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Investing, Compound Interest and the Ancient Lie

Investing, Compound Interest and the Ancient Lie

There is a vicious lie about investing that periodically makes the rounds in financial circles.  It goes something like this.  If, at the height of the Roman Empire around 100 AD, you were to have put one day’s wages into a savings account that earned a mere 2% interest, you would have an unimaginably large sum of money today.  This thought experiment is ostensibly supposed to impress the financially illiterate with the power of compound interest.  Instead, it demonstrates how out of touch denizens of Wall Street and other financial con artists are with the real world.

Let’s begin by dissecting the myth.  In the ancient Imperial Roman world, one day’s wages was approximately equal to a single denarius, a silver coin weighing about 3.4 grams.  This coin later became a unit of account that eventually turned into the medieval silver penny and, subsequently, the modern day copper penny most of us are familiar with.  In fact, before the decimalization of British currency in 1971, pennies were still abbreviated as “d”, short for denarius – a nod to their distant Roman ancestry.

So there are three ways to think of a day’s wages in Roman times.  First it can be viewed literally as 3.4 grams of silver.  We’ll round this down to 3.0 grams of pure silver to account for other, alloying metals in the denarius.  Second, if one is stingy, it can be viewed as a single, modern-day penny ($0.01).  Lastly, it can be conceived of as today’s dollar equivalent of a (non-skilled) day’s wages.  For this sum I’ll use 8 hour’s work at $8 an hour, equaling $64.

If you had invested $64 back in 100 AD at a 2% compound interest rate – never mind that the dollar wouldn’t exist for another 1700 years or so – today you would have the unbelievably large sum of $1,923,574,759,697,820,000.  That’s almost two quintillion dollars – enough to buy the entire world’s real estate (a mere $217 trillion dollars) 8,864 times over.  That is a nice way of saying that this scenario is a complete fiction.  If you had this much money you could theoretically buy everything and everyone on Earth and still have enough left over to buy Mars and some other planets as well.

So let’s be a little more conservative with our next calculation.  Let’s assume that you banked one modern day penny way back in Imperial Roman times and then let it compound for the next 1900 years straight.  Under this scenario you would end up with $300,558,556,202,784, or about $300 trillion dollars.  This is about 3.7 times the total amount of money in the world today – around $80 trillion dollars worth.  Once again, our parable is from a world of fiction.  There is no way such a large sum of money could ever be accumulated.

We have one more calculation to perform.  This time, we’ll deposit a modest 3 grams of pure silver into our fictional Roman era bank account and let is accrue at 2% per annum for the next couple millennia.  When we finally withdraw our deposit, we will find that it has grown to 90,167,566,860,835,300 grams of pure silver or just over 90 billion metric tons.  We should be elated by this good turn of fortune, until we realize that the total amount of extant silver in the world today is estimated at only 777,275 metric tons – not even one million metric tons.  It might be tough for our theoretical bank to pay out 116 times the amount of silver currently in existence.

So we are left with an excellent question.  If compound interest is so powerful, why didn’t any of our smart Roman, Celtic, Indian, Chinese, Persian or Mayan ancestors deposit a single day’s wages into a conservative bank account a couple thousand years ago so that we could all be obscenely rich today?  The answer is rather obvious.  There were no interest-bearing bank accounts in ancient times, and even if there were, the bank would have gone bankrupt long ago trying to satisfy our ancestor’s claim.

This is one of the reasons I’m leery of long-term, high return, pie-in-the-sky compound interest projections made by the Wall Street mafia.  You won’t get your 10% a year in stocks over the next 30, 40 or 50 years for a very simple reason – you can’t get it.  It is a physical impossibility.  And the charlatans who make you these dubious promises will be long gone – their pockets stuffed full of commissions and fees – by the time anyone figures out their game.

On the other hand, tangible assets like bullion, gemstones, art and antiques have a lot of excellent attributes absent from traditional financial assets.  Being physical, they cannot evaporate in the mathematically inevitable busts that must periodically occur in paper financial markets.  Nor can they be easily confiscated via government decree, provided you hold them personally.

And although they may not always earn phenomenally – and unrealistically – high returns, you can rest assured that tangible assets will generally earn you a fair return.  And they will do so steadily and predictably over the course of decades and even centuries.  Don’t fall prey to the lies of paper asset alchemists.  Ultimately, physical wealth is real wealth.  And real wealth is wealth you keep.

Luxury Goods Make the World Go ‘Round

Luxury Goods Make the World Go 'Round

It is a little known geopolitical reality that most exploration and trade throughout human history has been motivated by the desire to seek out and acquire luxury goods.  In the ancient world, the Roman Empire was famous for its extensive trade routes to the east.  These trade routes, including the legendary Silk Road, extended thousands of miles, finally terminating in Central Asia, India and perhaps even China.  Precious gemstones, spices, silk and incense were just a few of the luxuries that flowed through this complex, ancient trade network.  These exotic luxury goods were so coveted by the wealthy Roman elite of the day that many Roman writers commented disapprovingly on the massive drain of the Empire’s gold and silver from these eastern trade routes.

Another example of this phenomenon can be found over a thousand years later during the Age of Discovery, when European explorers first discovered and then colonized the Americas.  In 1492 Christopher Columbus set sail from Spain looking for the East Indies, a near mythical location rich with valuable spices like pepper, cinnamon, cloves and nutmeg.  These spices were in high demand in Europe and commanded huge sums of money, guaranteeing great wealth to whoever could supply them.  Columbus’ discovery that the New World lay between Europe and the Spice Islands was a rather unwelcome development.

Accident or not, it didn’t take long for the Spaniards to start exploring these new lands.  Sure, the Spanish conquistadors may have first marched into the unforgiving jungles of South and Central America for god and glory.  But they stayed for the gold, silver and emeralds they found which were exported back to Spain in massive quantities.  Over time, other luxuries came to be staple exports from the Colonial Americas as well – exotic timber for fine cabinetmaking, sugar for sweets, cocoa for the new European craze of chocolate and rum for wild parties.  This luxury driven trade helped create the modern, interconnected world that is now familiar to us.

The Victorian Colonial Age was also largely driven by the persistent demand for luxury goods and luxury raw materials from an increasingly affluent middle class.  Ivory from British Africa was used to craft the billiard balls found in every well-to-do Victorian home.  British South Africa supplied coveted diamonds for royalty, movie stars and commoners alike.  British Burma became the chief global source of high quality rubies and sapphires from the 19th century until World War II.  And the Americans didn’t force open feudal Japan in the mid 19th century because they wanted to be jerks, but because they desperately wanted to trade with the secluded island nation.  They wanted access to Japan’s acclaimed silks, lacquerware, porcelain and metalworking – all fine luxury items.

Even today the never ending chase for luxury goods forges and propels international relations.  China is renowned as a manufacturing center for many of our modern-day electronic luxuries – iPhones, iPads and MacBook Airs for example.  Understandably this means free-trade with China is a must for today’s wealthy developed nations.  The situation in Germany is similar.  Some of the world’s finest luxury cars are assembled and exported from Germany, making it another global trading powerhouse.

While the definition of what constitutes a luxury item has evolved over time, their centrality to international trade and even the flow of history is immutable – a fact that holds important lessons for investors today.  As long as people have disposable income, they will always seek out luxury goods to fulfill their desires.  In ancient times those luxuries were silks, spices and incense, while today we have new luxuries like portable electronics.  But some of the old standbys are still very much in demand – precious metals, gemstones and exotic woods – and these are all materials that are extensively used in investment grade art and antiques.  The savvy investor will take note.

Euro Currency Déjà vu – The Latin Monetary Union

Euro Currency Déjà vu - The Latin Monetary Union

The European common currency – the Euro – is often thought of as a new and bold political experiment of the 21st century.  As of 2016, 19 members of the European Union use the Euro, which has also become the world’s second most traded currency.  But as groundbreaking as many believe the Euro is today, it wasn’t Europe’s first common currency.

That honor belongs to the now defunct Latin Monetary Union.  The Latin Monetary Union was established in 1865 by founding members France, Belgium, Italy and Switzerland.  This arrangement wasn’t a single currency among participating members per se.  Instead, each country retained its individual national currency, but harmonized the weights and finenesses of their gold and silver coins.  This was possible because countries in the mid 19th century relied on fixed gold or silver standards.

A single currency unit in the Latin Monetary Union was defined as a 5 gram coin of 83.5% fine silver.  The largest silver coin was 5 units, weighing 25 grams of 90% silver.  The workhorse high denomination gold coin was 20 units, weighing 6.4516 grams of 90% fine gold.  And the largest gold coin was 100 units, weighing a hefty 32.258 grams of 90% gold.  Any silver coins smaller than 5 units were only struck in 83.5% silver because they were fiduciary coinage only, ineligible to settle large payments or debts.

Although there were only four participants to the agreement initially, membership soon grew.  Romania, Spain and Greece joined in 1868.  Peru, Columbia and Venezuela soon followed.  Finland, Serbia and Bulgaria also adopted the standard.  Austria-Hungary went halfway, striking some coins that matched the Latin Monetary Union’s requirements and others that did not.

Even tiny Albania joined the Latin Monetary Union upon its independence from the Ottoman Empire in 1912, although it didn’t mint coins until the 1920s.  So many coins were struck to Latin Monetary Union standards in the late 19th and early 20th century that they are still commonly encountered in the collector’s market today.

In hindsight the Latin Monetary Union was shockingly successful.  A preponderance of European nations joined the treaty along with a handful of Latin American countries as well.  It wasn’t perfect however.  At first the free coinage of both silver and gold was embraced.  This meant that an individual could go to the national mint of a Latin Monetary Union member with either raw gold or silver and have it coined into legal tender.

But due to the discovery of massive quantities of silver in Nevada’s Comstock Lode in the Western U.S. in the 1860s, the price of silver soon declined precipitously in relation to gold.  This naturally led to destabilizing arbitrage, where people took cheap, raw silver to the mint to have it coined and then exchanged it for more valuable gold coins.

This situation eventually forced the Latin Monetary Union members onto a de facto gold standard when they finally agreed to limit the quantity of silver coins they would mint.  Some countries could not resist the temptation to debase their money, however.  Greece, that perpetual basket case of monetary intransigence, was expelled from the Latin Monetary Union in 1908 due to recurring debasement.  In spite of these occasional problems, the Latin Monetary Union flourished from its founding in 1865 until the onset of World War I in 1914.

World War I, though, was the final twilight of the Latin Monetary Union.  The war blew out the national budgets of all belligerent nations.  The countries involved in the global conflict turned to the expediency of currency debasement in an attempt to ameliorate their fiscal plights.  This rendered the previously robust international monetary agreement inoperative almost overnight.

A couple nations not involved in the war – Switzerland and Venezuela – struggled on issuing coins that conformed to the old standard for decades to come.  The fatally wounded Latin Monetary Union was finally officially euthanized in 1927 after it became apparent that most nations involved in World War I were never going to reestablish their pre-war parity gold standards.  Lonely Switzerland struck the final coinage adhering to the old specifications in 1967 – a 5 gram 1 franc piece and a 10 gram 2 franc coin, both of 83.5% silver.

Thus a noble, if doomed, experiment in international monetary synchronization ended.  I suspect that barring a full political union, the current Euro currency will share the same fate as its Latin Monetary Union predecessor.  The massive, unrelenting forces clawing at the periphery of Europe’s current pecuniary arrangement are already plainly obvious to the casual observer.  How long the Euro lasts is anyone’s guess, but I doubt it will even take a world war to dismantle it.

The Sunset of the Age of Discovery

The Sunset of the Age of Discovery

Many historians spend a great deal of time researching the Age of Discovery, when European explorers sailed to every corner of the globe in search of new lands, peoples and riches.  However, they usually focus on the beginning of the period in the 15th and 16th centuries.

In my opinion though, it is really the end of the Age of Discovery that has more importance for art and antiquities collectors.  I loosely define this period as taking place during the early to mid 20th century.  It was during this historically crucial time that the last of earth’s wonders, both manmade and natural, were revealed.

Even a mere hundred years ago an amateur explorer could hike through the densest jungles of South America and into a lost city floating in the Andes Mountains.  Machu Picchu, abandoned by the Incas for almost 350 years, was only rediscovered by American professor Hiram Bingham in 1911.

Similarly, in the late 1940s nomadic Bedouin shepherds accidentally uncovered the Dead Sea Scrolls in desert caves in the Holy Land.  These priceless ancient religious texts contained the oldest extant writings of the Jewish and Christian Bibles known.

The mysterious culture of ancient Egypt also surrendered it last great treasures in the sunset of the Age of Discovery.  Egyptian pharaoh Tutankhamun’s unlooted tomb, found in 1922 by British archaeologist Howard Carter and his benefactor, aristocrat Lord Carnarvon, was almost certainly the greatest archaeological discovery of all time.  Forgotten for over 3200 years, it was a miracle that the tomb had remained intact.

A mere 18 years later, in the dark shadow of a brutal global conflict, French professor Pierre Montet uncovered the only other undisturbed Egyptian pharaoh’s tomb, that of Psusennes I, The Silver Pharaoh.

The earth was still grudgingly giving up her secrets to intrepid explorers into the mid 20th century.  A U.S. bush pilot operating in Venezuela, Jimmie Angel, first spotted the world’s highest waterfall in 1933 – 3,212 foot (979 meters) tall Angel Falls.

Even Mount Everest, the highest point on earth, only succumbed to ambitious New Zealand mountain climber Edmund Hillary and his rugged Nepalese Sherpa Tenzing Norgay in 1953.  However, it is possible that the famed Himalayan peak had actually been conquered decades before by doomed English mountaineer George Mallory in 1924 before claiming his life.

From an exploration standpoint, it had all been done, found or seen shortly after World War II ended.  Incidentally, I think this is one of the reasons the swashbuckling Indiana Jones movie franchise so captivated the public.  The lead character and story were set in the 1930s, the last time an explorer could plausibly still have any realistic hope of finding truly amazing hidden artifacts or cities.  Of course setting the movies against a backdrop of an evil Nazi organization obsessed with diabolical mysticism didn’t hurt either.

The end of the Age of Discovery has significant implications for connoisseurs and investors in fine art, antiquities and antiques.  It means that there are likely no more major unknown civilizations waiting to be uncovered.  Likewise, there are almost certainly no more intact ancient cities waiting in the mists.

The grandest and most important archaeological finds have assuredly been brought to light already.  And, of course, there are no more grand natural mysteries still residing on distant, forgotten corners of the globe.  While this might seem sad, it should help us realize that, as collectors, we are working with a relatively fixed pool of artifacts.  Invest accordingly.