Following Rome

Bill Bonner - Thu 24 Apr, 2008

Just as the Roman emperors over-reached themselves and indebted themselves, so too the US.

From Rome:

“The baths, the wine, and Venus corrupt our bodies,

But the baths, the wine and Venus are our life…”

Inscription found on a Roman tomb.

Yes, dear reader…we are here in Rome. We have enjoyed the wine. We have had a bath or two – in our own private bathroom. And Venus? Well…this is a family publication…

This afternoon, we are going to visit the baths of Caracalla, built at the beginning of the 3rd century by Caracalla’s father, Septimius Severus, and inaugurated by the son after Severus’s death.

‘Over-reach’ is not a Latin word. But it was practically invented to describe what the Romans did to themselves…to their empire…and to their money. About which, more below…and more about our own over-reach, circa 2008, too.

But first the bare facts, yesterday’s financial news in a nutshell:

The Dow rose slightly. Oil held steady at an all-time high of $118. Gold dropped another $16 to close at $909.

There is so much ‘noise’ in the financial system, it is hard to think. The papers are full of distractions and absurdities. You can find almost any point of view you want. Some argue that central banks are winning…that the stock market hasn’t gone down because it is getting ready to go up…and soon, the housing market will bottom out too.

“Fears of bank failures recede,” says a headline in the Financial Times today.

Others argue that the worst is still ahead…that the stock market will melt down… that housing prices will fall another 20%...and that the whole world will go into a monumental downturn.

“Housing slump may exceed Depression,” says the San Diego paper.

We take a middle view – that financial assets (including paper money), the financial industry, the credit cycle, the dollar-standard monetary system and the USA itself are in an historic decline…while emerging markets, gold and commodities are in a once-in-a-lifetime upswing.

But let’s take a look at the headlines and then we’ll come back to our analysis.

Is the housing market getting worse? Well, you already heard the report from San Diego; it could be worse than the Great Depression, it says. Up the coast, the news from the LA Times is that California is suffering a record level of foreclosures. And in Nevada, the local press tells us that many erstwhile homeowners are not being very considerate to the new owners. They’re wrecking the houses before they leave, says the paper, even putting cement down the plumbing. Of course, they’re upset, continues the report, because they feel they’ve been roughly handled by the mortgage industry.

Meanwhile, in Chicago, Jesse Jackson is in the news; he thinks borrowers have been roughly handled by the mortgage industry too. He’s called for a moratorium on foreclosures.

And over the on East Coast, the Washington Post says lenders are “being swamped” by delinquent loans.

Partly because of the risk of bad payers, mortgage approvals have fallen to a 10-year low. But not all the delinquents are homeowners. Many former students, who took out loans to get through college, are finding it hard to pay the money back. Lenders are tightening up on the scholars too. And the Bush Administration is so alarmed at the thought of all the college keg parties that might be cancelled, it has proposed to buy student loans from the lenders.

Where will it get the money, you ask? From taxpayers, of course. Who are the taxpayers? The parents of the students, obviously. Then, why not let the parents keep their money and pay for their own children’s’ education? Oh stop being a silly old fuddy duddy…

*** First, we turn to Project Over-Reach: America’s Imperial Budget, 2008. George W. Bush et al. have been stretching in all directions. And now comes his party’s chosen successor, John McCain, with even longer arms.

McCain wants to lock in place Bush’s $350 billion of tax cuts…and then cut another $300 billion more. Here at the Daily Reckoning headquarters we’ve never met a tax cut we didn’t like. But it’s the other side of the ledger than concerns us. If revenues go down, how would McCain pay for all those spiffy projects – mortgage rescues, student loan bail-outs, the never-ending war in Iraq, bombing Iran...not to mention all the regular giveaways to America’s seniors, poor, cripples, veterans, bankers, and feeble-minded citizens?

The idea, put forward by Arthur Laffer and the Reagan crew, was that lower tax rates would stimulate economic activity and, ergo, more tax revenue to the government. But now, McCain’s top economist – Douglas Holtz-Eakin – says the estimates of increased tax revenue as a result of lower rates were “overblown.” As director of the Congressional Budget Office, he admitted to Congress that a “dynamic analysis” of tax cuts (taking into account the likely positive effect of cuts on economic activity) made essentially no difference to the outcome. Conclusion: if you cut taxes…you also must cut spending...or you’ll find yourself in the hole.

The Bush Administration has worked the US into the biggest hole ever. Like Diocletian, Septimius Severus and Caracalla, the next president will face the consequences of over-reach…inflation, budget deficits, and rapidly expanding debt.

*** But mommas still want their babies to grow up to be president…or even better, to land a job on Wall Street. And to break into finance or politics, it helps to have a degree from a prestigious university. It is proof to your employers that you have been indoctrinated with the latest Efficient Market claptrap…that you believe the hocus pocus of modern macro-economics…and that you can do the miracle math required to turn trashy credits into triple A-rated investments.

But for all those mommas hoping to get their babies a place at Goldman or Blackrock, we have a suggestion: aim for the legal department. Yesterday brought word from the Financial Times that “sub-prime produces a tsunami of lawsuits.” Our guess is that the financial industry has seen its best days. The wheels are falling off the deal machine. Bonuses are coming down. Employees are being laid off, cast off, spun off, and blown off in every department – save where the legal team does its work. The next few years are likely to produce further trimming in the financial industry ranks. But the in-house lawyers…and lawyers who face them from outside firms…are bound to enjoy a boom. They’ve got to work out, renegotiate, defend, and deny thousands of claims. Their jobs are safe for years to come.

*** Poor Caracalla. The man spent his whole life pushing the barbarians back…or being pushed back by them. And for his thanks…one of his own men stabbed him to death.

But he had it coming.

He was a good child, say the historians: “sed haec puer.” But he went bad fairly early. After his father died, he ruled as co-emperor with his brother, Geta. Then, he murdered Geta in 212AD and fled to the army for support. After he had solidified his position, he began purging his brother’s old friends and supporters. More than a thousand were killed.

He seemed to want to imitate Alexander the Great…and even began walking with his head tilted to the right, as he had seen in a depiction of Alexander. He set out to make his military glory with a series of campaigns against the Gauls, the Chatti, the Alemanni, and the Getae. He pillaged Alexandria, after hearing that the citizens spoke of him with contempt. And he was preparing a war against the Parthians when he was killed.

His greatest achievement was the “Constitutio Antoniniana,” which made all inhabitants of the empire equal citizens. He is also remembered for a new coin – the Antoninianus – which replaced the denarius. It was a way of dealing with the inflation that was troubling the empire. Wars were expensive then, as they are now. But back then, were sometimes profitable enterprises, as a victorious army usually captured enough booty to pay its way – and then some. But the larger the empire became, the more neighbours it had, the longer its borders grew, and the more garrisons it needed to protect them. The people at home needed bread and circuses too – or they would go turn on an emperor…and shift power to a rival.

Pretty soon, Rome ran out of money, which was then calibrated in gold and/or silver. The Antoninianus was a way to depreciate the currency. It had a face value of three times the denarius, but with the same silver content.