Grand Super Cycle National Bankruptcies

Part VIII

Conclusion

 

By

 

Joseph M. Miller

jmiller585@mchsi.com

 

Daan Joubert

daanj@kingsley.co.za

 

Marion Butler

juneb01@msn.com

 

 

URLs for previous articles in this series are provided at the end.

 

Comparison of Historical Grand Super Cycle Declines

 

While each Grand Super Cycle decline is unique, hopefully we have achieved our objective of showing the many similarities between them.  We will summarize the broad similarities here.

 

In every historical case, financial desperation on the part of government led to insatiable hunger for money, resulting in taxation on a scale previously unthinkable.  In the fall of the Athenian Empire there was only one extraordinary capital tax levy that we know of, but the traditional trierarchy system of naval finance cost the Athenian elite dearly - because of the length of the Peloponnesian War and the number of ships employed.  At the end of the Roman Republic, numerous extraordinary war taxes were levied, some of them quite imaginative, like the tax on roof tiles.  In the Roman Empire it was the increasing general tax burden that eventually brought down the economy and the state.  In the Hundred Years War extended war taxation caused revolts in England and France.  In 18^th century France it was the resistance to Brienne’s last two new tax measures that finally forced the Treasury to suspend payments.

 

Forced levies of funds from allied or subject states is another common feature in GSC declines.  Athens employed forced levies after the failure of the Sicilian expedition.  The Roman Republic (or its various factions, anyway) used this measure as a primary funding source during the last two decades of the Republic.  The Revolutionary government in France sold off the Belgian biens nationaux (public property). 

 

One unfortunate government response to financial desperation, common to all five historical GSC declines discussed, was the confiscation of sacred treasures.  In the ancient Grand Super Cycles this was manifested in the use of temple treasure to fund government deficits.  (We assume that Athens utilized the gold plates on the statue of Athena, but we are not absolutely certain.)  In the Hundred Years War this aspect of decline was manifested in the confiscation of Church gold, silver, and jewelry by French tax collectors.  In the French Revolution this aspect of decline was manifested in the confiscation of Church property to back the Assembly’s paper money. 

 

National debt default is another common feature of GSC declines.  Based on the scale of Athenian debt in relation to post-war revenues, we assume (though we are not certain) that Athens was never able to pay off the debts incurred during the Peloponnesian War.  We do know that debt default occurred in the Roman Republic, though it was a relatively minor feature in the fall of the Republic.  In the Hundred Years War, debt default played a fairly important role in the decline, and in the fall of the French Monarchy national debt was the primary cause of the government’s collapse.  Only in the fall of the Roman Empire can we say that national debt played no role in the GSC decline. 

 

Disruption of the monetary system seems to be a universal phenomenon in GSC declines, occurring in all five historical cases.  In two examples there was complete destruction of the monetary system - the fall of the Roman Empire and fall of the French Monarchy.  Until recent centuries, monetary stress was manifested in the issuance of silver-plated coin, or the gradual reduction of weight and fineness of the coinage.  In modern times, the expansion of monetary aggregates has occurred on a much vaster scale, with the stroke of a pen or a keystroke.   

 

From the examples in our series, a decline in ethical and moral standards appears to be a common theme in all GSC declines.  In the Peloponnesian War, the moral decline was illustrated by Aristophanes’ quote from The Frogs at the beginning of Part II.  In the fall of the Roman Republic, the moral decline was illustrated by the replacement of civic virtue with the quest for personal power by leading Romans such as Marius, Sulla, Pompey, Crassus, Caesar, Anthony, and Octavian.  The moral decline in the Roman Empire can be seen in the replacement of self-reliance with public dependence on bread and circuses.  The moral decline of the 14^th century can be seen in the decline of religion through 1376, the despoiling of the countryside by English brigands and French Free Companies, and by terrible behavior of the Jacques peasants in France.  With the collapse of the Ancien Regime, the original lofty goals of the Revolution (Liberty, Equality, Fraternity) ended with the Reign of Terror and the beginnings of modern statism.  In modern times, the moral decline can be seen in the behavior of CEOs and CFOs in recent corporate scandals.  We predict that there will be more of these.  

 

The role of war as a cause of GSC decline has been highlighted in this series and requires some discussion here.  In Rise and Fall of Civilizations we showed that the immediate cause of all X Wave declines, since the Bronze Age at least, was assault on the civilized zone by nomadic barbarians.  The fall of the Roman Empire, described in Part IV of this series, is a case in point.  During the course of 1000-year advancing X Waves, wars between civilized nations are frequent, and they sometimes cause a shift in the economic center of gravity of Western Civilization from one region to another (eg. the rise of the Hittites or the rise of Rome) in the middle of an X Wave, but civilization advances nevertheless during the X Wave; and we have tended, therefore, in previous writings, to ignore war (apart from post-X Wave barbarian assault) as a cause of economic decline.  Frankly it surprised us, in writing this series, to discover just how important war is in determining the nature of each GSC decline.  Until writing this series we did not fully grasp the scale of financial ruin wrought by the Peloponnesian War or Hundred Years War.  We did not fully understand the intimate relationship between monetary debasement and military pay under the Roman Empire.  We did not appreciate the extent to which French military spending from Louis XIV to Louis XVI brought the Ancien Regime to the brink of insolvency.  War appears to function as a cause of all GSC declines.  Sometimes, as in the Peloponnesian War, it is a direct and immediate cause of decline.  Sometimes, as in the fall of the French Monarchy, war plays more of an indirect role.  But war did play a role of some kind in all five of the historical GSC declines.  For the 21^st century, war has already played a role by causing a portion of the present public debt in the world.  We can only hope that war does not play a more direct and important role in coming decades. 

 

William Buckler makes the following observation in the Mid May 2003 issue of The Privateer (see www.the-privateer.com):

 

“Between 1900 and 1970, US government debt grew from $US 2 Billion to $US 400 Billion.  $US250 Billion or 62.5% of this debt was incurred to fight two legitimate wars which were Constitutionally declared by Congress – WWI and WWII.  US PEACETIME debt between 1900 and 1970 grew by $US 150 Billion – just over $US 2 Billion a year.”

 

“Since 1970, US government debt has grown from $US 400 Billion to an official $US 6,400 Billion.  No war has been legitimately declared by Congress since 1941. US PEACETIME debt since 1970 has grown by $US 6,000 Billion – just under $US 182 Billion a year.”

 

“US debt is now officially $US 6,400 Billion.  Take away the ‘legitimate’ $US 250 Billion in wartime debt mentioned above, and this figure reduces to $US 6,150 Billion.  Of that PEACETIME DEBT, all but $US 150 Billion - $US 6,000 Billion or 97.5% - HAS BEEN INCURRED SINCE 1970.”       The Privateer, Mid May 2003, p.10

 

Buckler’s observation is important.  Prior to 1970, wartime expenditure was the primary driver of increasing public debt.  After 1970, social spending became the primary driver, and the amount of public debt caused by social spending dwarfs the amount caused by war.  This is something new in the history of mankind.  Buckler says, “THAT is the legacy of the past 30 years, the years of global ‘fiat’ currencies divorced from any connection to reality, the years when all ‘fiscal discipline’ have been thrown to the four winds.”  (We are reminded of the quote by Jacques Necker, presented at the beginning of Part VI of this series, regarding the creation of assignats).

 

For previous GSC declines, social spending played little or no role as a cause of decline.  In the 14^th and 18^th centuries, social spending played no role whatsoever.  In the late Roman Republic, social spending was minimal as a percentage of government revenue. Under the Roman Empire, social spending (including cash handouts, the dole, and civilian employees) was significant, but was much smaller than military expenditure.  Under the Athenian Empire, direct social spending (on widows and orphans primarily) was minimal, but one could argue that the Athenian navy served not only as a military force, but as a means of employment for the lower classes.  To the extent that the Athenian navy was expanded for the purpose of employing the masses, we could say that social spending played some kind of role in the decline of Athens.  But not a major role.  No, what we are seeing today is something brand new, at least in terms of scale.  Social spending will undoubtedly play a much bigger role in the coming decline than it ever has before.

 

In every historical case in this series, there was severe political upheaval associated, in one way or another, with the financial and monetary problems of the time.  In most of the cases we studied, the government fell and was radically reorganized.  In one case only, the fall of the Roman Empire, the state perished entirely.  (Actually, only half the state perished, as the eastern half of the Empire lived on.)  This a special case, because the fall of Rome marked the end of a much higher wave order than a Grand Super Cycle, and we will discuss this in more detail later.  Removing this example from consideration, we are left with four historical GSC declines: Athens, the Roman Republic, the 14^th century, and the 18^th century.  In the first two examples government was radically reorganized.  In the 14^th century neither the French nor English monarchies fell, although governments were reorganized in Italy.  In the 18^th century, France changed from monarchy to republic and America changed from colony to republic, but the English monarchy did not fall.  Bottom line, it appears that radical government reorganization occurs in the majority of cases.

 

Individual Prosperity

 

During the two and a half millennia covered by this series, daily wage rates remained fairly constant (at 4 grams silver for skilled labor) until the New World was discovered and the plunder of gold and silver brought back to Europe greatly multiplied the existing money supply.  By the 20^th century an increase in gold and silver production raised wages even further.  In 1905 U.S. daily manufacturing wages averaged $1.67 (40 grams silver), while European average daily manufacturing wages ranged from a low of 10 grams silver in Italy to a high of 22 grams silver in England. (See Appendix II for wage rates prior to the adoption of fiat money.)  It is convenient for our purposes that wages remained constant for so long, because it allows an easy comparison of individual wealth at various times.  (See Appendix I for some snapshots of individual wealth from Classical Greece through modern times.)  As a general rule, individual wealth increases over the course of 1000-year X Waves, with major contractions occurring in the intermediate GSC declines, and major collapse occurring in the post-X Wave declines.  For an examination of previous X Waves see Foundations of Western Civilization at

 www.freebuck.com/cgi-bin/header.cgi?../articles/elliott/00elliottfoundations.htm and

 Rise and Fall of Civilizations Part II at

www.freebuck.com/cgi-bin/header.cgi?../articles/elliott/00riseandfall2.htm.

 

During past GSC declines, individual suffering was intense.  Sizeable population decline occurred in most of the examples studied, and many individuals were financially ruined.  The heaviest financial loss typically fell upon the elite class, since they had the most to lose; but the middle and lower classes suffered as well, with each historical example presenting its own peculiarities. 

 

We quantified the loss of individual wealth in Athens in Part II.  In the fall of the Roman Republic, the brunt of the wealth decline fell upon the elite classes in conquered and subject states that were bled completely dry of money.  But even in Rome itself, we saw a similar pattern of huge financial losses – in the wars fought on Italian soil, in high war taxation at other times, and particularly in the confiscation of property of proscribed enemies of whoever was in power at the moment.   In the Roman Empire we saw the gradual extinction of the entire senatorial class that had existed previously, not to mention the damage done when the Western Empire was finally overrun.  In the 14^th century, the financial losses of the French aristocracy appear to have been most severe, with the English aristocracy making out fairly well until the 1370’s.  Besides these two groups, almost everyone else suffered greatly, particularly Edward’s creditors.  In the 18^th century, the rentier class in France (aristocracy and wealthy commoners) took heavy losses in the Mississippi Scheme and in Terray’s partial debt default, while English investors took similar losses in the South Sea Bubble.  Sir Isaac Newton’s £20,000 loss is the most famous example.  The French aristocracy was ruined by political overthrow in the Revolution, while the lower classes were harmed most by the Revolution’s paper money, as they had less ability than wealthy individuals to protect themselves from its pernicious effects. 

 

There were also some examples of great fortunes made in these declines, with methods varying based on the chaos of the times.  We did not focus on this in our articles, but it is worth mentioning briefly here.  In the Peloponnesian War, Alcibiades stole enough money from the Athenian treasury to buy a castle in Thrace.  In the Roman Republic enormous fortunes were made in acquiring confiscated property of the condemned.  The largest individual transactions in the 14^th century were the ransoms of captured nobles, and a few soldiers seemed particularly adept at making such captures, gaining great wealth in the process.  In the 18^th century there were fortunes made in England by individuals who sold South Sea Company shares before the collapse in 1720.  One example is Thomas Guy who invested £54,000 and sold his shares for £234,000 near the top of the market.  Similarly, there were individuals who sold Compagnie des Indes shares in late 1719.  (The word millionaire comes to us from this period.)  Individuals also made fortunes during the French Revolution by converting paper money into real estate at times when the paper money was over-valued.  This was particularly true in the period immediately after the transition from assignats to mandats.  In the American Revolution, many American merchants were bankrupted by the disruption of trade during the war, but a few men escaped this fate by secretly dealing with the British.  The Girard fortune, for example, was reputedly founded in this manner.  

 

Of these various examples, the only one relevant to modern investors (and available from a moral standpoint) is the fall of the French Monarchy.  Under a fiat money regime, there are times when fiat money is overvalued or undervalued vis-à-vis gold and silver.  This presents definite opportunities for investors, and implies that we should always have a sense of whether our fiat money is over- or undervalued, at any given time.  That requires, in turn, some method for determining the theoretical value of gold and silver (or, to be more accurate, the value of our fiat money in terms of gold or silver) in order to compare value to price.  Examining such methodology is beyond the scope of this article, but you could begin by reading The French Revolution: An Economic Interpretation by Florin Aftalion (see source #4 below).  He calculates theoretical values for the assignat at various times, based on quantities produced, and compares theoretical and observed values over time.  A somewhat similar method for valuing the modern dollar in terms of gold was used in Speculating About the Next Bull Market for Gold at

www.freebuck.com/cgi-bin/header.cgi?../articles/mbutler/020313mbutler.htm.

     

The A-B-Cs of Decline

 

Declining Elliott Waves, of any degree, display an A (down), B (up), C (down) pattern.  (See 12,000 Years of Elliott Waves Part VI for a description of Elliott Wave patterns – www.freebuck.com/cgi-bin/header.cgi?../articles/elliott/00years6.htm.)  In most of the examples of GSC decline in this series we can discern this A-B-C pattern, and it is worth discussing here.

 

In the GSC decline represented by the Peloponnesian War, the financial drain of the early phase of the war represents the A Wave down; the financial recovery during the Peace of Nicias (421-414 BC) represents the B Wave up; and the financial collapse in the final years of the war represents the final C Wave down.  In the GSC decline represented by the fall of the Roman Republic, state bankruptcy in the 80s BC represents the A Wave down; the financial recovery in the 70s and 60s BC represents the B Wave up; and the civil wars of the 40s and 30s BC represent the C Wave down.  In the fall of the French Monarchy the financial recovery after the collapse of the Mississippi Scheme represents the B Wave up.  For the Hundred Years War, we are not able to discern any distinct B Wave.  That may be due to the fact that we are uncertain of the exact beginning and ending dates of the GSC decline in the first place (see Part I for a discussion of the 14^th century dating problem), or it may be that the Black Death occurred where the B wave should have taken place.  We just aren’t sure. 

 

The fall of the Roman Empire is a special case, as we mentioned, because that period represented the culmination of a much higher order wave – a 10,000-year economic advance that was described in 12,000 Years of Elliott Waves, which we call a Z Wave.   While a GSC decline typically lasts 50-60 years, as you can see from this series, the decline following the height of the Roman Empire lasted seven centuries.  Like the smaller GSC declines, this Z Wave decline followed the typical A-B-C pattern for Elliott corrective waves.  In this case, the fall of the Western Empire from 337 to 476 AD represents the A Wave down; the coalescence of European states from 476 to 800 (the crowning of Charlemagne as Holy Roman Emperor) represents the B Wave up; and the Dark Ages from 800 to 1000 AD represents the final C Wave down.

 

The Hollow Nature of Wave Tops

 

One fascinating aspect of large Elliott Waves is the hollow nature of wave tops.  Today we envision the greatness of Classical Greece by looking at the ruins of the Parthenon, but Athens had built this grand edifice with other people’s money.  The Roman Republic was suffering from internal rot even as it made its greatest conquests.  The Roman Empire suffered a long period of internal decay at the height of its imperial glory.  Both England and France began to debase their coinage before the 14^th century, and in France there were severe financial difficulties at the beginning of the 14^th century resulting in the suppression of the Templar order.  Then there was the superficial grandeur of Louis XIV’s reign.  At the height of the Mississippi Scheme, in late 1719, the price of Campagnie des Indes stock bore no reasonable relationship to underlying earnings, and the same thing can be said, generally speaking, of stock prices at the end of the 20^th century – particularly in the Dot Com bubble.  

 

Where We Are Now

 

It is the authors’ view that Western Civilization completed a Grand Super Cycle Wave in the time frame 2000-2001.  We maintain that this Grand Super Cycle was a GSC5 Wave, or in other words, the third and final Grand Super Cycle of the next higher order wave that we call an X Wave.  We maintain that this X Wave is the first X Wave (labeled X1) of the next higher order wave called a Y Wave.  Our views on the stock markets and the economies of the West in the early 21^st century are largely predicated on this interpretation of where Western Civilization stands in the Elliott Wave sequence at this time.

 

Readers of this series might ask why we think that a Grand Super Cycle has recently ended that is less than 220 years year long (1782-2000), since we said that Grand Super Cycles typically last 300 years.  For anyone asking that question, we answered it in 12,000 Years of Elliott Waves Part II available at

www.freebuck.com/cgi-bin/header.cgi?../articles/elliott/00years2.htm.  To understand our full Elliott Wave interpretation requires that you read our various articles on the subject.  They can all be found at www.freebuck.com/articles/elliott/index.htm .

 

The Future

 

Our thoughts about the future can only be conjecture, and it is best to let our readers draw their own conclusions about what the future may hold.  Nevertheless, we do want to make a few points on the subject.

 

First of all, it is worth repeating that each decline is unique.  There are typical patterns but not inevitable developments.  While the recently started decline will be a unique case, it should be readily apparent that the vast scale of public and private debt today makes all previous examples look puny by comparison.  Meanwhile, the worldwide fiat monetary system is the worst case of monetary system destruction in history – even compared with John Law and the French Revolution.  Therefore, it appears safe to say that the scale of our debt and the nature of our monetary system today will play an enormous role in the declining decades ahead – perhaps more so than in 18^th century France. At the same time, it seems that military adventures of the recent past, which appears likely to continue for some years, will make a similar contribution to the financial rot of Western Civilisation as has happened during previous GSC wave declines.

 

The authors of this series were writing articles for the precious metals community well before we started our Elliott Wave project in 1999.  Most of our Elliott Wave articles only touch upon gold and silver in a tangential way, and some readers have assumed that we are bearish on gold and silver, because other Elliott Wave writers have been bearish.  This is not the case.  All three authors have written bullish articles on gold as individuals over the years, and you can find some of them at www.freebuck.com.  Just do an author search on our individual names if you are interested in our views.

 

There is not a single example of a GSC decline in this series where it would not have benefited individuals to hold gold.  In every case gold went up in nominal terms as the monetary system was disrupted or destroyed.  While the authors’ views on gold are essentially identical, our views on silver vary somewhat – but only in degree.  At one end of the authors’ spectrum of opinion, silver is a good investment, but secondary in importance to gold.  At the other end of the spectrum, silver is considered the best investment at this time. 

 

With that said, we are not investment professionals, and our remarks should be taken as merely opinion, not investment advice.  We recommend that you do your own due diligence regarding your investments.

 

Appendix I: Individual Wealth

 

Below are some snapshots of wealth at various times.  All figures are in silver, to allow for simpler comparison and because silver was the primary money metal for a longer than gold.  For readers who prefer to think in terms of gold, see Appendix III for historical gold:silver ratios.

 

The Roman X Wave

At the end of GSC1 the wealthiest Athenians had net worth of approximately 100 talents or 83,000 troy ounces silver.  The largest private fortune at the end of the Roman Republic (not counting those men who gained personal control over the Roman treasury) was the HS200 million (6.4 million ounces silver) amassed by Crassus.  Under the Empire the lower boundary of wealth for the elite class was the estimated HS8 million requirement for a senator (8: Duncan-Jones, p.18).  We do not know the net worth of many of the wealthiest Romans, but we do know that under the reign of Marcus Aurelius the largest private fortune was less than HS288 million, while HS20 million was considered a moderate fortune (8: Duncan-Jones, p.343).  The top 20 private fortunes that we do know (not counting Emperors) prior to the hyperinflation of Diocletian’s time are shown in table 1 below.  Most of the individuals were from senatorial families, with some physicians, private and imperial freedmen, one provincial magnate, and one court poet.

 

Table 1: Largest Known Private Fortunes under the Principate (8: Duncan-Jones, pp.343-4)

 

*Isidorus’ estate was HS60 million plus 4,116 slaves and 257,000 herd animals.

 

The Modern X Wave

French royal revenues were approximately 1 million silver ounces in the early 1300’s, which implies that the French King, probably the wealthiest man in Europe, had net worth greater than any private fortune in the Roman Empire.  Edward III’s £13,000 revenue as Duke of Aquitaine (135,200 ounces silver, with £1 = 10.4 ounces silver) provides an idea of the wealth of 14^th century French great vassals.  Below the aristocracy, prosperous 14^th century Europeans would have been considered relatively poor by Roman standards, and only the wealthiest English commoners would have met the middle-class requirement of 11,000 asses (equivalent to roughly 1,000 silver ounces) needed to join the legions in the early Roman Republic.  “There were some 800 citizens of York listed in the subsidy returns of 1327, but only one of these had assessable goods worth as much as £26 (ed: 270 ounces silver); fifty-five citizens were worth £5 or more, the remainder being assessed at anything up to £4, with a great concentration again at the lowest point on the scale.”  There was a similar pattern in Southampton with 50% of citizens worth £2 or less and 30% worth £2-£5 (1: Platt, p.133).  Of course, we also know that a few individuals, such as Chiriton’s syndicate and the Italian bankers, were wealthy enough to finance military operations in the 1300’s.

 

Table 2 below on the British pound is a continuation of table 1 in Part V.

 

Table 2: The English Penny and Pound Sterling (see Part V for source)

 

In 1469 Lord Cromwell, after giving £25,500 in property, cash, and jewels to Tattenham college, possessed property worth £41,940, which produced annual rent income of £2,097, “so that he had inherited and collected an estate of £67,440.” (10: Rogers, Vol.I, p.288).  The total of £67,440 was equivalent to 373,618 ounces silver.  Cromwell’s 5% rate of return on productive capital provides a rough tool for estimating wealth for those examples where we only know income.  For example, the largest English aristocratic income in 1559 was £6,000 (8: Duncan-Jones, p. 5), which implies productive capital of about £120,000 (442,800 ounces silver).  Net worth, including non-productive assets such as cash and jewels, would have been somewhat higher. 

 

Table 3 below shows net worth of individuals in Southampton, Leicester, Norwich, and Exeter in the early 16^th century.  Colin Platt defines “middle class” as persons with wealth over £10 (55 ounces silver) and “wealthy” as persons with wealth over £40 (222 ounces silver) in the early 16^th century.

 

Table 2: English wealth in the early 16^th century (1: Platt, p.132)

 

In 1524 there were eleven men in Southampton worth more than £40.  The richest man was a lawyer worth £250, and the second richest man was worth £133.  “In 1523, Robert Jannys, grocer and alderman of Norwich, was assessed for tax purposes at £1,100; in the same returns, the highest assessment anywhere outside London and the peerage was that of the widow and daughter of Thomas Spring, the Lavenham clothier, jointly assessed at £1,333 6s 8d.”  The Spring estate (7,387 ounces silver) was a respectable but not impressive level of wealth, from the viewpoint of the wealthy capitalists in London. (1: Platt, pp. 130-4).  

 

In 1640 the wealthiest English commoner had annual income of £20,000  (8: Duncan-Jones, p.5) implying productive capital of £400,000 or 1.43 million ounces silver.  Duncan-Jones compares this to ancient wealth based on wheat, stating that the HS400 million Roman fortunes were equivalent to ¾ to 1 ½ million metric tons of wheat.  “By comparison, the largest private fortunes in England in the mid-sixteenth and mid-seventeenth centuries appear to have been worth roughly 21,000 to 42,000 metric tons of wheat.” (8: Duncan-Jones, p.4)