Sunday Musings: Monetary Madness

Ulli Uncategorized 6 Comments

Reader Robert emailed me an interesting story written by Bill Bonner of Vancouver, Canada (sorry, no link available) with the title “Romulus, Remus, Stimulus: A Brief History of Monetary Madness.”

It puts the current monetary madness in historical perspective, and gives you something to think about.

Those whom the gods would destroy are first granted stimulus. When a man wins the lottery, for example, it has a stimulating effect on everyone around him. He usually spends the money quickly – often even before he gets it. But no matter how much he wins, he is usually broke within a few years…often, even broker than he was before he bought the winning ticket.

A recent example from the British press: One of the first lottery millionaires punched a plumber and ended up in court, says The Telegraph. Michael Antonucci won 2.8 million pounds in 1995. But he “blew his entire fortune,” reported the paper last month. Now he’s reduced to stiffing tradesmen. The amount in dispute was just 400 pounds, what he was billed for a “gigantic ceiling mirror fitted above a whirlpool Jacuzzi.” He had the mirror installed when he was still flush. Now that he’s broke, he can’t pay…hence the altercation.

The phenomenon is little different when it happens on a national or even imperial scale. Any money that you don’t earn is stimulus. Without the sweat of honest toil on it, money seems to play a pernicious role in history. There are no examples – none – where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford…and getting into trouble.

The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more booty…gold, silver, land and slaves. And each led to more conquests, which brought forth more booty. But the stimulus of this booty stimulated only the need for more stimulus. It did not stimulate real prosperity. Instead, it undermined it. First, slaves bought by rich landowners destroyed the free labor market and ruined small farmers. And then, imported wheat from the provinces – paid as tribute – put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food.

In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, made up of displaced small landowners and out-of-work laborers, needed bread and circuses which drained the Treasury.

The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it…with more stimulus. Neither paper money nor the printing press had yet been invented. So, Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock! This extra money did not bring prosperity; it caused price inflation. In a period of about three decades, Rome’s consumer price index almost doubled. Then, when output from the mines could be increased no further, Augustus’s great nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Of course, Rome itself was played out too.

Another early and dramatic example of stimulus-in-action came in Spain in the 16th century. The conquistadors increased their supply of money in the time-honored fashion – by stealing it. Galleons brought treasure from the Americas; increasing the Spanish money supply substantially and fatally. The Spaniards had so much stimulus that they laid down their tools. Why should they work? They could buy things.

The discovery of a whole mountain of silver – Potosi – in the middle of the 16th century insured a supply of stimulus that would last for nearly a century. Results? Predictable. Inflation. In the “price revolution” from 1540 to 1640 the cost of living went up throughout Europe. In England, for which we have the most reliable data, prices went up 700%. And Spain, though it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next 10 decades. Spain, like Rome, welcomed stimulus; it never recovered from it.

Now we turn to the biggest misadventure in stimulus ever – the period after the United States ‘closed the gold window’ in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. After 1971, on the other hand, the sky was the limit – especially in the United States of America. The US could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. The Fed’s adjusted monetary base grew 900% since 1985, and more than doubled this year alone. Total US debt tripled – as percent of GDP.

As it did with Rome and Spain, more and more stimulus stimulated spending and speculation, but not real output. During the 2001-2007 period, for example, credit in the United States increased by $22 trillion. The nation’s GDP increased only by $4 trillion. For every extra dollar of output, Americans took on $5.50 of debt.

But now the bubble has blown up; the feds are on the case. What do they offer? More stimulus! Cometh a report this week that $23 trillion has already been put at risk in the various bailouts and credit guarantees. As for the US public debt, it is expected to increase until the country goes broke.

Future economic historians will look at these staggering efforts with awe and they will wonder what the Hell we were thinking.

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Comments 6

  1. Excellent article. So, now knowing past history and how it repeats itself, as regular Joe, how do we plan for our futures from an investment standpoint?

    Dan

  2. That Roman analogy is simplistic and a farce. Rome as a civilization and empire endured for over 2000 years. What marker of success does this over use. Surely the only annodote that comes rom this story is that all things come to an end and Amer$ca's century starting with the rise of the empire flexing its muscles in 1899 with The Spanish War was teh 20th century and the sun has well set. Each empirical cycle has been less enduring and shortened. Anyone who doesnt think America's has ended is kiddin themselves. The uncoupling of the mkt from main street is just a beacon of that fact.

  3. Ulli,
    Your story about the Roman Empire is very interesting. Seems like lightning does strike, in the same place, twice — and is. Or does the government have any more silver it can throw out to stall the inevitable? Not.

    I think further evidence of this is what the Romans didn't have: the stock market. To me, the stock market is becoming increasingly uncoupled from "Main Street" or what I mean by "Main Street" is what's really happening in America. It's not good, and this is unsettling. I think, eventually, it will crash the market again — maybe even deeper than before. And this time, I don't think there's going to be any temporary, artificial stimulus to raise the hopes of people that things are going to get better.

    But for now, the market's doing pretty well, except the last couple of days, so people might as well hitch their wagons onto it while it's going up but beware of the downturn, because the downturns come faster and harder than the upturns. Your sell stops make a lot of sense to prevent this calamity.

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