The Empire Strikes Out

America’s WAT (War Against Terror) was a subject of discussion at the Foundation for Economic Education conference I attended in Las Vegas.

"We have to pursue this thing," said a panelist, or words to that effect. Speaking for what may well be a majority view, he suggested that "The U.S. should launch pre-emptive strikes at Iraq…Syria…and even China!"

The logic was impeccable. These countries may want to do us harm. We have the means to stop them. What’s standing in our way? Not much.

"Beginning in 1899," explains Gary North, "the United States has steadily replaced Europe in the expensive, risky business of empire. Our carrier fleet patrols the world’s seas. Now we have become the primary target of hatred and revenge. People don’t like to be pushed around by foreigners, whether in Greece in the era of the Athenian League, or today."

By 431 BC, Athens had become a empire, with subject states throughout the Aegean. In that year, on some pretext I can’t recall, the first Peloponnesian War began – between Athens and its allies…and Sparta.

Pericles decided that the best offense was a good defense. He brought the Athenians within the city’s walls – hoping that the enemy would exhaust itself in futile attacks.

But bubonic plague broke out in the besieged city and killed a quarter of the population – including Pericles. Thence, a nephew of Pericles, Alcibiades, stirred the Athenians to an offensive campaign. A great armada was assembled – to attack Syracuse, a city in Sicily allied with Athens’ foes.

The campaign was a complete disaster. The armada was destroyed and the army sold into slavery. Sensing a shift in the wind, other Greek city-states broke with Athens and went over to Sparta. In 405, the remaining ships in the Athenian fleet were captured at the battle of Aegospotami. Not long after, Athens’ walls were breached and the city became a vassal state to Sparta.

We recall this history of the Peloponnesian Wars because Athens was probably the first empire in the western world. Since America seems lured to empire, what happened to Athens might be of interest.

In early April, the International Herald Tribune reported that it is now respectable to describe the U.S. as an empire.

"Today," said the IHT, "America is no more superpower or hegemon, but a full blown empire in the Roman and British sense."

"No country has been as dominant culturally, economically, technologically and militarily in the history of the world since the Roman Empire," adds columnist Charles Krauthammer

But Paul Kennedy goes further, pointing out that the imbalance is even greater than in the Roman era. "The Roman Empire stretched further afield," he notes, "but there was another great empire in Persia and a larger one in China."

Today China is no competition. It is just another country on America’s hit list.

Being a citizen of a Great Empire is not all bad. Most people incline their chins a degree skyward at the mere thought of it. And minding other peoples’ business can be distracting and entertaining…as evidenced by the editorial pages of the world’s newspapers.

But since American liberty is being sacrificed to the security needs of maintaining an empire, we can’t help but wonder – is it worth it?

For an answer, we turn to Marc Faber, who addressed the subject in a recent issue of his excellent Boom, Gloom and Doom Report.

Faber gives us a passage from Robert Kaplan’s book, "Warrior Politics: Why Leadership Demands a Pagan Ethos":

"Our future leaders could do worse than be praised for their tenacity, their penetrating intellects and their ability to bring prosperity to distant part of the world under America’s soft imperial influence. The more successful our foreign policy, the more leverage American will have in the world. Thus, the more likely that future historians will look back on the 21st century United States as an empire as well as a republic, however different from that of Roman and every other empire throughout history."

Even after 227 years, dear reader, America’s stock continues to rise. That it has gotten dangerously high has been the subject of the last few of our Daily Reckonings.

The modest republic of 1776 has become the great power of 2002 – with pretensions to empire that need no longer be denied. That its citizens will not be freer is understood. But will they be richer under an empire than they would have been under a humble republic? Will they be safer? Will they be happier?

If so, pity the poor Swiss. In their mountain fastnesses, they have only had themselves to boss around…and only their own pastures, lakes and peaks to amuse their eyes…and only their own industries to provide employment and sustenance. And their poor armed forces! Imagine the boredom…the tedious waiting for someone to attack. What glory is there in defense? Oh, for a foreign adventure…!

But would the Swiss really be better off if they, too, had an empire to run?

All of the available evidence – from history – suggests an answer: no. If the past is any guide, early military successes are inevitably followed by humiliating defeats. Financial progress is always trailed by national bankruptcy and the destruction of the currency. And the good sense of a decent people is soon replaced by a malign megalomania which brings the whole bunch to complete ruin.

But who cares? It is not for us to know the future…or to prescribe it. Instead, we get out our field glasses and prepare to watch the spectacle.

A great empire is to the world of geopolitics what a great bubble is to the world of economics. It is attractive at the outset…but a catastrophe eventually. We know of no exceptions.

After the battle of Pydna in 168, Rome became the leading empire of the western world. Here, we turn back to Marc Faber for his description of the Roman Empire.

"Until the rule of Augustus (who was installed as the first ruler of the Roman Empire in 27 BC), 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 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.

"Upon his death in AD 14, his stepson Tiberius, whom Augustus had married off to his colorful daughter Julia (who pursued a very successful career of nymphomania), was installed as emperor. Under Tiberius, the rate of new coinage was far inferior to that during Augustus’s reign, which inevitably led to a real scarcity of money in the empire, but, at the same time, to a vast surplus in the coffers of the royal treasury (fiscus). Thus, when Tiberius was assassinated in AD 37, he left his successor, the insane Caligula, 700 million denarii in the royal treasury – about 30 times the sum Augustus had left.

"Caligula, whose spending had been lavish and necessitated the expropriation of the properties of a number of wealthy families he falsely accused of plotting against him, was then succeeded by the equally mad Claudius, and upon his death by Nero. By then, the accumulated fiscal surpluses of Rome had been spent and the large trade deficits Rome maintained with its colonies led Nero to debase Rome’s currency. In AD 64, he proclaimed that henceforth the aureus would be 10% lighter in weight. So, whereas in the past, 41 aurei had been minted from one pound of gold, the ratio now become 45 aurei to a pound of gold.

"Nero then tried to force the re-minting of the old coinage, debasing in the process the aureus by 10% and the denarius by 25%, but this was only partially successful because the well-to-do either hid their wealth or emigrated to remote provinces where they hid from the Roman tax collectors.

"However, Nero had set a precedent. Between his being deposed in AD 68 and the sacking of Rome in the second half of the 5th century by the Visigoths, Ostrogoths, and Vandals, a succession of emperors continued the practice of increasing the supply of money in the empire by debasing the denarius, which in the end only had a 0.02% silver content!"

Fighting terrorism in the Roman era was expensive – as it is today. Rome became dependent on imported capital and imported goods – just as America is today. But Rome must have had its own Alano Greenspanus – for each new emergency was met with more cash…just as it is today.

Were the Romans better off for it?

More on Thursday…

Bill Bonner
May 14, 2002

P.S. Marc Faber, as you may or may not know, is also a major contributor of investment ideas to our own Strategic Investment. Under the watchful eye of editor Dan Denning, Strategic’s portfolio has fared quite well in recent months. In fact, while the Dow has languished, the portfolio’s Cash-Rich Survivors are up 77.51%, 71.8% 75%…and that doesn’t even include the open gold positions.

"Something is going on…" said Alan Greenspan yesterday.

That’s what we’re worried about here at the Daily Reckoning. Something is going on that neither Greenspan nor the great bulk of American economists understand.

But Greenspan thinks that whatever is going on must be good. Citing increased productivity and first quarter GDP figures, the Fed chief said things are looking "increasingly, persuasively good."

"On the face of it, America’s economy is roaring back," adds the Economist. But, "dig beneath the headline figure for growth and America’s performance looks less miraculous."

The Economist points out that most of the GDP growth in Q1 came from a slower rate of inventory reduction and a big jump in government spending. Defense outlays, for example, are growing at a 20% annual rate.

Hard for us to see how people get richer by de-stocking shelves and building tanks. What really contributes to economic growth is business investment…and that, alas, fell in the first part of the year – for the 5th consecutive quarter.

Still, the stock market rose yesterday…right, Eric?


Eric Fry in New York…

– Hold off on the stock market eulogies. To borrow from Mark Twain, the rumors of the Dow’s demise appeared to be greatly exaggerated…or at least, somewhat exaggerated. The blue chip index is still showing signs of life.

– Yesterday, the Dow rebounded 169 points to 10,109, while the Nasdaq bounced back more than 3% to 1,652. The tech sector bellwethers, Microsoft and Intel, paced the Dow’s advance by gaining more than 5% each. All in all, not a bad day for the bulls.

– While stocks were soaring yesterday, the bond market slumped, causing yields on the 10-year Treasury to climb from 5.12% to 5.23%. Gold took a breather, easing 40 cents to $310.90 an ounce.

– "Is it too late to buy Gold?" wonders "Pandelong" on the Discussion Board at "The price of gold is up nearly 25% from its August ’99 low…but it’s still down a few bucks from its October ’99 high." – Comes the confident reply from the one who calls himself "jpaul": "It’s never too late."

– Jpaul is either: a) too young to know any better; b) just now awakening from a 22-year nap; or c) right as rain.

– "C" may well be the answer this time. But after a two- decade bear market, gold-stock investors could be forgiven for entertaining the urge to sell their gold stocks into this rally.

– For one thing, as Bill and I both observed yesterday, gold has become a little too popular for its own good. "Even USA Today has noticed the trend," says Bill. "The last thing a contrarian investor wants to see is too much favorable attention too soon. Could the gold bull market be old news already?"

– For another thing, the above-referenced USA Today story notes the stunning gains that many gold stocks have achieved this year. Harmony Gold, for example, is up 134% for the year, reports USA Today. Happily for the subscribers of John Myers’ Outstanding Investments, Harmony has soared an even more stunning 199% since he recommended the stock last November. Gains like these don’t simply fall out of the sky, and it is tempting to take them.

– "The rising gold market has presented the Gold Stock Bulls with a windfall and a dilemma," Jim Grant writes. "How high is up? When does a cheap thing become overvalued? Answers to these questions are necessarily inexact. The value of gold mining shares depends on the gold price, a thing of magic and mystery. Even less exactly, it depends on sentiment toward the gold price…The forces that drive the gold price are every bit as complex and far-reaching as those that determine currency exchange rates or interest rates."

– However, the unwavering Grant believes in gold for the long run (although he does allow that a near-term sell off is possible). He states resolutely: "To achieve the brilliant returns hypothesized by the gold price of $500 or $1,000 five years hence, there is only one prerequisite: You must not sell an ounce or share, even on the pullbacks. Ignore every instinct conditioned during a 22-year bear market."

– $1,000 may seem like a big number. But it doesn’t seem quite so large a number as Dow 36,000. If forced to choose between the two, I think I’d bet on Gold 1000. Certainly there are worse investments – like "B2C e- commerce platforms" or "server farms" or "carrier hotels." As the 19th century writer Thomas Bailey Aldridge put it, "The possession of gold has ruined fewer men than the lack of it."

– Furthermore, whoever would be a seller of gold or gold stocks would be, by definition, a "buyer" of dollars. And as America’s current account deficit swells, exchanging gold for greenbacks seems less and less appealing.

– "The U.S. needs to attract over two-thirds of the world’s capital surplus yearly to finance its debt," Bridgewater Associates observes, "and in our view the inflows that have made this possible are not likely to be sustainable. The large inflows of money to purchase U.S. companies and equities have faded already."

– In fact, the flow of foreign money into dollar- denominated assets has plummeted to less than half of last year’s average monthly inflow.

– "I submit," says Thom Clanadra of CBS MarketWatch, "that with the swollen account deficit and the dollar’s decline will come (has come and is coming) an explosive move up in the price of gold. The $310 metal, up almost 20 percent this year, one day will sell for a price that reflects a cascading American balance sheet…By then, the paper wealth that is the industrialized world’s stock and trade will be more paper and less wealth."

Stay tuned…


Back in Paris…

*** Elizabeth and I were called in for a visit with Jules’ school principal this morning. "Jules is intelligent enough," said Madame Blondet of the Institution de la Tour. "But he has to work harder."

*** Jules is not so sure. He begins his homework at 6 every evening – after getting home from school at 5. He keeps at it, with a break now and then for a computer game, until about 10.

*** "I hate this school…I hate Paris…I hate France…" said the 14-year-old last night.

*** "Jules…I’m going to give you 2 secrets," I said to him, with the gravity of Jupiter. "I didn’t learn this until I was 50 years old. And not one person in a 1,000 understands it, but…"

*** The secrets of success…tomorrow…