How can an investor profit if the U.S. Economic Empire is crumbling? 1 of 5

Executive Summary:

 In this analysis, the first in a series, we look back to learn how economic decline plays out.

It has been said excessive taxation, inflation and over-regulation felled the Roman Empire’s economy.  Understandably these same economic maladies cause today’s U.S. investors to worry about investment prospects for their investable funds.  Naturally, in an effort to direct advertising dollars their way, media outlets should be expected to play on these worries and run stories suggesting that the end is near. 

 

However the fact that will not be found in a headline title is:  Empires do not just vanish.  Instead empires tend to crumble over a very long period of time; decades, centuries.  The Roman Empire, for example, endured three centuries of economic deterioration before being finally overrun by Barbarians in 476 A.D. 

Our point is: If the U.S. Economic Empire were to follow the Roman path and last another three centuries, many investment opportunities will come and go.  Investors would have to contend with the Roman experience

  • Tax avoidance & evasion schemes multiply
  • Debasing the currency does not induce growth
  • Austerity measures lead to financial crisis only to be relieved when the state made large loans at zero interest in order to provide liquidity
  • Frustrated government officials combat failed regulation with new regulation
  • Higher and higher taxes failed to raise additional revenues because wealthier taxpayers could evade such taxes while the middle class – and its taxpaying capacity – were exterminated

Our investment strategies which will write of in the coming weeks pay consideration to this sequence of decline.  We attempt to find profit in such an environment.

 

Extended commentary – a chronology of decline:

In order to shape an investment theme to adopt in a declining economy, let’s visit events that played out in the Roman decline so that we may consider what the effect might be on our investments.  We are not suggesting the U.S. will necessarily follow this path.  We are suggesting economic decline is not the end of the world and investment opportunities will arise.

Note: We refer to a report Bartlett wrote in 1994 compiling research gathered for the previous one hundred years.  Bartlett’s entire report can be found at:

http://www.cato.org/pubs/journal/cjv14n2-7.html

1. Expansion of social services:

‘The distribution of free grain in Rome remained in effect until the end of the Empire, although baked bread replaced corn in the 3rd century. Under Septimius Severus (193-211 A.D.) free oil was also distributed. Subsequent emperors added, on occasion, free pork and wine’

2. The expansion of the dole is an important reason for the rise of Roman taxes.

‘[Initially] expansion of the money supply did not lead to higher prices. Interest rates also fell to the lowest levels in Roman history in the early part of Augustus’s reign.’ (Sound familiar?)

3. Inflation ensues (a.k.a. the tax on cash balances):

‘Revenue was needed to pay the increasing costs of defense and a growing bureaucracy. However, rather than raise taxes, Nero and subsequent emperors preferred to debase the currency by reducing the precious metal content of coins.’

In the absence of printing presses, Romans reduced precious metals in their coins to inflate their currency.   The silver content in Roman coins was reduced from 90% to 5% by the third century.

4. Government induced Inflation fails to grow tax revenues:

‘Interestingly, the continual debasements did not improve the Empire’s fiscal position. This is because of Gresham’s Law (“bad money drives out good”). People would hoard older, high silver content coins and pay their taxes in those with the least silver. Thus the government’s “real” revenues may have actually fallen.’

5. Government taxes a greater number of citizens in an effort to avoid having to raise the overall tax rate percentage:

‘Although taxes on ordinary Romans were not raised, citizenship was greatly expanded in order to bring more people into the tax net. Taxes on the wealthy, however, were sharply increased, especially those on inheritances and manumissions (freeing of slaves).’

6. Tax evasion stays one step ahead of tax collections:

‘…once the wealthy were no longer able to pay the state’s bills, the burden inexorably fell onto the lower classes, so that average people suffered as well from the deteriorating economic conditions.’

7. Money economy breaks down but the military required funding:

‘The army’s needs required satisfaction above all else, regardless of the consequences to the private economy’

8. The government increases its reach through more regulation

‘Despite the fact that the death penalty applied to violations of the price controls, they were a total failure.’

9. Goods and services are confiscated for taxes as money becomes worthless:

Tax burden exceeds a farmer’s production.  Next, fields became deserted and cultivated land was turned into forest

10. Small landowners, crushed into bankruptcy by the heavy burden of taxation, threw themselves at the mercy of the large landowners, signing on as tenants or even as slaves. (Slaves, of course, paid no taxes.)

 

The decline was complete.  Yet Bartlett writes: “for the bulk of Roman citizens [the fall of Rome] had little impact on their way of life.”