Tuesday, July 28, 2009

Romulus, Remus, Stimulus: A Brief History of Monetary Madness

Whiskey & Gunpowder
Gary's Note: Bill Bonner explains why money you haven't earned reliably leads to ruin. Parts of this very missive found its way into Mr. Bonner's endnote speech at this year's symposium in Vancouver. Enjoy. Send your questions and comments to gary@whiskeyandgunpowder.com.

Whiskey & Gunpowder
By Bill Bonner

July 27, 2009
Vancouver, Canada

Romulus, Remus, Stimulus: A Brief History of Monetary Madness

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.


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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.


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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 wonder; they will wonder what the Hell we were thinking.

Bill Bonner

Parting Shot...
Our time in Vancouver is at an end, good bar patrons. The Hotel Vancouver is a wonderful place to stay. A fella could get used to living like that.

At least three Symposium attendees were at the airport at the same time as some of us AF employees, and I had the privilege of sitting down to breakfast with a couple of them. One had made enough money to pay for his trip by running up to his hotel room after Chris Mayer's speech and doing exactly as Chris had said.

What did Chris say? Just click here to find out.

Like the trip away, the trip home required a very brief stop in Chicago. Each leg of the return featured the unceasing and piercing crying of an infant. I could certainly commiserate. Were it socially acceptable, I would have been wailing too. I was on my way back to Baltimore.

The City That Never Gladdens was covered in nasty weather, however, so our tiny plane was diverted to Harrisburg. We were forced to wait onboard while the ground crew topped off our fuel tanks. I watched the mob dynamics as a few of the louder mouths tried to spur a small mutiny.

The captain had used the public address system to admit to us that he was being forced to rely on his cell phone to text messages to the tower and that we were low priority for scheduling and takeoff. A large passenger with a shaved head and an unintelligent glower loudly questioned the captain's competency.

"This is how riots and revolutions begin," I said very quietly to myself. It was fascinating to watch.

My neighbor on the flight was a woman of subtle charms and obvious intelligence with a glittering engagement ring on her finger. We'd exchanged a few pleasant sentences and some laughter and managed mostly to avoid the awkwardness of airplane friendship.

By the time we were stranded in Harrisburg, I hadn't eaten in very many hours. When she offered me one of her chewy nature bars, I had to make a little light so I wouldn't be obviously overcome with gratitude.

We made it to BWI many hours behind schedule and deep into the night. Baltimore's light rail begins at the northern end of the terminal and halfway along its route passes just five blocks from the Whiskey Bunker. I made it home without further incident.

Please ignore the writer spouting rubbish about Vancouver.  I've seen what must be this same person posting similar b******t on the W&G comment threads and have called him out on it, but of course he'll say nothing to support his assertions. 
That's because they're unsupportable of course.  Even the worst part of the city is totally safe day or night.  Random assaults, muggings, rapes, car-jackings, etc. are virtually unheard of.  Sure, if you're in organized crime or a $5/bj "sex worker", or a small-time dealer ripping off a bigger dealer, you might get yours, but if you're an everyday guy or gal walking around you can do so freely and as safely as you would in places with 1/10 or even 1/100 the population.
The place is a major gem in the world's crown, especially in summer.  If you have some extra days, feel free to write me if you're into a day hike (more like a few hours).  A good workout with stellar views and whiskey at the top that'll put Baltimore out of your mind for a while, I promise.  Oh, and in case you like the occasional medicinal herb, you can partake freely downtown at the "New Amsterdam Cafe".  Well, you can partake freely anywhere without fear, but that's the "official" place and a must-see for any true fan of Freedom.

Sorry I didn't have time for that hike (or much of anything else), but I'd have to concur. There are many reasons Agora Financial holds its annual Symposium in Vancouver. And none of them is the policy on hashish! Yes, we may be based in Baltimore, but we know better than to bring our best customers here.

Seventeen people were shot in East Baltimore just last night, two fatally.

You may have noticed that there is no recounting of the very last day of the Symposium itself. That's because a gremlin or poltergeist has stolen the pad containing all my notes right off my desk. I swear it was here a couple of hours ago when I sat down to type this. I'm all alone in at Agora HQ in the wee hours of the morning. No human hand did this.

It's a shame really. I'd wanted to give you a few details of John Pugley's talk along with the highlights of Bill Bonner's charming delivery of the endnote address. Of course, you could always just watc h it all on the CD…

Hey! If you tune in tomorrow, there may actually be some useful and informative material in this space. I hope your curiosity gets the best of you and that I'll see you then.

Gary Gibson
Managing Editor,
Whiskey & Gunpowder

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