March 30 (Bloomberg) -- Historians cite the late second century as the turning point of the Roman Empire, when the once-proud, feared society began its descent into infamy.
As the ruling class was undermined by civil wars and attacks by outsiders, the Romans’ respect for law and social institutions began to erode. In the end, a combination of political and economic mistakes led to the empire’s downfall.
The U.S. today is a mirror image of the Roman Empire as it tipped into chaos. Whether we blame our bloated government, a greedy elite or a lethargic population, the similarities between the two foreshadow a gruesome future.
The Roman economy grew fat from the plunder of conquered territories and the added productivity offered by new lands. The waning of expansionism didn’t bode well for the empire.
While the U.S. ascended quite differently, it also used its position as a superpower to fuel economic expansion. Because the country had the strongest military and economy in the post-World War II era, the U.S. dollar became the de facto global reserve currency, ensuring endless competitive advantages -- which have vanished in the last decade.
Americans have become less productive while relying more on social safety-net programs such as Medicare, Medicaid and Social Security -- and now expanded health-care insurance. Worse, like the ancient Romans, a sense of entitlement has replaced the drive and motivation we once championed. With easy access to abundant government handouts, it’s no wonder so many jobless people have stopped looking for work.
Bread and Circuses
In the fifth century, the Roman political elite began searching for ways to distract its population from the hopelessness at hand. Bread and circuses postponed the ultimate fall. The tactic stopped working when people realized their bread tasted stale and sensed the true scope of the impending disaster.
The U.S. government’s version of bread offerings proliferated throughout the fiscal crisis, in which collapse was averted only by a massive financial bailout and an endless supply of paper money, along with the rest of the seemingly endless sustenance being shoved down America’s throat.
Meanwhile, the administration hasn’t yet tackled the most pressing issue: job creation. Given the current state of the labor market, American workers can’t possibly provide enough tax revenue to support the government’s swelling debt.
Even more unsettling is the government’s inability to fix the financial crisis. After a stream of stimulus programs and bailouts, the Federal Reserve continues to print enormous quantities of dollars and buy the nation’s debt.
California Like Greece
Many state governments are in even worse shape. With California’s 10-year debt currently yielding about 4.5 percent (municipal debt typically yields less than 10-year Treasuries, which now yield about 3.9 percent), the state poses the same sort of danger to the U.S. that Greece does to the European Union. If the federal government decides to bail out California, what happens when Michigan and New York start demanding the same treatment?
The burden of underfunded pension liabilities will cause states’ budget deficits to further balloon. Since defined state benefit plans assume an unrealistic 8 percent rate of return -- zero percent, at best, is more likely -- we can only imagine the catastrophe to come once states have to make good on their obligations.
As our society becomes increasingly immobile and sits on the couch doing nothing but surfing the Internet, using iPhones and watching “Jersey Shore,” the hopelessness of the situation becomes clear.
Unless the government creates a massive jobs program, cuts spending and taxes, and gains control of the national budget and the balance of payments crises, we should fear for our future. Unless our fellow Americans relearn the value of hard work, no government plan stands a chance.
Once the world realizes that the U.S. is the new Rome, the traditional tenets governing asset correlations will no longer hold, and we can expect a breakdown in traditional stock-bond portfolio theories.
Since paper assets are ultimately shoved down to zero, expect hard assets to benefit -- especially gold, energy and grains -- along with commodity-related equities.
The name of the game going forward -- let’s say the next five years -- will be buying ahead of whatever China and other developing nations are trying to accumulate and diversifying away from the U.S.
The China Factor
Consider the trading relationship between the U.S. and China. When the U.S. funnels its unfinished products to China, the Asian nation is able to send back manufactured goods -- thanks to its abundant supply of cheap labor -- in return for dollars. While the American people are busy tinkering with their newly manufactured playthings, the Chinese continue to use their new wealth to buy energy and commodity assets.
Thus, China and the other developing countries that are amassing dollars, euros and pounds basically play a game of global hot potato, trying to pass the potato -- worthless paper currencies -- to others in exchange for energy, water and valuable food assets.
As China continues to thrust its dollars at all things commodity-related, it’s hard not to laugh when hearing President Barack Obama speak about trying to identify “environmentally sound” opportunities in energy.
It’s only a matter of time before the mechanism that has allowed the government to sustain its trade deficit for longer than it should have -- similar to the Asian dollar peg of the 1990s -- causes a simultaneous decline in the U.S. currency, asset prices and the economy.
Once people begin to realize that their paper currencies, stocks and bonds are all garbage, we can expect a meltdown.
Although it may be too early to predict an impending collapse in paper assets and an immediate need to acquire hard assets, it’s clear that we’ve reached a turning point. The ship has begun to sink. As I await a global re-set of asset values and prices, I will continue to monitor the swelling federal and state tax revenue levels, the rising animosity between Main Street and Wall Street and the progress made by commodity-hungry nations as they continue to eat our lunch.
While I continue to hope for the best, it’s far wiser to prepare for the worst.
(Mark Fisher, author “The Logical Trader,” is the founder of MBF Asset Management LLC. The opinions expressed are his own.)
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