Mugabe to the rescue

Desperate times call for desperate measures, so goes the oft-quoted proverb. The politicians are well aware that the current dire situation has caused them to freeze up like the deer caught in the glare of headlights, not knowing which way to go. This is a result of the democratic checks and balances that are intended to prevent domination by any one of the three governing branches. However in governing, you must be able to switch from democratic to authoritarian methods as the situation demands. But the constitutions of all democratic nation-states do not provide for such a privilege.

Ancient Athens and Rome were more enlightened in this respect. We've seen in the previous post, The 'Greek' hold the answers to the euro crisis, how the ancient Greeks turned to Solon for autocratic leadership in 594 BC though it was probably the only time that the Greeks did so. The ancient Romans were much better; when faced with a major crisis during the time of the republic, they would appoint a dictator known as dictatura rei gerundae causa (dictatorship for getting things done) for a period of six months, enough time to lead the Romans in their wars which were fought only in summer.  The appointment of the temporary dictators occurred between 501 and 202 BC. Rome had other types of dictatorship but these were less common than the rei gerundae causa. Ordinarily the Romans would be governed by two consuls who would decide when a dictator was needed.

In 82 BC, the six-month time limit was breached when Sulla became a dictator for one year to suppress a civil war and amend the constitution. With the precedent set, Julius Caesar subverted the governing privilege when he declared himself a dictator for life in 44 BC though he didn't get to enjoy it for long as he was assassinated in the same year. Upon his death, his adopted son, Augustus, made the change official when he transformed the republic into an empire, though still maintaining a veneer of the old republic in the form of consulship and senate.

Our present dire situation now doesn't involve any war or constitution amendment but it might lead to more worrying conditions if the current crisis is not urgently addressed. The first thing to getting things done is to immediately tackle the debt crisis. Would this solve our real problem, which is the capacity/consumption crisis? No, but it will give us some respite and in a crisis that's many times preferable to stasis. Even with the cancellation of debts, wealth accumulation enjoyed by the affluent will continue unabated as if the cancellation is only a minor pullback. The debt crisis may recur but hopefully the paradigm of the fifth Kondratieff wave will precede it and destroy enough wealth so that mankind can pursue its new wealth accumulation game afresh.

Since no creditors would want to see their debts written off, we would need to explore some creative ways to magically siphon the creditors' financial savings, i.e., debts due them, off their books. For this, we have to call in Mr. Mugabe, a dictator that can get things done, albeit in a negative sort of way. He may not know much about economics but his mastery of money printing anytime thumps that of Ben Bernanke. The problem with the US is that people from the academia, who are too clever by half, are at the helm of the White House and the Fed.

Bernanke's grasp of money printing is flawed. Printed money is not money in the economic sense until it is spent, that is, it doesn't matter a whit to the economy if you print to hoard. To do the spending, Bernanke needs Obama: Bernanke prints and Obama spends. Only then can money supply shoot through the roof. In the case of Zimbabwe during its hyper-inflationary days, Mugabe had full power to execute both, which he did, unfortunately, too well. Mugabe's money printing was not a recent phenomenon, it had been going on since Zimbabwe's independence in 1980. Only in 2008-2009 did it rapidly intensify, the inflation rate, last recorded in July 2008 reaching 231 million percent annually before official inflation statistics stopped being filed.

By April 2009, the Zimbabwean dollar officially ceased being used, replaced instead by the US dollar and the South African rand. However capital flight continues to afflict the country as the country is effectively broke. The country's productive capacity has been severely curtailed with good farmland, expropriated in 2000 and turned over to cronies, being laid to waste. Now its foreign-owned mines, banks and factories are targets for seizure, ensuring further collapse of its capacity. Mugabe is economically dangerous if given a free rein. To benefit from his expertise, not only must his remit be restricted to the cancellation, or rather whittling down to nothingness, of most debts, but also his term be limited to only one month.

What damage has Mugabe wrought on the Zimbabwean dollar (Z$) as to cause its disappearance? In short, his money printing has become too efficient. If only that could be said of his country's productive capacity. To bring on hyperinflation, printing alone is insufficient. You must also add on countless zeroes, followed by a downward redenomination to slash the added zeroes. In the case of Zimbabwe, after three rounds of redenomination, all in all, 25 zeroes have been slashed from the Z$. The highest denomination ever printed was Z$100 trillion. Just imagine if the US dollar were printed in this denomination, a piece of this bill would have been enough to redeem all the world's holding of US treasuries with plenty of change to spare.

Printing money is only one half of the equation. Spending the printed money completes it. Once the bills are printed, they must be spent immediately in a 'shock and awe' way to preempt the holders of the financial savings from switching to gold or commodities. The easiest way is to flood the banks as settlement for all mortgage and other debts owed by individuals and corporations. The public would be happy that the banks as creditors get paid in devalued bills, and the banks shouldn't have any qualms as their problem loans would vanish immediately. All homeowners will get back their previously foreclosed homes. The final step is to erase the trailing zeroes from the bills by redenominating them in new US dollars, say a new US$1 for every old US$1 million. It must also be done quickly; otherwise the goods will disappear from the shelves. Of course, there are losers. China's forex holdings would be worth US$3.2 million. Even Sun Tzu would have marvelled at this money conjuring stratagem. Those holding treasuries and with substantial financial savings will find their wealth disappearing in front of their very own eyes. Not to worry, if they were successful before, their success in accumulating wealth would remain.

Those countries which have been fixated with squirreling forex reserves would now be wary of repeating it. Every country would trade with each other in a responsible manner. But most will wind down their international exchange, producing at home for home consumption. Where things need to be traded, they will be carried out on barter. Anyway, even without this extreme devaluation, trade barriers will go up in an economic depression. Any leaders still enamoured of free trade will be booted out of office in next to no time.

But wait, don't switch your savings to gold yet. This is just wishful dreaming because reality is still Nightmare on Wall Street.

Weak hypothesis on a great empire

History is an open subject; every historian has hisstory or herstory. In fact, you also can posit your own theory of the rise and fall of past societies. Now a new one has been made by a historian, Elin Whitney-Smith. Essentially, she hypothesises that great economic shifts have been precipitated by changes in the way information is managed. By her assertion, she has reduced the underlying pattern to a single cause, going too far in the direction of simplicity. This violates Einstein's dictum that "Everything should be made as simple as possible, but not simpler." Anyway, her information-revolutions.com website contains nuggets of interesting facts and her in-progress book would appeal to any history buff.

We can use her take on the collapse of Ancient Rome, specifically its western half, to test the tenability of her contention that information is key to understanding momentous changes in human history. She argues that the collapse of Ancient Rome was prompted by information overload. Rome was too big to be effectively governed, so it had to split into two: the Western and Eastern Roman empires. To reduce the overload, both Emperors Diocletian (reigned 284-305) and Constantinople (r. 313-324) turned to autocracy and mandated one state religion, the former promoting paganism and the latter Christianity.

As usual, Whitney-Smith has fallen into the single lever trap. The proponents of this approach try to discover one single overarching theme that can explain all monumental shifts in history. Then they tailor their findings to suit their hypothesis, ignoring all evidence that contradicts it. With enough materials assembled, voila, a new theory has been discovered. As history is subjective, everybody is entitled to his opinion. So their new theory is accepted as one of the many causes of great historical shifts. What history ends up is a mass of erroneous inferences which no one has taken the trouble to contradict, correct and reassemble. To do so, we need to bring up the big picture for which the various inferences can be fitted in so that the real story can emerge.

As a rule, history can never be reduced to a single lever theme. It takes several major causes, at its simplest not less than four, to explain great transformations. The four are encompassed in the 4C framework or model comprising Capacity, Communication, Consumption and Capacity. Whitney-Smith's information theme is only one aspect, i.e., the communication, of the 4C. That means she has missed out on more than three quarters of the causes. With the 4C as a reference, picking holes in any historian's arguments is a cinch.

Let's look back at the narrative on Ancient Rome so that we can fully understand why it collapsed. It will provide lessons on the coming collapse of nation-states. Ancient Rome reached its greatest territorial extent under Emperor Trajan (r. 98-117). Administering it was very costly because Trajan had overextended. However his successor, Emperor Hadrian (r. 117-138) undid his mistake by withdrawing from Mesopotamia and Armenia.

Land transport in those days was 60 times more expensive than water transport. As a result the Roman territories could not extend more than 75 miles from the coasts or navigable rivers. The map below, taken from the companion website of the Civilization in the West textbook, shows that the dominion of Ancient Rome was limited to accessible waterways, comprising maritime and riverine routes. Even now rail movement, the cheapest land transport, costs four times the cost of moving goods on a large ship.

The beginning of the split between West and East occurred around the time of Emperor Diocletian (r. AD 284-305). That's more than 165 years after Trajan's death. Mind you, the age of the US in its largely present form is less than that. California and New Mexico were annexed into the US only in 1848. Alaska was purchased in 1867 and Hawaii, the last state, added in 1898. Certainly information overload wouldn't have been an issue for the Romans. If it had been, the empire wouldn't have extended that far in the first place. In fact, communication between the two halves of the empire was cheap. Look at the map and immediately you'll notice the Mediterranean Sea, the main communication artery that fused the empire together. But extending beyond the 75-mile coastal and riverine limits was not possible as costs would have exceeded benefits.

In terms of capacity, the Roman empire's fortune moved downhill the moment it couldn't extend its land acquisition. In contrast to the modern-day superpower which must keep on acquiring new technologies to remain dominant, ancient Rome must keep on acquiring territories. New territories furnished Rome with new slaves and economic goods especially agricultural produce. Once Rome stopped expanding, economic growth stagnated though eventual downfall in those days took some time since events moved at a glacial pace.

Rome itself initially was a centre for the production of wine and olive oil. However other Italian regions began eroding Rome's competitive advantage. Eventually its colonies, Spain and Gaul (modern France), cornered this production leaving Rome a hollow core economically. Meanwhile, gold and silver flowed out to China and India to balance the trade deficits arising from silk and spice imports. The only economic activity left in Rome was building works as this could not be traded across borders. It also served to provide jobs for the unemployed. Sounds familiar?

The troubled times with chronic usurpations of power occurred around the 50 years after the death of Severus Alexander (r. 222-235). This chaotic period was characterised by rapid inflation, the combined result of decreased food production and coin debasement. Coin debasement took two forms: reduction of silver content and when this had reached its limit, changing the denominations to higher amounts.

As the western half of Ancient Rome was subjected to constant harassment by the barbarians on its borders, maintaining it cost more than the benefits it generated. It was therefore inevitable that for the empire to survive, it had to size itself down. This move began under the rule of Diocletian (r. 284-305) who divided the rule into two halves by nominating Maximian as the western co-emperor. He also appointed two junior caesars, in the process of which the two senior emperors were elevated to augusti. This Tetrarchy system secured his rule from the chronic usurpations of power as powerful army commanders now had more opportunities to be emperors. In actual fact, it solved the problem in his time but the problem reappeared later because more openings led to more contenders for power. The root cause had always been economics, not politics.

Diocletian managed to bring back some stability to the empire. But in an empire that had been on a natural decline, it was a temporary fix and the cost was immense. Inflation was rampant and this could be attributed to the fall in agricultural production as a result of his ruthless taxation. When the monetary system had broken down following hyperinflation, Diocletian instituted taxation-in-kind. As powerful landowners received exemptions from taxation, the burden of taxation fell on the small landowners. To avoid the oppressive tax, the small landowners left their farms deserted to become tenants or slaves to the big landowners. Notice that even now, the big corporations and the rich know how to find tax loopholes in order to avoid paying tax. This deceit would in turn hasten the breakdown of society.

The increased tax revenue allowed Diocletian to increase the hitherto declining Roman army by one third to 435,000 thus providing the needed stability. Bureaucracy was also expanded. He tried to reform the currency by issuing non-debased full-weight coins but his fixing of the new coin denominations at the same value as the debased ones resulted in the new coins being hoarded and taken out of circulation. Bad money drove out good money. Though politically astute, till his retirement economic issues proved elusive to him.

Emperor Constantine (r. 306-337) was able to consolidate the emperorship into one in 324 after spending the early part of his rule usurping power from fellow emperors and contenders. His rule was the last in which Rome regained its supremacy prior to its official split into east and west. Again the price was costly and it was just a short spurt in a secular decline. Constantine increased slightly the size of the Roman army to 450,000. Also like Diocletian, he used religion to strengthen the state but whereas Diocletian embraced paganism and turned against Christianity, Constantine was intensely sympathetic to the Christians. Turning to religion provides a ruler an alternative instrument of control when the economics crutch can no longer be relied upon.

Constantine initially ruled the western half of the Roman empire. However after uniting the two halves, he moved the capital to Byzantium, which he renamed Constantinople. It was a strategic location as it sat astride the east-west trade route. It could live off trade. This move marked the end of Rome. Sucked hollow economically and besieged by the barbarians militarily, Rome would permanently lose its preeminence. The official split between east and west took place in 395. Long before the western half collapsed in 476, its capital had moved from Rome to Ravenna in 402.

Constantine raised his funds in other ways aside from taxation. The pagan temples that he destroyed yielded a lot of gold and treasures. In addition he regularly received gifts, which were actually tributes, from Roman cities and provinces in the form of gold and silver on the many special occasions. With his new found sources of wealth, Constantine was able to issue a new type of gold coins known as the solidus. The solidus which eventually became the tribute objects, was to be produced over the next 700 years, the longest time any currency was ever used. Of course, Constantine relied on wealth transfer to mint his solidus but subsequent eastern Roman emperors assiduously cultivated its current account to ensure that it always generated surpluses.

After the split, Justinian (r. 527-565), the eastern emperor attempted to resurrect the old Roman empire by invading the Italian peninsula. He succeeded in 554 (see map below) but it was an expensive affair, costing him 300,000 pounds of gold with no significant economic returns. By 568, three years after his death, the new territories had to be relinquished. As usual the defining yardstick has always been the 4C, this time the conquest not yielding any new capacity that would have compensated for the cost of the expedition. Using information as the sole criterion does not do justice to the events surrounding the downfall of the Roman empire.

The economic and political evolution of the Roman Republic