Lessons Learned From History
The following is an excerpt from The Lessons of History, an article by Will and Ariel Durant. It is about how the destruction of the Roman Empire through the taxation channel that made people 'slaves,' in other words how serfdom emerged.
Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 3 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. 'In every large town,' we are told, 'the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.' When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.
The task of controlling men in economic detail proved too much for Diocletian's expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians.Seeking to check this elusive mobility and to facilitate regulation andtaxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.
It bears repeating that the task of controlling men in economic detail has always been, and will always prove to be, too much for any expanding, expensive, and corrupt bureaucracy.
Much like the early part of last year, the economic data has seen clear improvement in the first few months of 2012. For instance, while we’re still a long way from what economists consider full employment in our economy, the employment numbers have firmed from the depths seen in the last recession. Corporate earnings remain healthy, with a lot of cash still sloshing around on corporate balance sheets. That cash is being deployed toward dividend increases, share buybacks and acquisitions, all of which typically creates a healthy environment for the markets. The manufacturing indices are showing broad-based improvement, while capital spending continues at a solid pace. Consumer confidence is improving, and even the housing sector doesn’t seem to be getting any worse. The Fed and European Central Bank (ECB) have maintained their accommodative stances, keeping short-term interest rates at negligible levels.They’ve been joined in this endeavor by the emerging economies’ central banks, as we’ve seen China, India and Brazil all lowering their benchmark rates. This firming in economic growth has sparked a solid rally in the markets year-to-date.
That said, as we move deeper into the year, a shift from tailwinds to headwinds, due to looming fiscal austerity, appears to be a very real possibility. Our politicians, in the midst of getting re-elected and as polarized as they’ve ever been, have left virtually every tough economic policy decision of the last decade to a lame duck session of Congress. Unfortunately for them, while they’ve been able to tackle a single issue at the last minute (a la the debt ceiling debates), they haven’t had to tackle multiple issues all at once.
Let’s tick off what’s on their plate:
- expiration of the Bush tax cuts
- automatic, across-the-board cuts in defense and non-defense discretionary spending
- payroll tax cuts
- extended unemployment benefits
- the Alternative Minimum Tax [AMT]
- the Obama Healthcare Plan
- capital for the Government Sponsored Entities [GSEs]… along with a panoply of other expiring programs.
Essentially, this means that the U.S. is staring in the face of the largest fiscal tightening inover 50 years. According to the Congressional Budget Office (CBO), this is a tightening that comprises 4.6% of current GDP. It will easily eclipse the old record of 3.1% set back in 1969 – a tightening that triggered the 1970 recession. Even if we get some help from Congress and only half of this tightening occurs, it would still represent the second largest tightening in modern history. The risk of a major fiscal accident is very high, and given the brinkmanship we’ve witnessed in Washington, I am not confident that a fiscal shock to the economy can be completely avoided.
Throw that looming issue in with the front page re-emerging European sovereign debt issues (Portugal,Spain and Italy) and the potential for rapidly escalating energy prices (think Iran vs. Israel) together with some extremely useful technical market indicators…and we could very well find ourselves in one heck of a recessionary pickle. To me, in aggregate, the downside risks in the current environment far outweigh the potential upside rewards. Accordingly, I’ve been extremely busy guiding my clients' capital gains into safer havens for the time being.
Likewise, I've made some friends here and I want the best for you and your families. I would encourage you all to carefully review how your financial future might be at risk by one or more of these looming issues and take whatever action you and your advisor(s) deem most appropriate to better safeguard your particular situation.
Allen
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Originally Posted by Ralph
