Message Font: Serif | Sans-Serif
No. of Recommendations: 6

This is an article by Frank Giustra written in May of 2003. I like his style.

CNBC in my opinion is the biggest purveyor of optimism in the market place, although they are not alone. You would think it might be difficult to consistently put a positive spin on an endless string of bad economic data. But by a combination of what appears to be selective emphasis (i.e. no repetition or follow-up on bad economic news and repeating the trivial stuff ad nauseam) and allowing "industry experts" (who all have an interest in keeping investors in the game) to comment and opine on the data, and finally switching to sports and entertainment news on days when the economic news is particularly bad, investors never have a chance to do the right thing….and panic. Instead, investors feel obliged to pile into overpriced stocks with the tenacity of a pod of pilot whales beaching themselves. As for CNBC, who knows, maybe its parent GE will recognize this winning formula and license the format to foreign territories suffering with sagging stock markets in need of a boost.


It has to be a historical precedent that a debt-laden government goes to war and proposes to cut taxes simultaneously.


In the long run imperialism and over-consumption are a recipe for economic decline. We only need to look back at the 16th century Spaniards, the late 18th - early 19th century French or the late 19th century - early 20th century British for historic examples of countries trying to run concurrent war-monging and consumption.

Of the three, the experience of the 16th century Spaniards makes for the best comparison with the Americans of today. For nearly 100 years immense supplies of gold and silver (the likes of which Europe had never seen before), plundered from the natives of Central and South America flowed into Spanish coffers. Sadly, this 16th century version of excessive money supply growth managed only to fuel the nations' spending habits, while at the same time disincentivizing their willingness to produce. Instead of turning this windfall into productive wealth, Spain used it to buy "consumer goods" from other nations. As a result, Spain's debt to foreigners soared and all the gold and silver was exported out of the country (think current account deficit without the ability to "print" more gold). With all this new-found wealth, it didn't take long for the kings of Spain to think themselves superior and embark on a mission of bending the world to their will. Charles V, not satisfied any longer with being a mere king, lobbied intensely, using bribes and threats and eventually convinced a "coalition of the willing" to make him emperor of the Holy Roman Empire. After loosing quite a few of its booty-laden ships on the high seas, Spain, claiming self defense, declared that it would no longer make a distinction between the pirates and the nations that harboured them. To eliminate this "state-sponsored piracy", they decided to strike at the worst offender - Britain (although I doubt that Philip II ever suggested that he was merely trying to free the British people from oppression). Boasting their technologically superior Spanish Armada (not dissimilar to America's air supremacy), they waged what proved to be a disastrous war against Britain whose smaller ships proved far too wily. Years of wars ensued with a variety of other countries that did not share Spain's view of the world. Having already traded their gold and silver for consumer goods, the nation had to turn to debt-finance to pay for these wars. As Spain's tab reached the limit, their lenders, the Fuggers of Augsburg (16th century version of the Japanese) were forced to convert their debt into long-term loans. Eventually, Spain's creditors cut them off and the nation, now bankrupt, introduced to the world the now time-honored tradition of default by a sovereign state.

Of course, in their time very few of the above mentioned governments or their citizens would have ever believed such an economic fate would befall them. I suspect most Americans today wouldn't either. Truly amazing when one looks at the current sad state of America's public and private balance sheet and its voracious consumption appetite. For although past global powers had their excesses, it took the Americans to really put the "pro" in the term profligate.


As for the lesson in this story, unfortunately it will be learned time and time again throughout history and our protagonist, gold, will always be around to provide refuge from man's inherent need to push things too far.

Finally, for those that read this and dismiss it as apocalyptic ramblings, consider that all I predict is a repetition of history, not the end of it. The day will come when it will be prudent to sell one's gold holdings and invest in paper assets. Furthermore, although corporate America may be in decline, investment opportunities will always exist. And if not in America, then in other parts of the world, perhaps in emerging economic powerhouses such as China. On the bright side, who knows, perhaps in 50-100 years, it will be the Chinese who will play the "Ugly" role in our movie.

13 May 2003
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.