I, Paulson

GoldEnron Sachs and Morgan Stanley applied to become bank holding companies regulated by the Fed at the weekend, giving them access to wider sources of funding including direct loans. William Isaac, former chairman of the FDIC said, "The decision marks the end of Wall Street as we have known.  It's really too bad, as our country has benefited greatly from the entrepreneurial risk takers on Wall Street." ... interesting perspective ... wonder what planet he's been on this last six months? There's no doubt some people did very well indeed out of Wall Street's "risk taking" ... not sure it's been the country as a whole though.  

Paulson's master plan is now taking shape and looks as though it will involve a request for around $700bn to buy "troubled assets" (not just mortgages) from any bank with US operations (not just US banks). Interesting, Paulson gets unparalleled dictatorial powers to decide what assets to buy and from whom with no provision for subsequent judicial review ... wow ... but add to that the $85bn bail out of AIG and the estimated eventual cost of bailing out the GSEs of $250bn. Then add in the $500bn writedowns already taken by the private sector, and we get to a cost of the crisis so far of about $1.5tr ... as well as a new financial dictator ...  

Greenspan used to say a problem delayed is a problem solved. The Paulson plan will mark the end of this financial crisis by drawing a line under the root cause of the problem - bad system-wide collateral. There is still a recession to come. There is still the possibility that China's real estate bust might make the banking bust we've just seen in the West look like a picnic. And there remains a looming energy crisis.

But there has also been a very sharp increase in US government debt, by around $5-6tr depending on how you measure it. That will take total US govt. debt to around 100% of GDP, not including the "off-balance sheet" committments on health and social security which would likely take it to around a staggering 600% of GDP. Guess who said this:

"The budget should be balanced, public debt should be reduced, the treasury should be rebuilt, the arrogance of officialdom should be tempered and controlled, and assistance to foreign hands should be curtailed."

That's right - Cicero, the famed Roman consul and orator. 

The long-term over-committment of resorces won't trigger the sort of sudden financial crisis we've just been through. It will be a much slower moving decline, like the one currently killing the Detroit auto industry. Although Marcus Tillio Cicero's comment was attributed to around 44AD, for example, the inflation didn't really kick in in the Roman empire until the time of Marcus Aurelius over one hundred years later. Moreover, the Western Roman Empire's power didn't really peak for another hundred years after him, even though history books quote its ultimate demise as happening in 472 (although even this is probably a meaninless date because the real Roman Empire simply moved east to Constantinople and lasted through medieval times only coming to a definitive end when it was sacked by the Turks in 1453) .

The point is that while such massive debt issuance ultimately pressures the integrity of the empire and its currency it is something else to worry about in the future. Right now, the crisis is over. The Japanese, for example, went through a similar episode in the early 1990s and saw their debt load increase significantly as they tried and failed to fiscally revive their economy without fixing their banks. The economic pressures since have been deflationary, not inflationary ... so far ...  

Nevertheless, and regardless of the ultimate time horizon, the process is very clearly underway today. We are seeing a peaking of US imperial influence and historically such peaks have historically been disastrous for the imperial currency ...  gold and silver will serve role as the store of value as they have historically always done in such times.