The Roman experience looks eerily similar to the present US economic situation. Just like ancient Rome, the USA enjoys the privilege and shoulders the burden of enforcing its “Washington Consensus” on the world, but like late-stage Rome, the US cannot fund its army and welfare state through taxation alone.
As Rome had to resort to currency debasement to pay for its welfare/warfare state, the US finds itself increasingly unable to fund current expenditures through taxation. For each downcycle the US relies ever more on a complex process of bond issuance, covert, and more recently, overt inflationary policies to ensure the once mighty Empire can pay its bills.
Although the US saw expenditures soar during the world wars, large subsequent surpluses allowed the Federal fiscal house to remain in order. When the last vestiges of the old Gold Standard were abandoned in the 1970s, the spending dynamic changed as the Empire no longer needed to adhere to a sound fiscal policy. Funding was secured via the central bank. The modern-day Empire felt entitled to take full advantage of its ‘exorbitant privilege’ to keep its soldiers and plebs content, docile and obedient.
During the Global Financial Crisis (GFC), taxes covered less than 60% of outlays, down from an average of ~90% in preceding decades. In the course of the Covid-19 shutdowns the US government funded less than 50% of its outlays from taxation.
Rome found itself equally tied down by a Gordian knot. The ancient Empire had to fund its army above all else. Imperator Severus famously advised his sons Caracalla and Geta to “Be harmonious, enrich the soldiers, scorn all others” 61 to remain in power.
Similarly, the US has to placate its industrial military complex, but even more important to modern day ‘Imperators’ is to mollify the ~60% of its population who are either on state welfare or directly employed by the government.
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The investment community has been conditioned to believe technological innovation will continue to provide sufficiently large benefits and productivity gains to compensate for rising debt levels. A powerful secular bull market delivers big gains and changes how people perceive risk and react to downdrafts. That helps to explain the rush to buy the dips at every initial sign of a relief rally taking hold.
Artificial Intelligence, robotics, synthetic biology, autonomous vehicles and nuclear fusion are being discussed as near-term realizable solutions. I don’t think investors are prepared for the possibility the timeline for these kinds of advances might stretch to a decade or more. The fact Elon Musk’s latest pronouncement that full self-driving is less than a year away fell flat is a sign enthusiasm for inevitable imminent technological disruption is waning.Click HERE to subscribe to Fuller Treacy Money Back to top