IF you had lived 2,000 years ago, you might have been lucky enough to own the ancient equivalent of a bar/resto down the road from the nearest Roman Legion barracks.
Legionnaires were well paid in those times, as the Roman economy depended on the conquest of new lands to keep the public coffers filled, and trade and business booming. The emperors also depended on the military to keep order and to keep them in power.
One of the most generous to the military was Caracalla, who made his mark as a general—although his father was Emperor Septimius Severus—by marching alongside his troops, living in their tents, and eating the same food.
Caracalla created many enemies by having his wife and brother murdered so that he could remain the emperor. But he knew how to take care of his troops.
One day at your bar, the legionnaries would have come for a few pitchers of wine—beer was considered fit only for barbarians—and all of them would have been in a good mood. Caracalla had just raised the salary for the military by doubling their income. To do this, he created a new coin, the Antoninianus, which was a double-denarius, the standard coin of the realm.
Business would have been great, as the soldiers now had twice as much to spend on food and drinks.
However, after carefully examining the new coins and checking with the ancient Roman equivalent of the bank, you would have discovered that the silver content of the “double-denarius” was not equal to two of the former denarius. In fact, because of the lower silver content, you would be making less money on twice as many sales.
This all happened in about 200 A.D. and by 476, the Roman Empire ceased to exist, in part, because the money continued to be degraded by successive Roman governments. A 1,000-year history came to an end for a variety of reasons. But when an economy fails, the country and state cannot be far behind.
Once you discovered that the money was not worth as much as you thought it was, the price of partying would have to be raised. And if the bar owners are raising prices, then the grape growers, the wine vintners and everyone else in the economic chain would be forced to do the same thing.
The value of money can be determined by several methods. How much does it cost to borrow money? If interest rates are low as they are now, then the money is not as valuable as when someone wanted, say, 10 percent to make you a loan. If you can borrow money at 1-percent or 2-percent interest, it means that the lender is willing to accept very little just to get rid of the cash.
You might think that if money is cheap to borrow, then everyone would go out and borrow, start a business like drilling for oil or growing crops, and everyone would prosper. Actually, in the last years, that is exactly what has happened.
During the last 10 years, global production of cereal grains like wheat is up 20 percent and prices are down. “Cheap” money creates investments, which can create supply that is greater than demand. We have seen that in the price of crude oil. With a large increase in supply, a small fall in demand can cause prices to drop dramatically. We are seeing that as the Chinese demand for commodities is falling.
You might also think that if money is “cheap,” the producers and sellers would raise prices to offset the cheap money. But, at some point, what happens is just the opposite.
Hyperinflation is characterized as massive amounts of cash trying to buy a limited amount of goods. But deflation and even “hyperdeflation”—when prices fall—is just as real, although much rarer and can occur in times of cheap money.
Look at it this way: If I can increase my cash position by borrowing at very low rates, why should I break into a sweat trying to sell my goods and gain market share? Wouldn’t it be much easier just to lower my prices? If you can borrow money even at a high 10-percent interest and your net profit margin is 15 percent, there is no reason to raise prices.
The central banks have “broken” money by distorting interest rates. These rates should operate the same way that every other price mechanism works—based on supply and demand. If the “price” and value of money is artificial, then all other prices will be just as artificial.
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