From Romulus and Remus to Stimulus
By
Bill Bonner Jul 24, 2009
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Those whom the gods would destroy are granted stimulus. When a man wins the lottery, it has a stimulating effect on everyone around him. He usually spends the money quickly – often before he gets it. But no matter how much he wins, he is usually broke within a few years – often even broker than 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 Daily Telegraph. Michael Antonucci won £2.8m in 1995. But he "blew his entire fortune", reported the paper last month. The amount in dispute was just £400, billed for a "gigantic ceiling mirror fitted above a whirlpool Jacuzzi". He had the mirror installed when he was flush. Now 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 you don't earn is stimulus. But without the sweat of honest toil on it, easy money seems almost worse than none at all. This kind of stimulus has a long, sordid history. But there are no examples – none – where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it's 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. Each led to more conquests, bringing forth more booty. But the stimulus of this booty did not stimulate real prosperity – it undermined it. First, slaves bought by rich landowners destroyed the free labour market and ruined small farmers. 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 labourers, 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. 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 did not bring prosperity; it caused price inflation. In a period of about three decades, Rome's consumer price index almost doubled. When mining output 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. Rome itself was played out too.
Another early example of stimulus-in-action came in 16th-century Spain. The conquistadors grew the supply of money in time-honoured 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 downed their tools. Why work? They could buy things. The discovery of a mountain of silver – Potosi – in the mid-16th century insured a supply of stimulus that would last nearly a century. In the "price revolution" from 1540 to 1640 the cost of living rose across Europe. In England prices went up 700%. And Spain, although 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 ten decades. Spain, like Rome, welcomed stimulus; but it never recovered from it.
Now we turn to the biggest misadventure in stimulus ever – the period after the US '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. But after 1971, the sky was the limit – especially in the US. It 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. And, whenever the system was challenged, the feds rushed to stimulate it some more – with even easier cash and credit. The Fed's adjusted monetary base grew 900% since 1985, and has more than doubled this year alone. Total US debt more than doubled – as percent of GDP. As in Rome and Spain, more stimulus stimulated spending and speculation, not real output. During the 2001-07 period, for example, credit in the US increased by $22trn. The nation's GDP grew by only $4trn. For every extra dollar of output, Americans took on $5.50 of debt.
Now the bubble has blown up. What do the authorities offer? More stimulus! Cometh a report this week that $23trn has already been put at risk in the various bail-outs 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.
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