The Fiat Empire
Keith McCullough from Hedgeye recently sent out the following news letter about the Western world’s debt. The comparison he is making to the last days of Rome is intriguing. I am not yet worried about the level of US debt, however, I am terrified about the long-term implications of our unfunded liabilities (specifically Medicare). For those of you familiar with the theories of Hyman Minsky you understand that a government has to run a deficit during a recession to try and offset the precipitous dip in aggregate demand. However, before you start sending me emails about the fallacy of Keynesian economics, I want to be very clear that obviously not all deficits are created equal. Some government spending programs are more conducive to spur aggregate demand compared to others. The latest Administration proposal to borrow money to prop up state and local governments is not the most efficient allocation of deficit dollars. Immediately suspending payroll taxes is a much better strategy in my mind. This should coincide with increases in the age for Medicare and social security eligibility. Here are some of McCullouogh’s thoughts…
Not unlike those of the Roman Empire, the political fathers of the modern day Fiat Empire purge their citizenry’s hard earned capital in order to attempt to maintain short term popularity. When they run out of funds, they simply borrow more. Then they spend that too.
I’m in the midst of reading “Rubicon – The Last Years of the Roman Republic.” I’ve written about this before, but it’s worth mentioning again. The behavioral parallels between professional politicians circa 100BC was eerily similar to what you see in Western Europe and America today.
Sulla (138BC-78BC) was the poster child of what became an untenable Roman dictatorship. Once he captured control, he swept away the ideals that galvanized the Roman Empire’s longstanding pride. The meritocracy that allowed common citizens to rise up against the political aristocracy and lead their country was quashed. The greed and lust for political power in the Republic became disgusting. Tom Holland captures life in the Sulla moment effectively:
“As dictator he had thrown the largest parties in Rome’s history. Everyone in the city had been invited. Spit roasts had sizzled in the streets, vintage wines had flowed from public fountains. The citizens had gorged themselves.” (Rubicon, pg 104).
This, of course, didn’t end well. Leveraging yourself to the habit of overspending never does. European governments are finally coming to grips with this new reality. While their political resolve continues to be borrow-borrow-borrow, then spend what they borrow, unlike America, at least they are implementing some form of austerity on the spending side of this dysfunctional equation.
This morning, markets around the world remain confused. This is mainly a function of professional investors being confused, not the people whose money they are managing. To the citizenry of all nations who are over-geared, the output of austerity is crystal clear – slowing growth and less to gorge.
Here are some interesting thoughts from influential Europeans in this morning’s news:
1. UK – George Osborne (the new Chancellor of the Exchequer): “At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify, let alone prevent.”
2. Russia – Igor Shuvalov (First Deputy Prime Minister): “I’d be very cautious about stock investments in this country. I would welcome real investors who can build factories, something new in this country.”
3. Italy – Claudio Artusi (CEO of City Life – Milan’s $2.6B real estate project that’s built the tallest building in Italy): “Our investors are more concerned about long term value than short term returns. The project is aimed at the top end of the market and won’t be affected by the economic cycle.”
Confusion from the Italian sitting on his perch at Club Myopia and, at the same time, admission of the new Age of Austerity that has been voted into the UK’s political system. All the while Spanish and French governments are trying to convince the Russians to buy their broken promissory notes (more sovereign debt auctions this morning) as the Russians look to start taxing their almighty petrodollars (considering a tax on oil exports from tax-exempt Siberian oil fields).
The only way that this unsustainable Piling Debt Upon Debt plan changes is if we change the governments who plan to keep spending. Germany has a much better fiscal position than the US at this stage of the game and has already implemented austerity measures on the order of 2.7% of GDP. Part in parcel with Osborne’s comments in the UK this morning is David Cameron getting rid of the FSA (Financial Services Authority). Why? Because it doesn’t work.
You can’t solve problems with politicians who perpetuated the problems. Change is good and it seems to me that those countries who have the political backbone to make changes first will win this race to the bottom in the end (you need to hit bottom before you bounce).
Levered markets, politicians, and financiers alike need to take a good, hard, and long look at the bottom before they change their ways. Artusi’s fanciful expectations are a metaphor for an era that’s passing us by. The score for Italy’s latest version of an opulent “City Life” is on the board – only 90 of 390 luxury apartments sold. The Fiat Empire may not be burning yet, but the smell is becoming awfully familiar…