U.S. Government’s Path to Demise Similar to Roman Empire’s

Feb
26

By Charles Biderman

 

This government sequestration BS is driving me nuts. I can no longer watch the TV talking heads describing how horrible sequestration will be. The talking heads are saying that if sequestration happens, airports will close, aircraft carriers won’t sail, national parks will close and hundreds of thousands of jobs will be lost.

 

Yet, the TV talking heads who are predicting doom apparently haven’t bothered to do the math. If they did, they would discover that an $85 billion cut in government spending is only 2.4 % of the entire $3.75 trillion federal budget. OK. Back out $2.3 trillion, 62% for entitlements but $85 billion as a % of non entitlement spending is still a relatively modest 6%. So will a 6% drop in non entitlement government spending destroy the economy? They cannot be serious to even consider this.

 

Parenthetically, total income tax collections this year will be $2.6 trillion, meaning that the budget deficit is a modest $1.1 trillion.

 

What is apparent to me is that our government is becoming very good at the big lie. Our government will never say that $85 billion is only 6% of non-entitlement spending. Rather by comparing apples to oranges they are trying to say sequestration is more then 15% of spending. And to increase the fear factor, our government now uses 10-year numbers. Therefore, to scare people silly, sequestration is not $85 billion but a much more ominous $850 billion. Isn’t $850 billion much scarier than $85 billion?

 

So it is obvious to me that our government is deeply committed to not reducing the size of government, and is willing to either outright lie or twist the truth into an invisible pretzel. And if the government is not committed to cutting spending, then it is equally obvious that our government, in fact, is committed to growing the number of people who either work for the government or get paid by the government.

 

Let us backtrack for a moment. I have been saying that Paul Krugman, NY Times columnist and Princeton professor, will not be remembered kindly by history similar to Yale Professor Irving Fisher. Just prior to the Wall Street Crash of 1929, Fisher said that the stock market had reached a permanently high plateau.

 

Paul Krugman will be remembered as erroneously claiming that “deficits do not matter.” If deficits do not matter, as Krugman keeps saying, then there is nothing wrong with using newly created money to grow the government. And what is more, Krugman is saying, that people like me who keep complaining about government deficits are just wasting our breath. Why? Krugman’s reality is that because bond and stock prices have not gone down as of yet even though the US has been running huge deficits that, obviously, deficits do not matter.

 

Following along that chain of logic, if deficits do not matter, then government spending newly created money is a good thing by itself.

 

Really? Here is what happened to the Roman Empire as a result of debasing the Roman currency in a more ancient method then the US government.

 

In 200 AD new Roman Emperor Caracalla levied all kinds of new taxes so he could increase spending on the Roman military and government. For example, Caracalla raised the pay of soldiers by 50%, which he funded doubling the inheritance tax.

 

Surprise, high taxes did not generate enough new revenue to pay the governments bills, and Emperor Caracalla apparently realized that if he raised taxes any more he risked rebellion. Thus, he resorted to the traditional method of governments who need more revenue to pay bills – he debased the currency. The silver denarius introduced by the first Roman Emperor Augustus started out at 95 percent silver. By the time Caracalla got through the denarius was only 50 percent silver.

 

However, after Obama’s, I mean Emperor Caracalla’s, rein things got worse, much worse. By 268 AD the denarius had less than 1% silver. The result, in hind sight, was quite predictable. Inflation! Prices rose by a 1,000%. The “barbarians” hired as mercenaries stopped accepting Roman coins, and insisted on being paid in gold. Such manipulations of Roman currency directly contributed to the decline and fall of the Roman Empire.

 

How do you respond to that Mr. Krugman?

 

September 2009 Old Gold and Black

 

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9 Responses to U.S. Government’s Path to Demise Similar to Roman Empire’s

  1. matt on February 26, 2013 at 1:33 pm

    and that has been his intent from day one charles

  2. Larry on February 26, 2013 at 3:31 pm

    He has previously addressed this problem, by waving his hand and saying, ” ancient history.”

    I think he did it with a smirk, ridiculing the questioner.

    One thing that has frustrated me over the years is the tendency for bulls to use only the post war period as their frame of reference. Exclude all the negative outliers, and you get a much rosier picture. Too bad it is not statistically valid. Human nature hasn’t changed since Rome, and won’t ever change.

  3. Ed_B on February 27, 2013 at 12:41 am

    Krugman seems to be a happy resident of his own little reality wherein economics is mostly a matter of socialist convenience. One could just as easily turn his argument inside out by saying that if deficits do not matter, then why have a deficit at all? This would be every bit as logically valid as saying that they do not matter and then having one.

    The fact of the situation is that the Fed has seized the bond market via becoming the buyer of last (and soon to be only) resort. The old mechanism of the bond market being the brakes on runaway government spending via rising long-term rates ended when the bond market was no longer able to set long-term interest rates because the Fed would just buy up all of the unsold bonds at very low rates. These days, the Fed sets both the long and the short rates, so there is no obstacle whatever to runaway government spending. This is just the way that the Keynesians like it. After all, a metallic monetary standard is just so… restrictive. It doesn’t allow one to print ’til the cows come home and it forces the government to actually have bonds that are worth buying. Apparently, neither of these is a worthy economic goal. I am SO glad that I do not understand economics… at least, the fantasy version.

    Interest rates should not be set by the Fed but by the market itself. Those of us who believe in free market capitalism know that price fixing does not allow the markets to work as they should and always results in market distortions and the unintended consequences that result… and what are interest rates but the price of borrowing money?

    Another part of this is that the Fed IS creating inflation but the fake inflation numbers calculated by the Fed ignore the things that are rising in price quickly; namely food and fuel. Prior to 1995, these were included in the CPI and allowed the CPI to be an accurate measurement of inflation. These things are the essence of life and all who aspire to survive require them. It’s not as if we can say that eating, keeping warm in the winter, or driving our cars are too expensive so we simply won’t be buying any food or fuel until prices come down. Anyway, the old government method for calculating inflation yields a number of 9.4% and not the 2.4% claimed by Bernanke et al. This is slight of hand mathematics and is being done for the sole reason of making Fed policy and the Fed Chief look much better than the actual results he is achieving can justify.

    Finally, if we look off-shore to some of our trading partners and others we see inflation being caused by a cheaper / massively over-printed dollar. For the most part this exists because virtually all commodities are priced in dollars. As the dollar declines in value more of them are needed to buy that barrel of oil, sack of wheat, rice, or corn, or that bale of cotton. If food prices rise above the income capacity of those around the world who want to continue eating, civil unrest WILL result. Hungry people who cannot feed their families will become angry and then violent. Who would’nt? The Arab Spring had more to do with this than with any political or religious arguments currently in progress and, unfortunately, we have not seen the last of this as the US dollar printing presses continue to spin.

  4. Geoffrey Robertson on February 27, 2013 at 2:19 am

    Charlie I get a real kick out of this stuff, thank you so much! I would like to point out that if Mr.Krugman is so
    sure that deficits do not matter then why should we have
    to pay any taxes? Why not just “charge it” , can you imagine
    what that would do for the economy? Just think; everyone gets
    30% more to spend!!!!

    Geoffrey

  5. kelly trosper on February 27, 2013 at 3:32 am

    Thanks for the vid.. I don’t think these “cuts” are cuts at all.. I think it’s all baseline budget BS… check this chart out. http://mercatus.org/publication/federal-spending-without-sequester-cuts

  6. Dave in Canada on February 27, 2013 at 3:41 am

    Great video Charles. History always repeats itself but just in slightly different ways. The big question is when do other countries start rejecting the American dollar ? When that happens it will mirror Roman history once again. Thank you once again for your honesty about the markets.

  7. Joey Anchovey on February 27, 2013 at 2:28 pm

    The media is complicit in this farce as I have not once heard anyone say it’s only a 2.4% reduction in growth which most people would agree is a relatively small amount. And that’s in an economy that is now spending 75% more than 10 years ago. I wish one of our esteemed politicians or news media members could just bring up those minute facts. If so it would be a much more productful conversation. Right now Obama is doing his best sky is falling campaign and there is nobody out there telling the truth. He must be amazed about how easy this presidential governing thing is – nobody holds him accountable.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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