20 January 2012

The Bad Lesson

When Hadrian became Emperor in 117 AD, Rome had basically reached its greatest extent.  A little over 60 years later with the death of the last of the “Five Good Emperors”, Marcus Aurelius, things really started to fall apart.  Perhaps the first sign of trouble was what his son Commodus did, when he assumed full power in 180.  No, Mr. Scott, he didn’t make Russell Crowe’s [fictional] character become a gladiator.  He devalued Rome’s currency.

Although it wasn’t the first time it had happened (as Nero had done so first in 64), Commodus started off a series of significant devaluations that were repeated by him and subsequent Roman Emperors over the next four decades that led them into what is now known as the “Crisis of the Third Century”; a conflagration of economic and social calamity, civil war, invasion and plague.

That crisis may have dissipated by the mid-280s, but Rome never really fully recovered, spending the next couple hundred years being split apart, picked away from the fringes and ultimately just completely overrun by relentless Germanic invasions and sackings.

It was not that debasing their currency, the denarius, was so much the cause.  In my view, it was much more an effect, but an effect nonetheless that instigated subsequent other deleterious effects.  Rome had simply stopped expanding.  There was no more vast wealth to capture from rival lands to fund the ever increasing lifestyle that Romans had become accustomed to.  And their politicians had come to rely, in no small part, on a patronage system where interests were basically bought off for power, and vice versa.

It is a parallel for the US today.

I am not terribly concerned about invasion by hunnish Canadian tribes of the north massed on our borders (although simple migration into Gallia Belgica, Gaul and Hispania is how it started with the Goths for Western Rome).  Nor am I, of the drug cartel induced civil war in Mexico flowing over here (mostly because I don’t have to live anywhere near Arizona).  But nonetheless, probing powers do encircle our reaches today.

And I certainly can’t predict the next plague of scale.  But world population spent all recorded time up through the early 1800s trying to get to one billion.  And then in just ~200 years since, is suddenly seven billion – half of that expansion achieved in just the last 35 years.  So in my completely unqualified opinion, despite medical advancement, it seems we’re overdue since the Spanish Influenza of 1917-18, which killed ~3-6% of world population then and infected over one-quarter of it in just months.

Further, the US certainly doesn’t have a civil war in the 1861-65 context today.  But I can’t look at the current intransigence of the Republicans and Democrats and dismiss the notion that our nation is in some sense suffering the effects of a nation divided, perhaps like it hasn’t been since the notion that a house divided cannot stand was first proffered.

Nor can I pretend that the Federal Reserve, having now more than tripled the size of its balance sheet to $2.8 trillion in the last few years, will have no devaluing impact on our dollar ultimately.  Most of their activity now was so-called “quantitative easing”, which is not a sterile activity (meaning, it directly pumps inflationary dollars into the system).

And it’s not that we have stopped expanding the “reaches” of Emperii Americani, pardon my poor Latin.  But as the various quarters of the world expand around us at a good clip, it is as if we stagnate or contract on a comparative basis.  And this exacerbates our growing list of issues.  Our educational base is slipping away.  Our infrastructure is ailing.  We have real global competition for skilled labor, not just unskilled.  We hand out too much relative too what we can spare.  All of which existed before any financial crisis popped up, circa 2007+.  None of which are getting fixed by flooding the world with dollars, or running our debts toward the point of no return.

I must emphasize, all of these things are still treatable.  It’s not too late.  The only real issue – what is in the way of every solution presently – is that we lack the political will to demonstrate the leadership necessary to right our course.  So a simple (albeit a bit clich√©) message to our elected representatives:  Lead, follow, or get out of the way.

Gone it seems are our “Good Emperors” – our Nerva, Trajan, Antoninus Pius, Marcus Aurelius.  What are left are the likes of Commodus, Septimus Severus, Caracalla, Elagabalus, Alexander Severus, and so on into oblivion.  But were the former truly “good”?  Or did they happen to simply preside over a Rome during part of its time of greatest expansion, whereas the latter hadn't?

And the world sees us at this pivotal point.  They look on with almost disbelief, just as the Chatti, Marcomanni, Frisii, Vandali, Huns, Sarmatians and Parthian did upon Rome.  In one sense unnerved.  In another relieved.

If our financial crisis, ensuing recession and political incompetence played out in a world that did not have even scarier things going on outside our borders, like it does at present, the dollar would likely have collapsed by now – and with it, our way of life.

But the dollar is still the world’s reserve currency, about 60% of the world’s allocated reserves, down from over 70% a decade ago – a decline very roughly equivalent to the decline in our share of world GDP in that time.  Hate it or love it, the dollar still represents the least risk, and is the most accessible and abundant store of wealth available to the world – a world that simply has nowhere else to go.  So for now, a loaf of bread or the New York City subway continues to cost ~$2, and not $20 or $200.

The only other potential competitive alternative to the dollar was the euro, which made it to ~27% of world reserves a few years ago.  But with the slow-motion dissolution of the Euro Zone now in play – or at least the perceived credible threat of such – that is no longer an issue.  Remember all those celebrities wanting to buy stuff in euro, on Fifth Avenue or Rodeo Drive?  You don’t hear much about that anymore, do you?

Then there's the Japanese yen, a currency issued by a nation ~200% of GDP in debt (effectively the most in the world), in a now two-decade deflationary depressive state and an aging, declining population.  Despite all the yen’s attention, as well as Japan’s economic prowess as we entered the 1990s, at the peak of their economic miracle over two decades ago, it was never more than ~8% of world reserves.  Now, ~3-4%.

Then there’s the Swiss franc.  The Alps, clandestine banking and their claim of geopolitical neutrality might somehow make you feel safer with their franc, but the simple truth is its economy is the size of Pennsylvania’s – less than 1% of world GDP.  It just is not nearly large enough to support a currency, should the entire world choose it to safely store wealth.  Duly note Switzerland’s decision late last year to flood the world with francs, to counteract its 50%+ appreciation v. the dollar through 2011 – nearly 80% appreciation from pre-financial crisis levels.

So for scale, that basically leaves the Chinese economy and their currency, the renmimbi.  But – and although we’re all guilty of it to some degree – they are a serial and gross manipulator of its value.  And I don’t think I’m ready to trust a state with my money that has little respect for real or intellectual property rights, let alone the basic human ones.  Nor do I feel comfortable with a nation whose appearance of stability is nothing more than a rather precariously balanced tug-of-war, literally between 700 million people on each side – especially this year as we approach its first unscripted transfer of power since the 1970s.

And gold?  There simply isn’t enough gold in the world, proven and probable, to support the level to which the world’s economies have inflated, or could continue to grow.  Which is why a last ditch reliance on it as a store of wealth sends its price ever higher.

So we are learning a bad lesson from the lack of a collapse in the dollar – that since there is no perceived acute pain, there must be no trauma.  Pain is good.  It reminds us we are still alive.  But our American pain is being deadened with the drugs of fiscal overspending and dollar fabrication.  We have been massively over-treating the symptom for the past few years now, masking its message that warns us of the actual injuries.

The dollar has not collapsed, not because we aren’t behaving badly (multiple negtion intended), but because everywhere else in the world that is denominated in some other currency – right or wrong – is perceived the worse evil for now.  And our interest rates remain low also as a result (abetted by the belief that we are in some form of depression, which we are).

Our central bank scrapes more and more silver out of our denarius each year, faster than ever over the past few years.  In a sense, our politicians’ deficits burn away almost one-tenth of our economy each year, purchasing their power.   Weak as they are, they will continue on in a fashion that, as far as they can see, risks seemingly nothing with each new day (read, election cycle), yet almost everything down the road.  Until when, what precious thing we once had – and still have – is lost.  When it is too late and perhaps gone forever.

The only thing any of us have any real control over in our lives.  The value of our full faith and credit… the value of our word.

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