The Curse of Empires
Marc Faber
Although the US stock market has still failed to exceed its early January high, and although a
number of important high tech and telecommunication issues have broken down below their
September 2001 lows, there was some great news. We know now that the US is an “Empire”.
According to several articles which appeared in the international press, some of the most notable
US commentators and scholars believe that, today, America is no mere superpower but a full
blown empire in the Roman and British sense. Some observers even feel that no other country
has been as dominant culturally, economically, technologically and militarily since the Roman
Empire and that America’s soft imperial policies, tenacity and intellect can spread prosperity
around the world. This is all great news because when one considers the alternatives such as a
Chinese or Russian empire, which are, while no longer communist so still totalitarian in nature, a
globally dominant US can probably enforce some kind of a Pax Americana and, therefore, offer
the best hope for economic and social development. The bad news, however, is an economic one.
All great empires experienced over time, accelerating inflation, rising interest rates and a sharp
depreciation of their currency.
In the “History of Interest Rates”, Sydney Homer notes that interest rates have moved in
“repetitious patterns” over the centuries and that there was “a progressive decline in interest rates
as the nations or cultures developed and throve, and then a sharp rise in rates as each ‘declined
and fell’.”
Since US interest rates were in a long term declining trend between 1800 and the 1940s, when
US long term government bond yields bottomed out below 2%, and have since then been rising
irregularly, we can say that if the US is indeed an Empire, then it may already have passed its
zenith. In this respect a quick analysis of the monetary history of the Roman Empire is helpful,
particularly since some pundits are now comparing the US to Rome. Until the rule of Nero, the
Romans only used pure gold and silver coins. But, having run out money Nero proclaimed in A.D.
64, that hence the aureus would be 10% lighter in weight. So, whereas in the past, 41 aurei had
been minted from one pound of gold, from now one the ratio became 45 aurei to the pound of gold.
Moreover, he minted a new silver coin, which was not only lighter in weight but also contained
about 10% of copper, which meant that the new denarius was worth about 25% less than the old
one. Nero had set an important precedent and from the time he was deposed until the sacking of
Rome in the second half of the 5th century by 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! Rome demand for money was
insatiable because it was plagued by endless problems including continuous border wars, internal
discontent and strife, a heavy dependence on imported goods, which led to a chronic trade deficit,
slave rebellions, peasant uprisings in the provinces, power struggles between the rich eastern
provinces and the poor ones in the west, plagues, and poor leadership. And each time a new
problem crept up, the money printing press was turned on and led to a further debasement of the
currency and higher and higher inflation rates, two factors whose importance in the fall of Rome
cannot be overlooked.
Also, if we compare the Pax Americana with Rome, the fact is that the Roman Empire only
enjoyed a very brief period of “Pax Romana” at the zenith of the Empire under Augustus. But,
thereafter, Rome was continuously engaged in some costly wars along its borders or had to take
care of uprisings in the provinces and even on the Italian peninsula. So, the Pax Romana was
more of a myth than reality and it is no coincidence that Nero’s currency devaluation occurred as
the Empire began to weaken, which I suppose is analogous to President Nixon’s closure of the
gold window in August 1971 after the US had reached its peak in terms of economic hegemony,
which I would place around the 1950s or 1960s. Sidney Homer’s observation of rising interest
rates as empires decline would also indicate that the American peak was sometime in the 1940s
or 1950s. Lastly, while there is no doubt that the US, having won the Cold War, is militarily far
superior to any other nation, it is also a fact that the Roman Empire reached its largest extend
under the Emperor Trajan (98-116), at a time when several wars to protect borders had already
weakened the Empire. Also, by then the economy on the Italian Peninsula had experienced a
terrific slump because its wines were no longer competitive with wines coming from the western
provinces. Similarly, manufacturing in the US has gradually been undermined by new centers of
production south of the border and in Asia, especially now in China.
The 16th century Spanish Empire under Philipp II encompassed after Spain’s unification with
Portugal in 1580 by far the largest territory a sovereign state ever ruled. But prosperity was very
short lived because all the gold and silver, which flowed in the 16th century to Spain from its
mines in Mexico and at Potosi, were used for a series of costly wars, led to very rapid price
increases, and also brought about a total decay of agriculture and manufacturing on the Spanish
Peninsula. Thus, the Spanish Crown already defaulted on its loans in 1557, and further defaults
occurred in 1575, 1596, 1607, 1627, and 1647, which led to serious crises in major financial
centers such as Antwerp, Genoa and Lyons, since they had been the prime financiers of the
Spanish loans. The British Empire was in many ways probably the most successful empire in
history, because unlike the Roman and Spanish empires it did not depend on its colonies for its
wealth but its manufacturing sector was, in the first half of the Industrial Revolution, well ahead of
other nations. In 1830, Lancashire had more machines installed than the rest of the world
combined. But, over time the empire also proved to be extremely costly to maintain and in the
20th century the United Kingdom had to give up its overseas possessions successively and lost
out to other nations economically, a fact which was reflected in the British Pound’s gradual
depreciation against strong currencies. So, whereas in 1915, one Pound Sterling bought 25 Swiss
Francs, today it only buys about 2.50 Swiss Francs. Moreover, while US interest rates bottomed
out in the 1940s, British interest rates already reached their all-time low near the Empire’s zenith
in 1896, when yields on Consols fell to 2.21%. Thereafter, Consol yields never again reached
these low levels - not even during the depression.
In fact, looking at the history of empires, I wonder why anyone would wish to have an empire
because in the long run its maintenance proves to be far too costly. Inevitably, empires
experience inflation, rising interest rates, and a depreciating currency. This is not to say that there
are no good investment opportunities in empires, but in general better opportunities arise
elsewhere, and if I am right in assuming that the US empire is already past its peak, then we will
have to cope in years to come with higher and higher inflation and interest rates, and a weakening
dollar. My advice is, therefore, to avoid for now US financial assets and to invest in commodities
such as gold, and the grains as well as in Asian equities |
