McMansions In The Sky

McMansions In The Sky

Currency debasement and inflation have ultimately been bad news for men of modest means. Lincoln Rathnam learns lessons from the history of Emperor Diocletian on why our present penchant for McMansions may point to an Appalachian future

According to Gavin Menzies interesting book 1434 when a Chinese fleet sailed up the Adriatic in that year, they passed by the Dalmatian coastal retirement palace of the Roman Emperor Diocletian, who reigned from 284 AD to 305 AD. I was surprised to learn that the palace had lasted for 1000 years and even more surprised to know that it is standing today. Diocletian’s palace is a largish building, about the size of Versailles. Both palaces are real, long-lasting monuments to their designers, not the fragile, pre-packaged McMansions we have recently been building.

Diocletian was a cruel but effective emperor who ended the Crisis of the Third Century, fended off barbarian hordes, and, after proclaiming himself related to the god Jupiter, launched the tenth and most brutal persecution of the Christians by the Romans. To finance these achievements he produced hyperinflation in the empire by regularly buying up coins, melting them down, and producing many more new coins with reduced precious metal content, eventually reducing the silver content of the “silver” antoninianus to 2%.

Diocletian expanded the army from 300,000 to 500,000 men and increased the size of the bureaucracy, but he protected the state and its favoured few from the negative effects of inflation by effectively tying revenues to real commodities and making annual tax reassessments. The population grew more impoverished, and many free men were reduced to serfdom as they agreed to be tied on a hereditary basis to the great estates in order to survive.

Inflation increases income inequality. Wage earners and salarymen are always playing catch-up until inflation begins to decline, when they have a chance to move ahead again. This is not a conspiracy; it is simply how the world works. Still, Diocletian’s policies allowed the empire in the West to stumble on for a couple hundred more years and in the East for another one thousand. Not bad.

So what have the life and good times of Diocletian taught us? First, I think, that inflation impoverishes everyday people or, as the chairman of BP PLC so charmingly calls them, “the small people.” (Of course, the chairman is a Swede, a very tall race, so the sobriquet may well apply from his perspective.) If we are to have big government and inflation, then it’s a good thing to be an emperor or one of the few others with pricing power, but it is in the long run worse for everyone else.

Some people might buy McMansions, but they won’t last as long as Diocletian’s, and they might find them hard to keep up. After all, we have just learned that one-in-twelve mortgages in the USA is non-performing while the delinquency rate for mortgages over $1 million is one-in-five.

Despite recent hard times, US CPI is up 27% in the past ten years using the Clinton era calculation and twice that using the pre-Clinton calculation. In this period, US GDP increased 17% in real terms while median household income was basically flat. Price rises have been persistent and insidious. Eventually, however, people become aware. This is why President Lula of Brazil has been so popular with the small people there; he has dramatically reduced inflation so they could catch up and afford to have chicken twice a week. Lula put prices and real income more in sync.

“Tarnation” is an old New England and Appalachian slang term meaning “eternal damnation.” A recent neologism has come across my desk: “intarnation”. This is when a middle class person dies and comes back as a hillbilly. It is, I believe, clearly established in history that inflation results in intarnation for the 99% of the population that does not have pricing power. It is worrisome that governments around the world engage in monetary debasement on a scale that would have impressed even Diocletian. With monetary inflation, 99% of the population is faced with “intarnation.”

Economists such as Irving Fischer and Keynes have written about the “money illusion,” which comes when people mistake changes in nominal income or costs for real changes. For example, if inflation rises 5% and wages rise in 3%, wage earners think that they are 3% richer even though they are 2% poorer, and they expand their consumption accordingly. Inflation is like the drug “soma” in Aldous Huxley’s Brave New World: it creates a false feeling of euphoria. The soma of inflation makes people feel richer and able to buy McMansions they cannot afford.

Today various experts, such as Paul Krugman, are urging further debasement of the currency through Diocletian-like monetary expansion while others, mainly in Europe, are worried about the debacle that such expansion will inevitably produce. If the former prevail, we may be in the last days of our Roman Empire. Either way, of course, life will go on, even if only through our intarnation in the next generation. Tarnation for us…too bad for them.