Deflation remains a mystery for many because they just cannot grasp the fact
that money supply can increase while prices decline. Their heads begin to spin
around and they spit out green pea soup because it is not supposed to happen in
their mind. During deflationary trends, money supply can still increase but the
contraction is so massive that money supply cannot possibly increase at the same
pace as assets collapse as demand shrinks into the sunset.
Deflation can emerge from two primary sources – domestic and international.
President Grover Cleveland explained his observation during the Panic of 1893
how capital can flee and hoard but labor cannot. Then if taxes rise, capital is
consumed by government and that further shrinks the domestic available money
supply.
In Japan, the government fought deflation in a losing battle for more than 20
years. As deflation emerges, it becomes profitable to hoard money even if it is
fiat. Increasing the value of money causes people not to borrow to spend or
invest when they see no profit potential. The low rates destroys pension funds
and lowers the income of the elderly forcing even them to cut back on
everything. The purchasing power of the currency strangely rises regardless of
its backing as consumer prices fall even when the “official” supply increases as
we saw with the Fed. The price of a lunch in the financial district of Tokyo at
the peak was 1,000 yen and today it has fallen to below 100.
Consumer prices are
now collapsing in Greece falling by 2% in October alone. This is the strongest
deflation for over 50 years. Throughout the Eurozone, the official inflation
rate is currently at 0.7 percent, the lowest in four years.
Deflation is one of the most difficult monetary concepts to understand
because thanks to Keynes he defined it as merely a one-dimensional collapse in
demand that could be overcome by increasing the supply of money. However,
historical research we have conducted going back to Rome shows that deflation is
multi-dimensional and it will
NOT be cured by simply increasing
the money supply and lowering interest rates. The only way to stop deflation is
not institute regulations or lowering interest rates in hopes of stimulating
demand with no guarantee the banks will pass that along to the consumer. Without
retroactive adjustment of rates as both Tiberius and Julius Caesar imposed, you
cannot prevent a collapse in asset values known as deflation. The focus cannot
be trying to stimulate future demand, but to address the contraction
There was a financial panic in Rome in 33AD that was caused by a cascade
failure from many different aspects.
Emperor
Tiberius (14-37 AD) who had a reputation for being frugal in his
expenditures yet unlike modern politicians never raised taxes during his reign.
Suetonius tells us in Book VIII that Tiberius
acted as advocate in Rome beginning
his civil career in separate cases with Augustus presiding, on behalf of
King Archelaus (of Cappadocia); the citizens of Tralles (Aydin, in Turkey); and
the Thessalians. Tiberius had also undertaken two special commissions; a
re-organisation of the defective grain supply, and an investigation into the
slave-farms, in Italy, whose owners had acquired an evil reputation by confining
lawful travellers, and also harbouring men who hid there as slaves, out of an
aversion to military service.
Tiberius’ coinage is rather scarce for there is not a great deal of issues.
He even refused the title Augustus (‘Father of the Country’) and prevented the
Senate swearing to uphold his actions, for fear of the greater shame when he was
found to be undeserving of such honors. He was a complex character and the
emperor who presided at that time of Jesus’ execution.
Tiberius also appeared before the Senate to support
pleas by the inhabitants of Laodicea, Thyatira and Chios, who requested help
after a devastating earthquake on the coast of Asia Minor. Thyatira (Thyateira),
is the modern Turkish city of Akhisar. It lies in the west of Turkey, south of
Istanbul and almost due east of Athens. It is about 50 miles from the
Mediterranean. In classical times, Thyatira stood on the border between Lydia
and Mysia. It was famous for its dyeing and was a center of the indigo trade and
this was a key component in the luxury trade. The foreign trade in luxury
products of spices, silks, and dyeing with rare colors like purple and indigo
included both product from Africa and China via the Silk Road.
The Panic of 33 AD began as a contagion that spread across the entire Roman
world. Where the Great Depression of the 1930s began with a banking failure in
Austria, this one began with a famous bank failure of Seuthes and
Son, which was located in Alexandria, Egypt. There was a loss of
three cargo ships in a Red Sea storm. This was combined with a collapse in
luxury products they financed from Africa for sale in Rome – ostrich feather and
ivory markets in addition to a various dyes.
Virtually simultaneously, there was the collapse of the great trade house of
Malchus and Co. of Tyre with branches at Antioch and
Ephesus, which went bankrupt as a result of a strike among their Phoenician
workmen (early unions) and the embezzlement of senior staff – the business
manager. These financial failures set off a contagion that then impacted the
Roman banking-house of
Quintus Maximus and Lucious
Vibo. As news of these problems emerged, a bank run surfaced and
spread to other banking houses as confidence collapsed. Rumors spread that many
banks were involved especially that of the
Brothers
Pittius.
The Via Sacra was the financial center of Rome located in the Roman Forum. It
was the ancient Wall Street of Rome in its day. As the financial crisis struck,
this thoroughfare erupted in panic with merchants clamoring to save their
businesses. The banks were all interlinked doing business with each other much
as we have today even creating syndicates..
With the financial chaos rapidly spreading from bank to bank throughout the
empire within days, there was also a rebellion that had erupted in Northern Gaul
(France). The Romans were also great investors in emerging markets and labor
costs were cheap the further you moved from the center of Rome. With large
investment in emerging markets, any rebellion in these regions alone sent panic
down the Via Sacra. A moratorium of investment and debt had been declared by the
provincial government on account of the distributed conditions and now capital
could not be withdrawn. This now set off a cascade effect on yet other banks as
capital became frozen thanks to capital controls not dissimilar from current
conditions in India or South East Asia during 1997 Crisis..
This all combined with the economic decline in agriculture had peaked in 29
AD with the
Economic Confidence Model. Thus, there was
a bear market in full motion in the primary economic driver – agriculture.
Tiberius was confronted by a major financial crisis coming from several
directions in the middle of an economic down wave. He responded requiring that
one-third of every senator’s fortune be invested in Italian land to support the
collapse in land values that were based on agriculture. Thus he also had a real
estate crisis to confront. The senators had 18 months to make this adjustment,
but by the time the period was up, many senators had failed to make the proper
adjustment because prices had been still falling. This deadline occurred at the
same time at the bottom of the wave in 33 AD as these additional events
unfolded.
Deflation was in full swing and the value of money rose sharply. Shortages of
money began to emerge and we find at this time private tokens start to appear.
These tokens are rare and have denominations on the reverse in Roman numerals
denominated most likely in the base unit the Roman As. There was no difference
in size relating to value so they were purely a representative form of money
(value).
During such economic
contractions, we often find private script appearing due to severe shortages in
money. During the Great Depression in the USA, more than 200 cities issued paper
currency because there was a shortage of money. During the US Civil War there
was postage currency circulating as coins advertising various companies on the
reverse. The backing is a postage stamp because of the massive shortage in
coinage. We find the same thing with private tokens being issued because of the
shortage of money.
In Rome,
Publius Spencer, who was a wealthy
noblemen in Rome, requested 30 million sesterces from his banker
Balbus Ollius. The bank was unable to fulfill his
request and closed its doors. You can imagine the financial crisis that emerged.
What if Bill Gates went to his banks and wanted a billion and the bank today
said no they did not have it. The chaos that would emerge is indescribable.
The banking crisis of 33 AD now spread everywhere within a matter of days.
News could travel from Rome to Britain in just 7 days as established from
letters
found near Hadrian’s Wall dividing Britain and Scotland. During this short
period, major banks in Corinth, Carthage, Lyons and Byzantium all closed unable
to meet obligations. A full-scale banking crisis held the entire Roman Empire in
the grips of sheer panic. The closure of banks along the Via Sacra in Rome would
be the equivalent of the Wall Street announcing it closed unable to meet
obligations.
The banks began calling in their loans desperately trying to regain liquidity
as they always do in a crisis, which fuels the deflation forcing assets to be
sold in distress. This collapse in prices as debtors cannot meet the demands of
their creditors creates a cascade failure. This is the heart of the deflation
that cannot be prevented by increasing money supply for you cannot increase it
in sufficient proportion to the collapse in asset values. This vortex of a debt
implosion leads to seizures of assets with forced sales of homes and possessions
sending the purchasing power of money even higher (deflation). As money becomes
unavailable and its value rises daily, even at the legal limit of 12% for
interest rates gave way. We can see the chart of call money rates during the
various financial panics in the United States. Interest rates rise tremendously
during such early periods of crisis as the “cost” of money rises sharply
regardless of what it is at that time and as rates subside, the “value” of money
then rises yet demand for loans collapses as lenders also begin to hoard their
capital.
As the deflation unfolds, tangible asset values collapse such as real estate
and other goods as cash becomes king with few buyers. The Panic of 33 AD gripped
the entire Roman World. Tiberius had retired from Rome fearful of the public
perhaps because of the economic decline in real estate values in motion from the
peak in the ECM – 29.15 AD. Nevertheless, as the crisis of 33 AD emerges,
Tiberius sent a letter to Rome with measures to alleviate the crisis that
demonstrated his keen awareness of the economy. His decrees ordering senators to
invest in land were immediately suspended. Tiberius then ordered 100 million
sesterces were to be taken from the imperial treasury and distributed among
reliable bankers, but unlike the incompetent US Congress, the money
had to be loaned to
the neediest debtors. To put this in perspective, a soldier earned about 1000
sesterces at that time and comparing that to military pay today it would be more
than $2 billion.
Tiberius was concerned about the economy rather than the bankers who were not
primary dealers as they are today capable of blackmailing government. Tiberius
ordered that
NO interest was to be collected for three years.
He also ordered that the bankers accept security that was to be offered at
double value in real property taking into consideration how much it had fallen
in price by about 50%.
Tiberius brilliantly enabled many people to avoid selling their estates at
low prices, which the US Congress just bailed out banks with no strings
attached. Tiberius actually stopped the fall in prices by stopping the forced
sales and ensuring that the lack of liquidity would be halted. It is true that
the weak banks never recovered from the panic. However, most eventually did
resume business as usual.
Tiberius’s response was
direct rather than
indirect as the
central bankers do today that help banks at the expense of the economy.
Governments wrongly assume that the banks are the cornerstone of the economy
rather than the participants. They routinely sacrifice the people for the banks
because they are themselves the greatest debtors within society.
Tiberius did not merely increase the money supply as was Bernanke’s response
of the Fed or Congress signing TARP with no strings attached. Tiberius lowered
interest rates to zero for three years, but this was on
outstanding
loans not to create new ones with hopes of stimulating demand
(Keynesian Economics). Tiberius’ response was substantially different from the
quantitative easing we saw in Japan, Europe, and the USA. Lowering interest
rates to zero today destroys savers, expends the revenue of banks, but does
nothing to suspend the crisis in outstanding obligations. Tiberius’ approach was
substantially different and above all –
IT WORKED!
We produced studies that were being circulated around everywhere. I found myself on Capital Hill shuttling back and forth between Dick Army who was championing the Flat Tax and Bill Archer who was Chairman of the House Ways and Means Committee championing the Consumption Tax. Both were Republicans and both were from Texas. But they would not sit down with each other for that somehow would have led to unfounded rumors. So I became the go between. I sat in Dick’s office with his boots on the desk as he smoked and filled the room. He looked at me and said: Marty, I cannot agree with the Consumption Tax unless there is a Constitutional Amendment eliminating the income tax for when the Democrats got back in power, we would then have both. It was at that moment I knew meaningful tax reform was doomed.
