Empire of Dirt

A history of the rise and fall of Rome, Bonner-style. This DR Classique was first aired on April 18, 2003, almost exactly one year ago.

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, 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 tear 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: The Rape of the Sabine Women

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 Caesar’s wars against the Gauls in 58-51 B.C. Roman history has another 500 years of wars to go!

The civil wars in the 1st century B.C. put an end to the Republic…then, Caesar crossed the Rubicon. 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 à 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 Baghdad) 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: Doubling Rome’s Prices in 21 Years

"Until the rule of Augustus (who was installed as the first ruler of the Roman Empire in 27 B.C.)," writes Marc Faber, "the Romans only used pure gold and silver coins. In order to finance his vast infrastructure expenditures, Augustus ordered that 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 B.C. and 6 B.C., prices in Rome doubled.) In the second half of his reign (6 B.C. to 14 A.D.), 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 A.D., in Nero’s reign, the aureus was reduced by 10% of its weight. Thereafter, whenever the Romans 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: Other European Empires

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 empires 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 Russians’ 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 1000 years – from 700 B.C. to about 300 A.D., 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
The Daily Reckoning
April 23, 2004

Editor’s note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the international bestseller: Financial Reckoning Day: Surviving The Soft Depression of The 21st Century (John Wiley & Sons).

Someday, something will happen.

But not yesterday. Stocks went up. Bonds went up. The dollar went down. Gold rose $2.50.

Investors are still trying to decide what Greenspan meant the day before…and what it foretold for the day after.

We doubt that it matters what the Fed chief said. First, because he doesn’t know anything more than anyone else. And second, because even if he did know, he probably wouldn’t say.

"Rates to rise eventually, Greenspan won’t say when," summarized a newspaper headline, helpfully.

Even if rates were to rise tomorrow, it is not certain how investors would react. Yes, higher rates would add a dangerous new straw to a nation of humpbacked debtors. Already, judging from the statistical evidence, America’s borrowers are schlepping along with the heaviest debt loads in history. Debt service payments, as a percentage of wage income, is the highest it has ever been.

Of course, the self-same Fed chairman who has investors wondering about the next rate increase is the same economist who claims that this outsized consumer debt burden is nothing to worry about. Consumers may owe more money to more people than ever before, he says, but the prices of their houses and stocks are rising.

Their stocks rose yesterday. Whether they will rise today or not, we don’t know. And neither does the Fed chairman. Stocks go down as well as up. And today’s stocks could go down 50% and still not be exceptionally cheap.

Likewise, houses have gone up in price. We understand how this makes it possible for a homeowner to borrow more. What we have been unable to figure out is why Alan Greenspan believes the extra debt poses no problem. Yes, he could sell his house and pay it off. But where would he live? All houses rose in price…not just his.

Alan Greenspan has also given his approval to homeowners who speculate on interest rates, choosing adjustable rates over a fixed one. Surely, rising rates will weigh heavily on the man’s reputation; people who followed his advice will have to make higher monthly payments. Already, their expenses often exceed their incomes…what will they do when their expenses rise, and borrowing is more expensive?

We don’t know. We will find out, sooner or later. Eventually, the consumer’s hump will bust. But a small increase in the fed funds rate might be just another straw…not the final one.

Investors might take it well…or badly. They might be reassured that Greenspan is exercising his authority to guide the economy in a responsible, measured way. They might bid up stocks…anticipating that things will get better and better, forever and ever. They might sell their euros and buy dollars, too, confident that the dollar will stay the world’s money for eternity. They might go and refinance their houses…taking advantage of an opportunity to ‘take out equity’ before rates rise further…and while there’s still equity left to take out.

Then again, they might have already done all that. We will see…

Here’s more news…


Addison Wiggin, reporting from ‘Charm City’…

– The headlights of the assembled cars illuminate the cliff top. Far below, huge breakers smash the rocks, the white froth exploding in all directions. But the gathered teenagers aren’t watching the sea…their eyes are focused on the dark track leading away from the summit. They know something big is about to occur, but they know not what…

– From around the corner come the two speeding cars, their engines roaring, and their headlights piercing the gloom. As they hurtle down the track toward the precipice, the crowd steps back, holding its breath, transfixed. Our daredevil hero, Sir Alan Greenspan, is racing against inflation; the last man to bail from his car is the winner. This is a game of chicken, and the future prosperity of America hinges on the result.

– Greenspan has the pedal to the metal. He is pushing the economy as hard and fast as he can, trying desperately to squeeze an extra ounce of power from the engine. He needs growth and he needs jobs – and until he gets them, he cannot jump, and he cannot brake.

– "As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging. As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building. But the Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome," cooed the valiant gladiator in his testimony.

– Meanwhile, inflation is catching up. And not only is it catching up; it’s accelerating, too. Should inflation come out on top, Greenspan will have to bail prematurely, dashing the hopes of his supporters. Yesterday, a government report showed March producer prices rose by 0.5% or 6% annualized.

– "Go, Alan, go!" shouts the commissioner who, the night before last, following the testimony, pleaded with Greenspan not to raise rates – her state is still suffering from acute unemployment, she reasoned. But the commissioner is not alone. George Bush echoes the commissioner’s support, as do all the leaders of America’s businesses.

– And the stock market cheers, too…yesterday, it had its best day in nearly a month. The Dow racked up a triple-figure gain, closing at 10,461, up 1.4% or 144 points on the day. Likewise, the S&P and the Nasdaq both showed their encouragement, gaining 16 and 37 points respectively to close at 1,140 and 2,033.

– But cheering loudest of all are the homeowners of America. They whoop and they sing and they dance…thanks to Greenspan, they are rich. "Quite frankly," cautions Steve Sjuggerud, "everybody where I live believes that real estate prices can only rise. There is nobody here that believes that real estate prices can fall…which is exactly my cause for concern…"

– Paradoxically, it is the same inflation the lumpen profess to deplore that is making them rich. But instead of guarding the additional value bestowed on them, homeowners refinance their houses with adjustable rates and spend the proceeds…on SUVs and stocks. Now they, too, depend on Greenspan and his low rates.

– "You won’t believe what the two-bedroom row home next door sold for," challenged one of our new Baltimore-based colleagues this morning, "…$345,000! In January 2002, it sold for $110,000, and then in October 2003, it was sold again for $252,000. Now look!"

– "The average sale price of homes in the Baltimore area jumped almost 20% last month, the highest year-over-year price increase in the last five years and another jolt to the region’s torrid housing market," proclaims the Baltimore Sun.

– And worse still: "To buy a home in New York, you practically have to be a millionaire," reports the Daily News. "Prices of homes in all five boroughs have risen through the roof, with average selling prices going up as much as $220,000 from a year ago. Manhattan leads the way: The average sales price of an apartment in first quarter of 2004 rose 28.2% since a year ago to nearly $1 million…"

– Fortunately, everyone is a millionaire these days, and if you aren’t, well, don’t worry, there is bound to be someone nearby willing to lend it to you (in return for the deed to your house, of course).

– All we can do is hope that this episode follows the right script: Inflation’s black leather coat catches the door handle as he tries to eject himself from the speeding car, and he plunges to his death. Meanwhile, his opponent smoothly tumbles out of his car at the last moment, and is left staring through the dust at the smoldering wreckage below. But remember, our hero is no James Dean; he’s Alan Greenspan – rebel without a clue.


Bill Bonner, back in Venice…

*** ‘Layoff events’ declined in the most recent reporting period.

*** Producer prices rose 0.5% last month. But don’t worry, dear reader. Alan ‘Bubbles’ Greenspan has both inflation and deflation under control.

*** As Addison notes above, colleague Steve Sjuggerud is concerned that an international housing bubble may have formed. But down in Argentina, he sends word that real estate prices go down as well as up:

"Citibank had spent $65 million fixing up what some consider to be the nicest hotel in South America…the Llao Llao Hotel in Patagonia. Not long after, [my friend] Eduardo was able to acquire the hotel from Citibank…for the equivalent of $13 million dollars.

"This type of story is repeated over and over…including a big steal…buying up the equivalent of New York’s Central Park in Buenos Aires for next to nothing from a bankrupt soccer team (Boca Junior). This jewel could earn…hundreds of millions in revenues when they decide to develop it (in the next few years).

"Eduardo has cash when nobody else does. Simple as that. When the economy goes bust, and everyone is up to their eyeballs in debt, Eduardo is able to swoop in and buy assets on the cheap. It is brilliant. He sits and waits, ready with cash, knowing which assets he interested in, and he buys when they’re desperate to sell. He may wait many years. But Argentina has had many crises, and he has built quite a portfolio.

"Said another way, Eduardo has no debt when everyone else has debt.

"Shares of Argentine stocks lost over 90% of their value in dollar terms. And companies that had big debts are now stuck, having to give away everything to rid themselves of the debt they took on.

"Argentines took on debt just like Americans are taking it on now. Now the U.S. looks more dangerous than Argentina in a way…as Argentines have no mortgage debt, while Americans are up to their eyeballs.

"Eduardo is a great model of how to survive and prosper when a debt bubble bursts…Here’s what you d

1) Have a ton of cash when nobody else does. Your cash will go a long way when people are desperate for it.

2) Have no debt when everyone else has debt. After the debt bubble burst in Argentina, credit has been impossible to come by. When everyone else is upside down, you’re in a healthy position…"

The Daily Reckoning