EDITOR NOTE: The collapse of empires caused by monetary debasement, fiscal spending, and reckless malinvestment is a perpetual swan song that repeats itself consistently; almost predictably. We just don’t have the “cultural memory” to recognize the verses, though we do have the historical data to recognize the song, however abstract the mood or stale the aesthetic. The author of the article below draws comparisons between Ancient Rome and modern America. We can also draw comparisons between our current state of affairs and Ancient Athens right before the Peloponnesian War with Sparta. In both cases, the empires collapsed. The cause, however, varied in form, is always the same. The outcome, in chaos and collapse, is always the same. And the song of reckoning in gold and silver upon recovery--that song remains the same as well. But how should you invest? Let’s take a look at all of the data--equities, bonds, metals, and everything else that’s current and relevant to the state of our wealth today, amid the pandemic, amid monetary and fiscal actions. Will this time be any different?
While we fully admit that former Fed Chair Paul Volcker does have a point about price stability under a gold standard, the question begs: does anyone really wish to return to the living conditions of the 17th to 19th centuries? The value of the U.S. dollar in 1700 was worth 63 more times than it is today. Since the average wage of an unskilled worker in 1700 and even up to about World War I was roughly $1/day, that would mean that a worker today would have to earn $63/day to be the equivalent of $1 back in 1700. $63 works out to over an 8-hour day to $7.88. The minimum wage in much of the U.S. today is $7.25. Back then, people generally lived in large groups under one roof. As well, the population was largely rural (60%) rather than urban (40%). Children worked from an early age onward. It took until 1929 for children under the age of 14 to be legally fully excluded from working in factories and mines. The more things change the more things remain the same, but, thankfully, some things do change.
The purchasing power of the dollar has been in a downward spiral since the advent of the Federal Reserve in 1913. An item that cost $100 in 1913 would today cost $2,656.71 (all figures are U.S. dollars). Or, to put it another way, that $100 in 1913 is worth only $3.76 today. But an ounce of gold in 1913 was $20.67. Today, that ounce of gold would have to be $537 to be the equivalent of 1913. But gold is trading over $1,700 or $64 in 1913 money. Some things do maintain their purchasing power, and then some.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation […] Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
—Alan Greenspan, American economist, served five times as Chair of the Federal Reserve 1987–2006; b. 1926
For the U.S. dollar, over the past century and even going back three centuries, its purchasing power has been mostly falling, not rising. At the same time as the purchasing power of the U.S. dollar has been falling, the value of the U.S. dollar relative to other currencies has also been falling.
U.S. Dollar Index 1971 – Present
In 1971, the US$ Index was at 120. It peaked in 1985 at 164.72. Today it is at 91.50 and falling—a decline of 23.8% from 1971 and 44.5% from the 1985 peak. When you combine this with the loss of purchasing power of the U.S. dollar, the decline has been considerable. Since 1971 the purchasing power of a $1 has fallen by 84.6%. Meanwhile, the price of gold has gone from $40.80 in 1971 to over $1,700 today for a gain of over 4,000% and silver has gone from $1.80 to $26 for a gain of over 1,300%. In 1971, prices for today’s gold would have been $262 and for silver, $4.
The loss of purchasing power and decline in the value of the U.S. dollar reminds one of another era. It reminds us that a collapse does not take place overnight but instead over decades, even centuries and it is steady and insidious.
The Collapse of the Roman Silver Monetary System 280 BCE – 518 AD
During the early years of the Roman Republic the silver denarius was the main coin of trade, the reserve currency of its day. The coin, about the size of a nickel or dime, was a day’s wages for a skilled labourer or craftsperson. The coin was of high purity and held roughly 4.5 grams of pure silver or about .145 troy ounces. Today, that silver denarius is worth roughly $3.75 in silver content. However, there was only a finite amount of gold and silver and, as the Roman Republic turned into Imperial Rome, the ability to pay for the wars, palaces, roads, and more was compromised. The solution: decrease the amount of silver in the coins so one can issue more. It was today’s equivalent of printing money. By the time of Marcus Aurelius (161–180 AD), the silver content was down to 75%. By the time of Gallienus (260–268 AD), the silver content was down to 5%. Not long after, the silver content fell to 0.5% and prices soared by upwards of 1,000%.
The third century was known for the collapse of the Roman Empire. The decline was underway following the death of Marcus Aurelius (161–180 AD) and the Antonine Plague (165–180 AD). The plague was said to have killed 2,000/day. The plague killed millions, including soldiers and tradespeople in an original population estimated at around 130 million. Severely weakened, the empire degenerated into soldier emperors and civil wars. The silver denarius effectively became no more in 215 AD under the emperor Caracalla (198–217). The replacement coin was the antoninianus which was initially silver and bronze. An antoninianus was worth two denarii. But the debasement continued until eventually it was made of bronze but washed with silver.
The third century was in constant crisis. There were an estimated 50 different emperors, most of whom were murdered, assassinated, or killed in battle. Adding to the misery was a second plague known as the Plague of Cyprian in 249 – 262 AD. Again, millions were killed estimated at its height, averaging 5,000/day. The plague caused widespread manpower shortage of the army and for food production. It severely disrupted trade which was the lifeblood of the empire. Trade networks disintegrated as movement became too dangerous with not enough manpower to patrol the routes. There were constant attacks by Barbarians. The period was also marked by civil wars and economic depression. Rome, whose population peaked at over one million in the 2nd century went into long decline eventually falling to about 20,000 over the next three centuries.
Imperial Rome was also heavily built on slavery and it failed to adjust to the realities of a collapsing population, coupled with the attacks from Barbarians to the north. By the time of the emperor Diocletian (284–305 AD), the empire was split into two: the Eastern Empire in Byzantium (Constantinople) and the Western Empire in Milan. Before the split there had already been the breakaway Roman Gallic Empire in 260-274 AD that included Gaul (France), Germania (Germany), Britannia (Britain), and for a time Hispania (Spain).
Despite an attempt by Diocletian to reform the monetary system, the debasement of the currency continued to the point that even the antoninianus didn’t exist. So-called silver coins were now just copper or had only a thin coating of silver. Copper coins were often spiked with tin or zinc. Diocletian tried to reform the monetary system and introduced the silver argentus. But it too was quickly cut. The bronze folis became the coin of choice. The gold aureus also disappeared and was replaced by the gold solidus which was smaller. The gold solidus became recognized as the main means of trade. The Eastern Empire managed to fortify itself against the Barbarians but the Western Empire continued its disintegration and by 476 AD it ceased to exist. The Eastern Empire which became the Byzantine Empire continued to exist in some form until 1453 when it was overwhelmed by what became the Ottoman Empire.
To give this some perspective, a Roman soldier in the 1st century BCE was paid 225 denarii/year or roughly 30.7 troy ounces of silver. In today’s money with silver at $26 that is worth about $800/year. By the time of Domitian (81–96 AD) it was raised to 300 denarii which at the time would be worth about 972 grams of silver or 31.3 troy ounces of silver. The silver content in the denarii had also fallen to about 75% of what it was earlier. For the Roman soldier that was still only just over $800/year in today’s money. Today, the average U.S. soldier is paid roughly $61,000/year, although those starting out earn at least $24,000/year. For the average soldier that would purchase 2,346 troy ounces of silver. Today’s soldier by comparison is paid better than the average Roman soldier.
Here is another look at the collapse of the Roman denarius. Compare that with the chart that follows of the long-term debasement of the U.S. dollar in terms of gold. Again, the comparisons are stark. The denarius was the reserve currency as is the U.S. dollar today. The U.S. dollar as a reserve currency has been around for at least 100 years since World War I, although officially since the end of World War II. But a few common factors stand out as to why reserve currencies fail. They are the result of a massive increase in spending, creating deficits, accumulation of debt, easy credit, and the collapse of free trade through either trade wars or sanctions. All are present today in the U.S.
U.S. debt, as measured just by government debt alone, has expanded at an incredible rate. Today it stands at over $28 trillion. Percentage-wise, the largest increases came under former presidents Roosevelt (Great Depression and World War II), Woodrow Wilson (World War I), and Ronald Reagan (failure of supply side economics and massive increase in military budget). Dollar-wise it grew the most under Barack Obama as a result of the fallout from the 2008 financial crisis. Percentage-wise though, the growth under Obama was behind the percentage growth by his predecessor George W. Bush. Total U.S. debt, including household and corporate debt, stands at over $82 trillion, representing roughly 30% of all the debt outstanding in the world and an incredible 382% of GDP. In 1980 that figure stood at 177%.
Today in the U.S. there are more people on assistance—i.e., disability, unemployment, Medicaid, food stamps (est. over 150 million)—than there are people who work full-time (est. 125 million). 36 million or about 11% of the population are considered to live in poverty. Other calculations put it at around 18%. Add in the working poor and the number rises to about 30%. An estimated one in four works in a job paying less than $10/hour. Income inequality is one of the biggest issues facing the U.S. and many other countries today. With a Gini-coefficient potentially as high as 0.51 in the U.S., the gap between the rich and poor is as high as it has ever been. The Great Depression and World War II was the equalizer the last time which helped lower the gap between the 1% and the rest. But that period was punctuated by the rise of populism and created deep splits in societies that were exploited by groups like the Nazis.
Against this backdrop, thanks to QE and record low-interest rates, the stock market keeps on rising. The K recovery: Wall Street up, Main Street down. Many are expecting a sharp recovery once people are vaccinated and can get out to spend again. But history tells us we don’t go back. Plagues, money debasement, and civil wars have a way of changing things. Just ask Rome.
The Pandemic Rages On!
Another week, another 3 million cases and 60 thousand plus dead. At least we have slowed down as t one point we were well over 5 million cases every week. The 7-day average is now 422 thousand vs. 741 thousand at the peak. Deaths have dropped to about 8,500/day vs. over 14 thousand/day at the peak. The U.S. has crossed 30 million cases and is approaching 550 thousand dead. The U.S. has 25% of the cases and over 20% of the deaths with only about 4% of the world’s population. Canada is now over 900 thousand cases and 22 thousand dead. Canada’s cases and deaths per million are higher than the global average but not substantially. The U.S. is amongst the highest (top 10) for both cases and deaths/million. Personally, we have only known one person who contacted the disease. Yet despite it being mild and he quickly recovered he complains of constant fatigue to this day.
Sunday March 14, 2021 – 14:24 GMT
Number of cases: 120,167,554
Number of deaths: 2,661,539
Number of cases: 30,044,060
Number of deaths: 546,617
Number of cases: 906,201
Number of deaths: 22,434
Chart of the Week
Canada’s Job Numbers
Canada’s economy unexpectedly created 259,000 jobs in February. This was well above the expected gain of 75,000. It follows a 266,000-job loss in January. Both part-time and full-time benefitted with part-time rising 171,000 and full-time up 88,000. Given the loss of 3,004.5 thousand jobs in March/April 2020 Canada has now recouped 2,421.7 thousand jobs or 80.6% of those lost. It’s a record that surpasses the U.S. who has only recouped 57.6% of the 22,362 thousand jobs that were lost last March/April 2020.
Canada’s unemployment rate fell to 8.2% in February, the lowest level since March 2020. It was 9.4% in January. While admittedly this level is higher than in the U.S., keep in mind Canada’s labour force participation rate is 64.7% vs. 61.4% in the U.S. With higher labour force participation rate, it stands to reason that our unemployment rate would also be higher. A lower participation rate reflects the number who have dropped out of the labour force or are no longer counted. The R8 unemployment rate was 12.2% in February vs. 13.3% in January. The R8 rate is similar to the U.S.’s U6 rate as it includes discouraged job searchers plus involuntary part-timers. The U.S. U6 rate is 11.1% but when long term discouraged workers who are no longer considered a part of the labour force are counted the rate rises to 25.8% according to Shadow Stats (www.shadowstats.com). We have no comparable figure for Canada.
In February there were 1,665.1 thousand people unemployed, down from 1,899.0 thousand in January. The employment rate rose to 59.4% in February vs. 58.6%. Job gains were primarily seen in the services sector, up 306.2 thousand with the biggest jump coming in wholesale and retail trade as things opened up. Accommodation and food services also gained. The goods producing sector gained 3,100 jobs. Of those working part-time, some 23.8% wanted full-time work, up from 18.5% 12 months ago.
The jobs created in February were largely jobs paying less than $17.50 an hour, a rate barely above the minimum wage of $14.25. Ontario gained 100,000 jobs and Quebec was up 113,000 jobs as restrictions eased. Youth unemployment (15–24) fell to 17.1% as the number of jobs grew by 100,000. Employment losses for women over the past year are double that for men. Youth have also suffered more than the core working age of 24–54. The number of hours worked rose 1.4%, thanks to the gains in wholesale and retail trade. Overall, part-time workers are down 264,000 since last February and full-time jobs are down 335,000. Private sector employment rose 226,000 while government sector was up 46,000 in February. As things opened up, some 600 thousand returned to working in places other than their homes.
Labour underutilization remains a problem—meaning, people who are unemployed, want a job, but have given up looking as they are finding nothing. The group includes job searchers, those on temporary layoff, those wanting a job but not looking, and those who were employed but working only a fraction of their usual hours. The underutilization rate is 16.6% which is the lowest since last February.
The market is viewing this report as positive. TD Bank economics said “Wow, what a bounce-back.” The Canadian dollar rose to just past 80 cents Friday, the highest level seen since 2017. Economists are calling this a quick turnaround like what happened last June and July 2020. Canada reported GDP growth of 2.3% in Q4, although for the year as a whole GDP contracted 3.2%. The BofC will also view this as positive. The question on everyone’s mind is, what if there were a third wave?
Overall, we view this report as encouraging and it should improve further as vaccinations occur and things open. There is a big belief out there that pent-up savings will get spent. But after a year of lockdowns and more, the suspicion is that many will be happy to pay down debt and build a better cushion in the bank. Canada’s household debt to GDP is an astounding 111.0%, one of the highest in the world as Canadians have gorged themselves on mortgages to chase houses. Note the chart below that shows personal savings falling from its highs but the household debt to GDP soaring. The personal savings rate is 12.7% in Q4 vs. 14.6% in Q3. Canada’s household debt to GDP at 111% compares very unfavourably with the U.S. at 78%. The personal savings rate is also lower.
Read more on Born2Invest