The Debt Ceiling: America’s Roman Hubris

TL;DR

As we examine the parallels between the economic decline of the Roman Empire and the current financial situation in the United States, it becomes clear that there are valuable lessons to be learned. In Rome, the debasement of its currency, the Denarius, was a result of economic mismanagement and excessive spending, which ultimately led to the empire's fall. When we compare this to the U.S., we notice that our ballooning national debt and reliance on a fiat-based monetary system have allowed us to continuously issue debt and print money to make up the difference.

It is crucial for us to recognize that, like Rome, we must address our fiscal mismanagement and unsustainable economic policies to avoid following the path of decline experienced by past empires. By acknowledging these historical patterns and taking corrective action, we can work together as a nation to devise a strategy that rectifies our financial challenges and critically examines our fiat-based monetary system, as well as the unsound monetary and fiscal policies that led us to this point. Failing to do so may result in us experiencing a similar fate to that of the Roman Empire and other fallen empires throughout history.

Picture yourself as the Emperor of Rome during a time of great turmoil: your economy is faltering, barbarians are knocking at your gates, massive social programs are churning out free food for your populace at great expense to your empire, and a political crisis looms as resources continue to dwindle. With limited choices, you must keep the economy intact, your populace happy and fed, and simultaneously rally the army to safeguard yourself and your people in the face of death and destruction.

So, what’s your next move?

If you thought, “systematically debase your currency by diluting its silver content with base metals to extend your silver reserves,” you’d be correct!

In Rome, from the beginning of the first century to the end of the third century AD, the Denarius (Rome’s Dollar) experienced a dramatic decline in value as administration after administration chose to stretch dwindling silver reserves further. Initially, the Denarius boasted a silver purity of over 90% in the first century, but by the year 300, in the aftermath of the Third Century Crisis, its purity had plummeted to a meager 5%.

This significant degradation was a result of decades of economic mismanagement, extravagant government spending, vast borders, and numerous internal crises. All of these factors left Rome in a precarious state, ultimately contributing to the decline and fall of the Western Empire just over a hundred years later.

So, why does this matter?

As a nation founded on the very principles of the Roman Republic (with some definite nods to its later Imperial expansion), America has spent the last 50 years emulating the policies that characterized Rome during its twilight years. We’ve invested heavily in expensive and inefficiently run military and social programs, costing some $5.4 trillion (just this year alone), accumulated debt to cover the gap between our outgoings and tax revenues, resorted to printing money as a solution to every problem that arises, and detached our currency from the gold standard to make it all possible.

Instead of addressing the issue, we are on the verge of exacerbating it once again.

In the past two weeks, unless you’ve been (understandably) disconnected from the world, you’ve likely heard the news discussing the topic of “raising the debt ceiling.” This ongoing debate between Republicans and Democrats centers on how much to raise the debt ceiling and the subsequent plan for America to shoulder the financial burden.

What is the debt ceiling?

The debt ceiling represents a limit imposed by the U.S. government on the amount of money it can borrow to cover its expenses. If the debt ceiling isn’t raised when necessary, the government faces the risk of defaulting on its financial obligations, which could lead to economic disruption as salaries go unpaid, government programs shut down, and worst of all, payments cannot be made to the creditors of the US government (i.e., the people who lent us money).

The US has never defaulted on its debt because we have been — at least for the past 50 years — in the privileged position of operating under a fiat system supported by the world’s largest and most robust economy; giving us a significant advantage over ancient empires that used metal-pegged currency (like the Roman Denarius). Essentially, whenever the USA requires additional funds, it has been able to issue more debt and the world (including our own populace) has gobbled it up. Whenever the world has come up short, our own central bank — the Federal Reserve (AKA “The Fed”) — has bought up the remainder by printing the necessary money.

Presently, the Fed owns about one-fifth of the US Government debt (double what it did 10 years ago); the rest is held by a mix of the US Government (21%), domestic funds, companies, state governments, etc. (34%), and overseas entities (25%). This process has enabled us to raise the debt ceiling periodically since the 1940s to cope with any needed increase in government spending we have wanted to add to the tab.

Although, generally speaking, this is just the economy functioning as normal, every now and then a major crisis occurs when we need to significantly bump the debt ceiling to deal with extenuating circumstances following a major economic event. This happened in 2011 when the US economy was still recovering from the 2008 credit crisis and again now in the aftermath of the COVID-19 pandemic.

OK, so we just create more debt, right?

Right; when we need more money, historically we have just been able to pray to the debt gods, and they have provided (no goat sacrifice needed). However, as shown by the steady increase in Fed-owned US debt, the amount of debt being created is slowly outstripping the international appetite for our debt.

Money and economics are, after all, a confidence game. Our debt will be worth something to someone as long as we continue to pay it and our economy grows (which historically have both happened), and our US Dollars will hold their value as long as we don’t print their value into oblivion by printing more and more of them to deal with ongoing economic crises or to buy our debt that no one else will buy.

So, why can’t we print more money?

When money is printed, the existing pool of money is devalued because an increase in supply without a corresponding increase in demand leads to a drop in prices (i.e., value). In a traditional gold or silver-backed system like that of Rome, the process works like this: imagine having 𐆖1 million shiny Denarii made from one million ounces of pure silver (i.e., “backed” by silver). When a crisis occurs, you need to print more Denarii to pay for essential services like the military and medical care. As you double the Denarii in circulation to 𐆖2 million, you have to halve the amount of silver in each because you still only have one million ounces of silver. Consequently, while 𐆖1 was worth one ounce of silver yesterday, now it takes 𐆖2 to own the same amount of silver. This process is known as “inflation.”

In the United States, the system used to function this way. However, since the country abandoned the gold standard in the 1970s, US Dollars are no longer backed by gold. Instead, they are supported by “the full faith and credit of the US Government,” which essentially means the strength and power of the US economy and military. A more cynical view might be that the currency is backed by red, white, and blue “vibes.”

This has both positive and negative aspects. The ability to accumulate debt when necessary and freely print money to address unforeseen economic challenges (such as a global pandemic) is a highly effective method for maintaining flexibility, as long as money circulation is subsequently regulated and debts are repaid. However, providing such options to an irresponsible economy (like ours) results in a continuously exacerbating problem, akin to handing an unlimited credit card to a shopaholic.

While we may issue debt, and print money to cover the shortfall in our debt sales, eventually confidence in our economy is eroded as people feel like maybe we won’t pay back our debts, or maybe there are just too many dollars in circulation for an economy such as ours.

When this happens — and they often happen simultaneously — it only takes one influential voice (like a major bank) to blow the whistle, and confidence in our economy will evaporate into thin air. And in a fiat-based system like ours, these evaporations of confidence are far more deadly than in a metal-backed system like ancient Rome, because when our economy is no longer viewed as keeping up with our debts or supporting our currency valuations internationally, there’s no backstop; no shiny metal to prop up our currency valuation, nor for us to use to pay off our debt holders. We are left with a pile of paper that no one wants to hold to pay off debts that no one wants to own.

So what has this got to do with Rome, and why should we be worried?

Rome, akin to empires before and after its time, underwent a three-stage process: growth, zenith, and decline. This decline, as detailed in Edward Gibbon’s seminal work, “The History of the Decline & Fall of the Roman Empire,” highlighted numerous reasons for Rome’s downfall, including public decadence, a shift in Roman culture, corruption, all the good stuff; but a primary reason was economic collapse, brought about by a combination of military overspending and financial mismanagement, leading to the debasement of their currency. History is replete with such instances.

Whether examining more contemporary examples like Britain and Germany in the early 20th century, as they recovered from the aftermath of WWI, or ancient examples such as the Song Dynasty China and the Macedonian Empire, all empires eventually reach this point. They become accustomed to a certain lifestyle (power, military, influence, etc.), and consequently, the fiat currencies they issue to “resolve” their financial issues ultimately collapse.

In Rome (like the USA) government spending outstripped economic output as it tried to prop up an enormous global empire while keeping the Roman citizenry happy and well-fed. It misused its precious resources to cover its obligations, debasing its specie and excessively printing money, resulting in a total collapse of confidence both outside and within. By the time the Visigoths entered Rome in 410 A.D., they were marching into a dusty, decrepit shadow of a once-great nation, hardly defeating a worthy adversary.

So, America is Rome?

Not exactly; the circumstances of Rome and the USA are somewhat different. America exists at a time of relative international peace — our world is connected, international trade reigns supreme, and our nations discuss things (mostly) like adults. In the Roman age, news traveled slowly, various empires and minor kingdoms were at war frequently, and empires were far more exclusionary and closed off than nation-states are today. In addition, we benefit from the history of Rome’s example; with access to data and information that ancient cultures could not have fathomed. This means we are more flexible, can react more quickly, and address problems in a more scientific and educated manner.

Additionally, we have something ancient Rome did not: Debt. Although we believe that the Romans had methods by which to raise money from their populace other than simple taxation, the concept of public debt in the modern sense was not invented until long after Rome was ancient history. This means that we have more economic flexibility than Rome, but it also allows us to use debt as a shield to hide greater economic mismatches within our economy and does not mean we are exempt from walking the same path of failure, so don’t get too comfortable.

Since the 1970s, when the United States abandoned the gold standard, our national debt has ballooned from $371 billion to over $31 trillion. While some economists may argue that this isn’t concerning due to the substantial growth of our GDP (from $1 trillion in 1970 to $23 trillion today), this perspective fails to capture the entire picture. To properly assess the impact on the economy, we must examine debt as a percentage of GDP. Currently, our debt surpasses our economic output with a debt-to-GDP ratio of 120%, and we continue to run a $2.8 trillion annual budget deficit. Consequently, the trajectory of our debt can only trend upward.

To put this in relatable terms, imagine earning $100k per year, spending $102k annually, and already carrying a personal debt of $120k.

The last time we approached a 120% debt-to-GDP ratio was in 1946, following the conclusion of World War II. This historical context makes our present debt even more alarming, as we are not currently engaged in a war. Thus, the question then arises: what will happen if we need to?

This situation leaves America vulnerable. We are going to start running out of options and as long as we continue down this road, it is only natural that our debt will continue to increase and our currency continue to inflate. Although we may not be Rome exactly, our economic trajectory is starting to look more and more like the makings of a fiery exit in the style of the Western Roman Empire. With the additional aspects of America’s current internal fighting, political discontent, growing inequality, and loss of public self-esteem, one would be forgiven for donning gladiatorial armor and searching around DC for the Colosseum.

So, what happens now?

Inevitably, Congress will address the present crisis, albeit with a provisional solution. They must increase the debt ceiling, as there is no alternative, and once more, the world will buy into the American debt machine, and the Fed will no doubt activate the printing press to tie up the loose ends. Inflation will bump up a bit more, the Fed will react by raising rates again, and we’ll all be that bit sadder and that bit poorer.

Like Rome before us, this approach is unsustainable. The formidable American Empire will eventually need to unite and acknowledge that merely printing money to buy up excess debt, and issuing more debt to solve previous debt cannot resolve our dilemmas. As a nation, we must devise a strategy to rectify our fiscal mismanagement, while critically examining our fiat-based monetary system and the unsound monetary & fiscal policies that led us here. If we fail to do so, we risk following in the footsteps of the British, Dutch, Spanish, Chinese, Macedonian, and Roman Empires that preceded us. From a historical perspective, it’s not a question of whether this will occur, but rather a matter of when and to what degree of certainty.