Roman monetary policy

Joseph Peden gives an interesting lecture on inflation in the Roman Empire:

I’ve been asked to speak on the theme of Roman history, particularly the problem of inflation and its impact. My analysis is based on the premise that monetary policy cannot be studied, or understood, in isolation from the overall policies of the state. Monetary, fiscal, military, political, and economic issues are all very much intertwined. And they are all so intertwined because any state normally seeks to monopolize the supply of money within its own territory.

Monetary policy therefore always serves, even if it serves badly, the perceived needs of the rulers of the state. If it also happens to enhance the prosperity and progress of the masses of the people, that is a secondary benefit; but its first aim is to serve the needs of the rulers, not the ruled. This point is central, I believe, to an understanding of the course of monetary policy in the late Roman Empire.

We may begin by looking at the mentality of the rulers of the Roman Empire, beginning at the end of the 2nd century AD and looking through to the end of the 3rd century AD. Roman historians refer to this period as the “Crisis of the 3rd Century.” And the reason is that the problems of the Roman society in that period were so profound, so enormous, that Roman society emerged from the 3rd century very different in almost all ways from what it had been in the 1st and 2nd centuries.

The intrinsic link between the interests of the state and the economic policies it pursues is why I suspect that the discipline of political economy is more integral to understanding the way the world operates than the theoretically objective science of economics. The problems that we are facing, courtesy of our fiscal and monetary authorities, are far from new. While the particular form they take is different, the core issues remain the same.

Denninger’s parabola

Karl Denninger explains why the inflate-and-grow strategy cannot work in the current situation:

In 1933 Roosevelt devalued the dollar to get out of this death spiral. He was able to do so because the dollar was linked to gold, and thus he could simply sign a document and change the exchange rate, at the same time banning private ownership of the metal (and thus preventing the market from immediately counteracting his devaluation and rending it meaningless.) Today all currencies are fiat and this option is not available – should it be attempted via massive money printing (doing so would require The Fed to literally print the entire asset base underlying the credit system in the US – somewhere on the order of $20+ trillion dollars!) the outcome would be an instantaneous ramp in energy costs (and all other imports) by more than 1,000% and the immediate collapse of both our economy and all banks, including The Fed itself, since wages would not and cannot increase by that same 1,000% in a global economy.

We must force the outstanding credit levels down to sustainable levels. This will cause a huge number of bankruptcies, especially among the financial “heavy hitting firms” on Wall Street and the pension and insurance funds of Americans as the true “value” of their so-called assets are exposed. The problem is that there is no alternative – we squandered the ability to rebuild our safety margins over the previous 30 years, and now we’re into the maw of the parabola with no remaining margin available to exploit. The longer we wait to do the right thing the worse the outcome will be, and if we wait too long we will lose our nation – literally.

History has shown that the 2000-01 recession “avoidance tactic” of more than doubling outstanding consumer credit in mortgages and increasing it by 60% in other debt while income only rose 23% during the same period bought us seven years of delay and a collapse far worse when we hit the wall – unemployment only reached 6.3% during the 00-01 recession (in 2003) while we are now at 9.7% (officially) and climbing. Consumer spending and defaults were a non-factor in 00-01 – today they are the feature of our recession.

Today we simply have no more “forward debt capacity” in our economy. This is not conjecture or belief – it is hard fact and has been proved by the structure of the current recession.

What most people watching the markets for clues about the economy don’t understand is that the markets are operating on misinformation. The “profits” that the financial institutions are reporting are not real, they’re actually smaller than the amount of money being pumped into them by the government. More importantly, the banks are in much worse shape than anyone is willing to admit; as bad as the banking situation looks, it’s reliant upon assigning false values to worthless loans that have already stopped receiving payments and are never going to be repaid.

As Denninger points out, the extend-and-pretend possibilities have been exhausted because there simply isn’t enough consumer income left to support additional debt. The Keynesians and Neo-Keynesians have always insisted that debt doesn’t matter, but they’re about to find out that it is the critical aspect of the ongoing crisis.