“While it is the duty of the citizen to support the state, it is not the duty of the state to support the citizen” – President Grover Cleveland

The point President Cleveland made back in the 1880s was that individuals and vested interests had no rights to preferential treatment by a government elected to represent all. For if preference is given, it is always at the expense of others.

Those days are long gone, and the last president to take this stance was Calvin Coolidge in the 1920s. He was followed by Herbert Hoover, who was very much an interventionist. As Coolidge reportedly said of his Vice-President, “That man has given me nothing but advice, and all of it bad”. Hoover was criticised for his disastrous intervention policies by Franklin Roosevelt, who succeeded in ousting him in the 1932 election and then outdid him with even more intervention. The outflows of gold generated by accelerating government spending and the Fed’s monetary policies led in 1933 to the suspension of gold convertibility for American citizens and the devaluation of the dollar in 1934 from $20.67 to $35 per ounce of gold.

Interventionism has increased ever since, not just in America but in all other advanced nations. The socialization of earnings and profits and the regulation of our behavior by governments dominates economic activity today. Despite the warnings of sound-money theorists, a process that commenced nearly a century ago has not yet led to economic collapse, though the dangers of escalating state liabilities are a growing threat to economic stability.^[i] 

A point that is ignored by nearly everyone is that government spending is an expensive luxury for any economy, tying up capital resources in the most inefficient way. Furthermore, governments, through tax and the diversion of savings and monetary inflation, destroy personal wealth. Yet, it is clear both through observation and economic logic that a successful economy is one that instead maximizes personal prosperity.

This is clearly illustrated by observing the difference between Venezuela and America. Venezuela overtly and covertly has transferred nearly all personal wealth to its socialist government in the name of equality for all. The costs of government have increased exponentially relative to its sources of available finance, bringing forward the day when economic and civil order cease entirely. America, despite decades of growth in government spending, has not yet sequestered the majority of its citizens’ wealth, though the process has been accelerating in recent years.

However, the problem is likely to become more of a public issue in the coming months, triggered perhaps by an increase of US Government bond issues at a time of a cyclical downturn in bond demand. This downturn is driven by improving global economic prospects, which means banks will increase lending to non-financial businesses at the expense of purely financial activities.

At the same time as President Trump’s administration is increasing its budget deficit, the Fed is trying to normalize its balance sheet by running off its bond exposure. Add to the mix marginal reductions in an estimated $17 trillion of dollar exposure in foreign-owned portfolios, and we have the potential for a perfect storm in the reserve currency’s bond market.^[ii] 

We have already seen a sharp increase in bond yields over the last six months, with the benchmark 10-year US Treasury yield increasing from 2.06% to 2.94% currently. On a historic basis, and given the Fed’s inflation target of 2%, the time-value on this bond is still on the low side, despite the increase in yields so far. Assuming, that is, the Fed genuinely limits inflation to 2%. 

Readers should give more credence to ShadowStats.com and the Chapwood index as better measures of price inflation, currently registering between 6-10%, than clearly biased government estimates.

We should not be surprised if these dynamics soon result in a derating of US Government bonds, and of the US Government’s finances. Instead of passively accepting the Fed’s monetary cool-aid, proper assessments of bond risk can be expected to dominate valuations. Assuming the Fed continues to restrain interest rates, bond yield curves will steepen, and the interest cost to the Treasury will increase for all its new debt, except for very short-term borrowing. After snoozing through the period of zero interest rates, we are bound to awaken with some suddenness to the risks we have been collectively ignoring for too long.

Therefore, when thinking about risk, the economics of inflation are likely to become central to our thoughts. And as bond yields adjust by rising, we will be increasingly aware of the debt trap faced by the US Government. A one percent increase in interest costs it an extra $216bn. Will President Trump pay for this by cutting the overall budget? Unlikely, on the evidence so far. And when we begin to think in terms of what the time-value on US Government debt should be, possibly two percent above a rising, but heavily doctored, CPI, how will an increase of borrowing costs of perhaps three or four percent or even more look on the government’s books?

The pressure to increase the rate of wealth-transfer from the productive private sector will simply increase as bond yields rise. And the more wealth is transferred, the less there is left to transfer. This was the underlying reality faced in the Roman Empire, when the spendthrift Nero reduced the silver content of the denarius to pay his soldiers, having run out of money. Among other costly acts, he set much of Rome on fire in order to rebuild it, through which legend has it he fiddled. This was perhaps a metaphor, because according to Suetonius, Nero was dedicated to the arts, sex, and debauchery, and was obviously a pyromaniac to boot. If Nero fiddled with anything, it was the currency. Some forty-three emperors following Nero continued the debasement process until the final monetary destruction under Diocletian over two centuries later.

The current century’s worth of spending-led monetary debasement includes the additional burden (that is additional to Roman profligacy) of promises to the general public, in defiance of President Cleveland’s maxim. Depending on the rate at which these future financial liabilities are discounted, these are anything between five and ten times current GDP for America, and probably considerably more proportionately for Japan and many EU member states. Not even heavily-doctored price inflation figures can suppress the debt trap in which governments are now visibly ensnared, which all precedence tells us will be met with accelerating monetary debasement.

Since Herbert Hoover’s presidency, the US Government has been unconsciously rhyming the American economy with the Roman. Just as Rome’s emperors debased the coinage to pay for their profligacy and soldiery, so have America and her western allies debased their currencies to pay for welfare and military spending. 

Excessive military spending was a Roman theme: pay the soldiers or the emperor dies. Diocletian 225 years after Nero went on to issue an edict in stone, banning traders from raising prices. Trade ceased, and Rome and other cities emptied for lack of food. 

Donald Trump and his predecessors have overseen more sophisticated methods of achieving the same result. For the last forty years, prices for goods and services have been officially controlled by doctoring the inflation figures, though the reality is prices have continued to rise.^[iii] The government’s inflation-linked spending commitments have been curbed and the state’s beneficiaries cheated. That cannot go on forever.

Wage increases, which normally keep pace with rising prices, have been replaced by the simple expedient of encouraging the expansion of bank credit to fund personal consumption, along with discouragements to saving. Consequently, US Household debt now stands at $13.15 trillion^[iv] funding personal consumption expenditures of $13.717 trillion.^[v] It amounts to modern smoke-and-mirrors deflecting attention from an underlying problem.

The comparison with Rome has a further, worrying similarity. Roman silver and gold coins were the principal currency for the known world. The US dollar is the world’s reserve currency today, and nearly all the other 170-odd government fiat currencies are aligned with or refer to it. An accelerating dollar collapse takes most of them down, just as surely as the Roman debasement propelled the world into the Dark Ages.

So far in this article, we have seen that the US economy has provided us with an example of a modern debt trap, that if not faced up to, will inevitably lead to an acceleration of monetary inflation and ultimately a collapse of purchasing power for the dollar.  Most other nations are in the same position, though the high levels of personal borrowing are more endemic to America and the UK than anywhere else. Consequently, when the final currency collapse happens, profligate Anglo-Saxons will suffer a slightly different fate from the citizens of nations who habitually save.