and even Romans in the civil wars ….and we have not even arrived at Ceasar’s wars against the Gauls in 58-51 BC. Roman history has another 500 years of wars to go!

The civil wars in the 1st century BC put an end to the Republic…then, Ceasar crossed the Rubicon and it was a new era in Rome, an era of Empire. It was as if Tommy Franks decided to move his army to Washington and make a regime change of his own. Some people would object, of course….the liberal papers would howl…but most people wouldn’t care.

In ancient Rome, as in modern Washington, people chose their ideas like they chose their clothes — they wanted something that not only did the job, but also something that was fashionable. And at the time it was a la mode for emperors and individuals alike to pretend that they lived in a free republic, which honored citizens’ rights, but in practice… the government, and its leader, could do what they liked. And what they seemed to like doing was going out and making war against everyone they thought they could beat.

Back then, of course, war was a paying proposition. When emperor Trajan took Ctesiphon (near modern Bagdad) he captured 100,000 people who were sold into slavery. When Augustus took Egypt, he used the Nile’s wheat harvest to feed the growing population of rabble in Rome.

But while some people came out ahead, in the aggregate, wars then — as now — were negative gain enterprises. And as the empire grew, the costs mounted too, to the point where both became grotesque and insupportable.

Fall of the Roman Empire: Augustus

“Until the rule of Augustus (who was installed as the first ruler of the Roman Empire in 27 BC),” writes Marc Faber, “the Romans only used pure gold and silver coins. In order to finance his vast infrastructure expenditures, Augustus ordered the government-owned mines in Spain and France should be exploited 24 hours a day, a measure which increased the money supply significantly and also led to rising prices. (It is estimated that between 27 BC and 6 BC, prices in Rome doubled.) In the second half of his reign (6 BC to AD 14), Augustus reduced coinage drastically, as he recognized that the expanded money supply had led to the rise in prices.”

But Rome wasn’t built in a day…nor was its money destroyed overnight. In 64 AD, in Nero’s reign, the aureus was reduced by 10% of its weight. Thereafter, whenever the Roman’s needed more money to finance their wars, their public improvements, their social welfare services and circuses, and their trade deficit, they reduced the metal content of the coins. By time Odoacer deposed the last emperor in 476, the denarius contained only 0.02% silver.

Still, the impulse to build up an empire seems to be as strong as the impulse to tear one down. To the question, when does a country aim for empire, comes the answer: whenever it can.

Fall of the Roman Empire: Reaching for the Imperial Purple

Every country in Europe has at one time or another reached for the imperial purple. Portugal and Spain discovered and conquered vast jungles, swamps and pampas…and built an empire of them. For Spain, the conquests were extremely profitable –– after they found huge quantities of gold and silver. But nothing ruins a nation faster than easy money. The money supply grew larger with every ship’s return from the New World. People felt rich, but prices soon soared. Worse, the easy money from the new territories undermined honest industry. In the bubble economy of the early 16th century, Spain developed a trade deficit similar to that of the U.S. today. People took their money and bought goods from abroad. By the time the New World mines petered out, the Spanish were bankrupt. The Spanish government defaulted on its loans in 1557, 1575, 1607, 1627. and 1647. The damage was not only severe, it was long-lasting. The Iberian peninsula became the ‘sick man of Europe’ and remained on bed-rest until the 1980s.

France and England built their own empires in the 18th and 19th centuries. Napoleon’s conquests took less than a dozen years to complete…but the empire collapsed even faster. By the end of the 19th century, all that was left of the French empire were a few islands no one could find on a map and some godforsaken colonies in Africa that the French would soon regret ever having laid eyes upon. Almost all were lost, forgotten or surrendered by the 1960s — with nothing much to show for them except what you find in the Louvre…and a population of African immigrants who now weigh heavily on France’s social welfare budget.

England’s empire was much grander, stretched further, and left more debris when it collapsed. But the end result was about the same: the pound had been degraded and the British were nearly bankrupt, while the crime rate in central London rose to surpass that in New York… thanks largely to immigration from the former colonies.

Germany lost its overseas colonies after WWI. It then created another empire — by conquest — in the late ’30s and early ’40s. The enterprise ran into Russia’s empire in the East — resulting in history’s largest and bloodiest land battles. In the end, thanks partly to American intervention on the side of the Russians, the German empire was destroyed. The Russian’s empire collapsed under its own weight 44 years later.

Empires, like bubble markets, end up where they began. Rome began as a town on the Tiber, with sheep grazing on the hills. A bull market in Roman property lasted about a 1000 years — from 700 BC to about 300 AD, when temples, monuments and villas crowded the Palatine. Then, a bear market began…which also lasted at least 1000 years. As late as the 18th century, Rome was once again a city on the Tiber…with sheep grazing on the hillsides, amid broken marble columns and immense brick walls. They had been built for a reason….but no one could recall why.

Bill Bonner
Paris, France
April 18, 2003


The Bush Administration, with the active connivance of the Fed, has been trying to return the U.S. economy to its glory days of the end of the ’90s. Back then, an investor could count on rising stock prices, a consumer could count on a job, and even a naughty president could count on re-election.

The usual methods have now been given a test — inflation and war — but yesterday’s news brought more evidence that the slump continues:

“Jobless claims jump again,” says a headline from the Houston Chronicle. At 442,000 new claims, unemployment shows no sign of improvement.

The Philadelphia Fed said activity in the manufacturing sector was easing off. And a survey of the nation’s 100 biggest corporations revealed a pension deficit of $157 billion, compared to a $183 billion surplus in the last year of Bill Clinton’s reign.

Behind these numbers is a backdrop of woe which seems unlikely to change easily. Throughout the developed economies — North America, Japan, and Western Europe — jobs, income, and sales are being lost. Not cyclically…but almost permanently.

Two headlines from the BBC tell the story:

“Alarm as UK recovery stalls,” says the first.

“Chinese growth hits 6-year high,” says the second.

“More and more goods are produced in the low-cost world,” Felix Zulauf explained to Barron’s. “The old world [including the U.S.] loses profits, jobs and income.”

Under these circumstances, he continues, “it is virtually impossible…for economies to re-enter a normal business- cycle expansion…”

The Bush/Fed program has been the familiar one — lure the consumer deeper into debt with lower interest rates and distract him with blockbuster military circuses.

We didn’t care much for this approach, dear reader, so you can imagine how delighted we were to learn that the Bush administration has a new economic plan.

“Oooh, I’m all a-tingle,” says Mogambo Guru, taking the words out of our mouths. Then, without even studying the details, “I will say right here, for all the world to see, that it will fail. All economic plans will fail from here on out, as there is nothing that can be done…

“And it all comes down to the Federal Reserve. If that particular filthy bunch of moron jackasses had no underwritten every stupid Congressional free-lunch program for the last 50 years, we would certainly not be in the mess we are in.”

Over to Eric Fry with the latest on the mess we’re in:


Eric Fry in New York…

– Wall Street kicked off the Good Friday holiday with a good Thursday. The Dow advanced 80 points to 8,338, lifting its gains for the week to 1.6%. The Nasdaq, which jumped 31 points yesterday to 1,425, racked up a dazzling 4.9% gain for the week. All the major averages have managed to claw there way back into the black for 2003. But where to from here?

– According to the Daily Reckoning’s Paris office, “Stocks may go up, but with a dividend yield of less than 2%, we can’t think of any reason to own them.” Nor can the New York office think of any reason to sink one’s nest egg into low- yielding stocks. After all, a meager dividend buys even fewer glasses of Puligny-Montrachet in Manhattan than it does in Paris.

– Despite three straight years of painful capital losses in the U.S. stock market, most Americans continue to retain the bad habits they acquired during the bubble-era – namely, an obsession with capital gains and an ambivalence toward dividends. Neither habit serves the investor well, but disdaining dividends is a particularly bad idea. Not only are dividends a nice thing to receive from time to time, but also, from an historical standpoint, they are darn near the ONLY thing that an investor can count on.

– “We’ve reached a funny position where the long run doesn’t work; where the long run evidence doesn’t fit circumstances as they are today,” observes Peter Bernstein. “Forget investing for the long haul. The long run, right now, is irrelevant.”

– This is a remarkable, and somewhat ironic, comment from the man who — along with Wharton professor Jeremy Siegel — co- authored “Stocks for the Long Run.” Bernstein readily concedes Siegel’s assertion that stocks-for-the-long-run have produced remarkably consistent real returns of 7% per year since 1880 — at least when measured over 20-year timeframes.

– “But the average dividend yield during all those 20-year periods was over 4%,” Bernstein points out. “Real price appreciation contributed only 2.1% to that long-run 7% annual return. All the rest was dividends, received and reinvested. By contrast, today’s dividend yield is in the neighborhood of 2%. Which means that in order to add up to 7% real growth over the next 20 years, we’d need 5% real growth in earnings, in addition to those dividends-and that’s not exactly a reasonable expectation over the long run. Impossible, in fact…”

– That’s why Siegel’s analysis is as deceptive as it is factual. When calculating long-term investment returns, the starting price matters. Even a simpleton, or a Wharton professor, would understand that a stock market selling for a low multiple of earnings and paying a high dividend yield is much more likely to appreciate than a richly valued market paying negligible dividends.

– “The historical average returns that so many rely on as guides to the future are misleading,” says Bernstein. “The double-digit returns that stocks were able to generate over the last century were due to equities starting cheap and getting richer over time.”

– The problem is; the stocks that once were cheap are now expensive. When stocks are dear, investors have two choices – hibernation or hyperactivity. Buffett suggests the former; Bernstein the latter. Both men have a point.

– “Despite three years of falling prices, which have significantly improved the attractiveness of common stocks,” writes Mr. Buffett in last month’s letter to Berkshire Hathaway shareholders, “we still find very few that even mildly interest us. We continue to do very little in equities…Occasionally, successful investing requires inactivity,” the oracle of Omaha concludes.

– While Bernstein would not quarrel with Buffett’s caution, he advocates a proactive approach to profiting from a richly valued market. “I am suggesting that investors just can’t put stocks away and forget them,” says Bernstein. “They have to be much more flexible and ad hoc in their asset allocation decisions.”

– But he readily admits the risk of wading into pricey stocks. “A lot of what the last century was about in the U.S. stock market was a succession of positive surprises,” says Bernstein. “Maybe now we’re going to have a succession of negative surprises. There are a lot of other places we could have them, but earnings growth in particular looks vulnerable to negative surprises.”

– Richard Russell, editor of the Dow Theory Letter, is inclined to hibernate alongside Buffett, but not because he anticipates meager, positive returns. Rather, La Jolla’s famous beachside bear fears continuing, sizeable losses. Stocks that have progressed from cheap to expensive over the course of many years tend to move in the opposite direction over the subsequent years. In other words, they will revert to the mean…and then some.

– “What is so worrisome at this point,” says Russell, “is that great bull markets tend to beget great bear markets and ‘great values.’ What am I referring to when I talk about ‘great values’ or extreme undervaluation at a bear market bottom? Here’s what I’m talking about. At the 1949 bear market bottom the S&P was selling at 5.4 times earnings (and those were honest earnings) while providing a dividend yield of 7.6%. Do I think we’ll ever see undervaluation like that again? The answer is, ‘Yes, I do, but it may take five to ten years before we see them.'”

– If the septuagenarian Russell is willing to wait for value to re-emerge, shouldn’t we?


Bill Bonner back in Paris…

*** Et tu, Indonesia? While the world was watching American tanks go through red lights in Baghdad, Pertanina (?), Indonesia’s state-owned oil company, said it was considering doing what the Iraqis had done 4 years earlier — switching from dollars to euros when they sell oil.

*** Home ownership is thought to be such a good idea the government and private charities actually give away money to encourage it. But there are times, notes the Boston Globe, when renting is a better deal than buying. And with the average single family in Massachussetts selling for $340,166 in February, this may be one of those times. Home ownership has increased over the last 10 years — aided by low mortgage rates and easy-lending policies. That means that fewer renters are left…which has forced down rents, even while home prices have gone up. It was axiomatic, in the public mind, during the ’90s that stocks always went up. Now it is axiomatic that housing prices always go up. Both axioms will be revealed as myths – eventually.

*** CEOs’ compensation rose 14% last year. Funny, we don’t recall shareholders’ compensation rising. Capitalism — the idea that corporations are run for the benefit of capitalists — is largely a myth too.

*** Our train ride back from Rome was a disappointment. The service was priced as “first class,” but anything first class about it would have been accidental. After enjoying Italian food for the last week, for example, we ordered the “Italian Plate” in the dining car…imagining ourselves digging in to a nice dish of linguini alla funghi or osso buco as we looked out on the Appenine hills in the distance. What arrived was like a TV dinner, bearing so little resemblance to Italian cuisine as to constitute grounds for a libel action.