History Often Rhymes – Lessons for the US Dollar From the Collapse of the Roman Denarius.
For some, America is in the midst of a modern Diocletian moment.
Inflation is a topic that has been coming to the forefront around the world since the beginning of 2022. Even Jerome Powell, who refused to admit it for a long time, has finally come to terms with it: this inflation will not be transitory as he had been claiming and hoping for months.
The annual inflation rate thus went from 8.5% in March 2022 to 8.3% in April 2022. This is still extremely high, although Jerome Powell hopes that a peak has been reached. This is the highest level since the 1980s, and many experts believe it is unlikely to continue to fall significantly in the near term. According to estimates by the American website ShadowStats, American consumer prices would even experience a real inflation rate of more than 15%, if we use the calculation method applied in America until 1980:
Indeed, the issue of inflation will be increasingly central to government policymaking in the months ahead.
Here's what Goldmoney analyst Alasdair Macleod has to say:
“We will be increasingly aware of the debt trap that the U.S. government faces. A one percent increase in interest rates will cost the government an additional $230 billion.”
The big question is whether U.S. President Joe Biden will respond to inflation by cutting the government's budget in a time of economic decline. According to Macleod, that is highly unlikely. After all, a three or four percent increase in interest rates could be catastrophic for the U.S. economy.
Not ideal just a few months before the Midterms, which will clearly decide Joe Biden's political freedom of action for the rest of his term.
The UK experienced a similar situation in the 1970s and had to be rescued by the International Monetary Fund (IMF). However, that would not be an option for the United States today. “There is no way the IMF or any other supranational organization could intervene in U.S. economic policy,” says Macleod.
This would be because U.S. policymakers do not fully understand or recognize their market, whereas the reality of the market should guide the monetary policies of politicians, the analyst believes.
Interestingly, Macleod sees a series of parallels between the current problems of the U.S. economy and the problems of the denarius, the Roman silver coin. After some two centuries of currency devaluation, the Roman denarius eventually ran out of money. An increasingly expensive bureaucracy crippled the Roman economy and precipitated the fall of their empire.
The West devalues coins to pay for its prosperity and armies
Although such a historical comparison is difficult to sustain for a variety of reasons, and there are essential differences between the history of the United States and that of the Roman Empire, we could nonetheless learn much from the demise of the Roman denarius. Indeed, the American and Roman systems would have in common a “stifling bureaucracy” and a “lack of value in the coinage system,” Macleod believes.
The Roman emperor Nero began devaluing the denarius in the first century CE by reducing the amount of silver in the coin. The silver content of the Roman coin must have dropped because the profligate Nero no longer had enough money to pay his armies.
Forty-three emperors after Nero continued this process of devaluation until, two centuries later, under the emperor Diocletian, the coin was replaced by a new monetary system. Diocletian's system used several new coins: the silver argentine, the follis or nummus covered with silver foil and the bronze radiatus. However, the bronze coins quickly lost all value due to relentless inflation.
Since the 1930s, the American economy has shown increasing parallels to this Roman story, Macleod believes:
“Just as the emperors of Rome devalued their coins to pay for their profligacy and armies, the United States and its Western allies have devalued their coins to pay for their prosperity and military spending.”
It was essential for Roman emperors to spend large sums of money on the army. Those who could not afford soldiers risked being killed by the praetorian guard, or imperial bodyguard.
About 225 years after Nero's reign, Emperor Diocletian is said to have made another attempt to save Rome's costly bureaucracy and disastrous finances before introducing a new coinage system. In the year 301, the emperor introduced a price decree providing for a maximum amount for all types of goods and services. The highest price limit in the edict was for a pound of purple-dyed silk, with a ceiling of 150,000 denarii. A wild lion also cost the same amount.
The goal was to preserve the purchasing power of soldiers and limit inflation by balancing the prices of goods and services. For Macleod, the American government might be tempted to follow Diocletian's example:
“Biden is not Diocletian, but the US government will soon be tempted to introduce price controls. As for food products, meat and dairy prices may reach Diocletian's peak this summer.”
The speed of implosion of the US dollar seems to be faster than that of the Roman denarius
There is a second comparison to be made between the Roman denarius and the American dollar. Roman coins were once the most important currency for much of the known world. The U.S. dollar has been the world's most important reserve currency for nearly a century. Some 170 forms of fiat currency are believed to be tied to the U.S. greenback.
“An accelerated collapse of the dollar will bring down most of these currencies, as surely as the collapse of the Roman currency brought the world to the Middle Ages,” Macleod believes. The current problem of inflation and debt in the U.S. economy represents a modern debt trap like we have never seen before. “This will inevitably lead to accelerating monetary inflation and ultimately a collapse in the purchasing power of the dollar,” the analyst adds.
If a credit crisis were to occur, it could cause inflation to explode.
Macleod is already talking about a “modern Diocletian moment,” or a final moment of devaluation before the collapse of a monetary system, with all its consequences:
“A credit crisis is always the culmination of a credit cycle, endemic to economies destabilized by banking systems that attempt to stimulate consumption through money and credit inflation.”
The collapse of U.S. financial services provider Lehman Brothers, whose bankruptcy in September 2008 led to the credit crisis, would be just a foretaste of another major economic crisis, Macleod believes:
“And unlike the Romans, who took 225 years to destroy the denarius, its successors and the empire itself, the current wave of currency destruction looks set to end in a century or so.”
As you can see, Macleod believes that the end of the U.S. dollar's hegemony has already begun and that the worst is yet to come in the decades ahead. Not an optimistic vision, but it has at least the merit of clearly posing the problem of the explosion of the American debt, and especially of its grave consequences in a realistic way.
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