Eternal City, Chronic Trouble

No modern government policy is so stupid that the Romans didn’t think of it first. Inspired by his recent trip to Rome, Bill takes us through Rome’s trash pile of history to try to learn something from it. Read on…


A visitor to the Eternal City, even if he has been many times before, feels his jaw drop and his pulse rise. The city is still a magnificent ruin…a vast memento mori recalling every absurdity and corruption known to man. Here we begin ab ovo, as the Romans used to say – with the egg.

At the far end of the Largo di Torre Argentina, for example, is the spot where Julius Caesar’s body was ventilated. Poor Julius. His wife warned him. His soothsayer warned him. Even his friends warned him that something was up. Still, the man who had conquered Gaul and brought Vercingetorix back to Rome in chains, and then triumphed in the civil war against one of Rome’s greatest generals, Pompey, dismissed his guards and walked into a cheap ambush by politicians, one of whom was probably his own son. “Tu quoque, fili mi,” [you too, my son] he said to Brutus as he was going down, after the unkindest cut of all. But that is the amazing thing about the Romans and modern man too; even when the traps are as obvious as bailouts and Baghdad, they sashay right in.

And over there…at the Domus Aurea, was Nero’s golden palace; a place that saw such debauches as to make Britain’s royals – perhaps with the exception of that ancient Edward – seem like archangels. Nero’s mother was Caligula’s sister, with whom she an “inappropriate relationship.” She plotted against Caligula, and when he was out of the way, married her uncle, Claudius. She poisoned Claudius…and his son, Britannicus, too, so that her own son from a previous marriage – Nero – could become Emperor. Then, fearing that she was losing her grip on her son, she seduced him. But by that time, he was so deep into carnality with slaves, senators’ wives and castrated boys, that her motherly charms couldn’t hold him. So, she tried to kill him. He beat her to the punch, sending his soldiers to skewer her. Tacitus reports that she died in a theatrical way; “strike my womb,” she told them.

Our beat is money, not history. But today we pick through Rome’s huge trash pile to try to learn something.

Everything started to go wrong in the time of Marcus Aurelius, say most historians. Soldiers returning from the Parthian war brought the first major plague epidemic with them. There was a revolt in Egypt. And Germanic tribes pushed across the Danube and the Rhine.

But the real problem began much, much earlier, practically ab ovo. From the very beginning, the Romans picked fights with the neighbors. The small colony had a shortage of females, so the Romans carried off the women of a nearby tribe. “They was sobbin’, sobbin’, sobbin’…fit to be tied,” as the song puts it. From there, one local tribe after another was subdued. And each successful campaign elevated the power and wealth of Rome and led, like antipasto to primo platti, to the next campaign.

As a business model, Rome’s strategy was obviously flawed; like a credit bubble, it required constant expansion. Still it was nice in the beginning. The early days of the Roman Empire were like the early days of the British Empire or the American Hegemony. Expansion opened up new markets and brought in new supplies of raw materials at better prices. Not only was there booty; there were also slaves.

Nothing fails like success. The slaves had an effect on the domestic labor market of the time not unlike Chinese and Indian peasants on today’s labor rates. The price of free labor fell. Another familiar consequence was an increase in speculation and what we would call ‘financialization’ of the economy. Instead, of farming themselves, ambitious Romans outsourced, setting up huge agricultural estates all over the empire, which were operated by slaves. This had a further effect of lowering prices on farm products. Small, independent landowners couldn’t compete. They went to the cities. Or, they joined the army.

Eventually, Roman expansion reached its limits under Trajan. Then, the military machine gradually changed from a profit-making institution manned by Romans, to an expensive peace keeping force staffed largely by barbarians. Worse, the clattering of chains was no more to be heard in the Delian slave market. Now the problems really began. The government had begun distributing free bread, in order to keep the urban mobs quiet, a program similar to today’s Tax Rebate checks. Already, under Augustus, one in five people in Rome depended on the “dole.” Then, Rome’s balance of trade grew increasingly negative. This gave rise to something else that will be familiar to us: inflation. Nero took 10% of the silver out of the denarius. Then, under Marcus Aurelius, it was down to 75%. Finally, by the third century, the denarius was made of brass, with a silver coating. Consumer prices soared. Diocletian’s solution was very similar to what Richard Nixon would do many years later – The Edict of Prices, a system of price controls.

With no more slaves shuffling into the city, Rome turned to its remaining small farmers. First, it subsidized the farmers – with the ‘alimenta’ – like our own crop support programs. Then, desperate for food, it requisitioned grain and cattle from them directly…and forced the farmers to stay with their land, like serfs. The farmers’ situation became so miserable, they began to sell themselves into slavery. This traffic became so heavy that the government banned the practice in 368AD.

Modern politicians and central bankers have nothing on their ancient forebears. Bailouts…monetary stimulus…subsidies…giveaways – the Romans had a solution for every problem. And every solution brought new problems…until the weight of them crushed the whole empire.


Bill Bonner
The Daily Reckoning

May 07, 2008 — London, England

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

“Hey, dude, where’s my fiscal stimulus?”

It’s in the mail, dumbo.

The feds have been hard at work pushing out $110 billion of ‘rebates,’ designed to help Americans do what they already do best – spend money that they never earned.

The resulting spending spree comes after 7 rates cuts sent the Fed’s lending rate down to only half the rate of consumer price inflation.

At the end of last week, the Fed also announced that it would allow lenders to launder their dirty car loans, student loans and credit card debt; they can henceforth use it as collateral for loans from the Fed. And this week, Ben Bernanke, guardian of the nation’s money, urged Congress to take action to avoid more foreclosures.

And then, there’s the promise of a “tax holiday” on gasoline for the summer.

All these measures are designed to do the same thing – make people feel richer than they really are. Thanks to the Fed’s emergency low interest rates, they can borrow more money and pay less for it. Thanks to the ‘rebate’ checks, they can spend more money too. If the feds intervene to block foreclosures, as they have already stepped in to bail out Wall Street, people who should have gone broke can still hold their heads up…and live in houses they can’t really afford.

And now, dear reader, we find that all these marvelous deceits are having an effect; they’re bamboozling almost everyone into thinking things are getting better.

There’s also a hidden flimflam…an even more important one. Since ’95, reports Martin Hutchinson, the U.S. money supply, as measured by ‘money of zero maturity,’ has gone up at about 8.8% per year. The average fellow, seeing that he has 8.8% more cash – and with no knowledge of the volume theory of money – might reasonably conclude that he is richer. But when money increases faster than the goods and services it’s destined to pay for, the result is rising prices. At 8.8%, U.S. money supply was increasing about 50% faster than the GDP. You’d expect prices to rise and the dollar to fall – which is exactly what has happened.

But recently, the feds have put their fabulous money machine into high gear. MZM has been going up at a 28% annual rate over the last three months.

Here at The Daily Reckoning, our theory is that the feds’ inflation will goose up prices of commodities, gold, consumer prices and oil – but not the real economy. So far, that seems to be what is happening. The CRB commodities index is up 24% since last September. Oil has gone up 25% this year. Natural gas has risen 49%. Gold, meanwhile, has only gone up 4.8% in 2008…but this is after a correction; remember, it was over $1,000 just a few weeks ago.

As for consumer prices…the latest numbers show consumer prices rising at an 11% rate in March. This number would have been a shocker – if it had ever seen the light of day. Instead, the boys down in the basement of the Labor Department went to work on it with hammers and baseball bats; when they were finished, the number had been ‘seasonally adjusted’ down to only 3.6%.

But consumer price inflation is definitely in the pipes. It will start coming out of the faucets and backing up in the drains soon. Yesterday, oil – the sine qua non of modern economies – rose to a new record high of $122 a barrel. People are killing each other over rice and wheat. Farmers are sleeping in their fields to prevent thieving neighbors from helping themselves. And crooks are peeling the lead roofing off of churches in England…pilfering copper gutter pipes in Baltimore…and stealing the manhole covers in Detroit. This huge run up in prices of primarily materials has to make its way into prices for finished products – sooner or later.

And how about the economy? The latest report showed the economy growing at a 0.6% annual rate. Since the population is growing at 1%, this represents a real decline in output per person. We’re getting poorer, in other words – just as forecast.

Still, all of this new cash and credit is creating its own happy disaster. People who didn’t completely ruin themselves in the bubble phase are getting another chance. People who should be saving for their retirements, for example, are being encouraged to continue borrowing and spending as if nothing had changed. People who should move to a house they can afford are being encouraged to hold on to digs that that are beyond their means. Companies that should be liquidated are being refinanced and restructured on the Fed’s EZ Credit. And to many people, all this looks almost too wonderful.

Yesterday, we mentioned Warren Buffett’s comments – the credit crunch is over, he said.

Today, the Wall Street Journal tells us that the “housing crisis is over,” too.

In a way, they’re probably both right. With lower rates coming in…and fiscal stimulus checks going out…the money is flowing again. The ‘crisis’ stage is probably over – at least for now. But your teeth don’t get better by putting off a visit to the dentist. And when the pain returns – probably in a few months – it will be worse than before.

That’s why we continue to advise our dear readers to protect your wealth and assets now…because the initial crisis may be coming to an end – but the aftershocks will be felt throughout our economy for months (or years) to come.

*** Gold rose $3 yesterday…climbing back towards $900. Many gold investors are worried that the end of the Fed’s rate cuts also means the end of gold’s bull market – at least for the near term.

We don’t think so.

Rate cuts, more loans, rebate checks, money supply increases – it all adds up to higher rates of inflation. And there’s no Paul Volcker on the horizon to stop it.

Here’s the way our friends at Doug Casey’s ‘Big Gold’ report see it:

“So what happened? Is the bull market over, or is it intact?

“We are confident the bull market in gold is not over. There is simply too much pressure for higher inflation and a weaker dollar for gold not to rise. A dreadful day (or week or month, or even a season) for gold doesn’t drain out the bad stuff that’s been simmering in the economic cauldron. The Federal Reserve hasn’t stopped printing money (in fact, it’s picked up the pace); the U.S. government hasn’t balanced its budget (in fact, the ‘stimulus package’ is making the deficit worse); and the dollar’s foreign exchange value hasn’t fallen nearly enough to cure the U.S. economy’s enormous trade deficit. In short, we don’t share the sentiment that all is better in the U.S. economic and financial systems.

“It’s our opinion that gold’s downturn and the corresponding easing of worries about the financial system are temporary. How long ‘temporary’ will continue is unknown, but events always trump psychology at some point. First we will see investors return to gold – and then we’ll see newcomers fleeing toward it.”

*** Yesterday, we went to visit Julian Mayo, who runs Charlemagne Capital here in London.

“The results from investing in emerging markets, over the last five years, have been spectacular,” he said. “It’s only in the last few months that they have fallen off. But this probably means that this is a great time to get in.”

Julian reminded us of one of our 5 “Big E” themes – the Exodus of wealth from the developed countries of the emerging markets.

Some day, when the economic history of this current period is better understood, people will see that the world owes a huge debt of gratitude to the American consumer. Against his own interest, he has put himself deep in debt so that others could have prosperity…and have it in greater abundance. The Exodus of U.S. wealth was probably going to happen no matter what. But the American consumer – like Pharaoh’s army – chased it to the waters’ edge, where the Fed, with its easy money policies, parted the sea so it could get across. By spending money he didn’t have on things he didn’t need, the US consumer hastened the flow of money from America to the exporting nations – the Arab oil exporters, China, India, Brazil, and Russia. Now, all these nations are flourishing…with rising currencies…huge current account surpluses…trillions of dollars in reserves…growing middle classes…and soaring wages. And the poor American consumer? Again, like Pharoah’s poor soldiers, he is being swallowed up under the waves of “flation.” The value of his house is being reduced by deflation. And the value of his time and his money are being cut down by inflation. The poor fellow. The Chinese, Indians, Russians et al should at least thank him.

*** What about Japan, we asked Julian? Japan is a special case. It is the only country to maintain low rates of currency growth, and the only one to be locked into an on-again, off-again deflationary recession for the last 18 years. Stock prices in Japan are barely a third of what they were in the ’80s…and the country has no exposure to sub-prime debt, still investors sold Japan along with the emerging markets in October of last year.

“Is this a good time to buy back into Japan?” we wanted to know.

“No, I don’t think so,” was the answer. “Japan is not a bad economy. And stocks are not bad values. But there is nothing on the horizon that is going to make them go up much either. The emerging markets are good places to invest because they have huge domestic markets and they are growing rapidly. Japan is stable…”

Japan also has the distinction of actually losing population. In America, we honor mothers and fathers. In Japan, they celebrate “National Child Day.” But for the last 27 years, there have been fewer children to celebrate each year.

*** A contrary view of Japan comes from Christopher Wood. Here is the Bloomberg report:

“The ‘bull story in Japan is all about a sustained move out of the nearly 20-year period of deflation with all that means for companies’ pricing power and, consequently, their profit margins.’ Consumer prices rose at the fastest pace in a decade in March, suggesting the economy has emerged from a deflationary spiral. Price gains also boosted expectations the Bank of Japan will raise interest rates, allowing banks to charge more for credit. Wood increased the weighting of banks in his model portfolio of Japanese shares, recommending investors hold 24 percent of their assets in the nation’s four largest lenders. Banks comprise 12 percent of Japan’s 1,722 member Topix index. Sumitomo Mitsui Financial Group Inc.

*** Meanwhile, our friend Michel reminds us that not all investments in art are bad ones.

“One day in 1880, a dealer proposed to Collis P. Huntington, one of the founders of the Central Pacific Railroad…and the state of California, a certain number of old paintings, unsigned, at $2000 each. Huntington chose one, ‘The guitar player,’ and paid $750 for it. Later, experts attributed the painting to Vermeer.

“I saw the money in it,” said Huntington.

The Daily Reckoning