Picture a single country at the center of the world’s monetary system.
An empire overflowing with unprecedented wealth.
Sounds pretty nice. But underneath the shiny surface, all isn’t well.
These vast riches have discouraged industry at home. The country imports most of its goods.
Its elites are living a life of luxury. Building palaces and importing the finest foreign wares.
But inflation becomes a persistent problem due to all the money sloshing around. Working people struggle to get by.
Wars and nation-building are a continual drain on its finances. So despite all the wealth, debt piles up.
We’re talking, of course, about the Spanish Empire in the 16th century.
Drowning in Money
In one of the best investments in history, Spain’s King Ferdinand and Queen Isabella financed Columbus’ voyage to the New World in 1492. The Crown spent only $5-10 million in today’s money on the venture, generating an ROI for the record books.
Columbus and Spain were in search of a better route to Asia, but what they found was a New World with incredible amounts of gold and silver.
And back then gold and silver were money. Silver was the true backbone of the economy. The gold:silver ratio stayed around 12, so each ounce of gold was worth just 12 of silver. And they found a LOT of silver in the Americas.
From 1500 to 1650 Spain shipped hundreds of tons of gold and tens of thousands of tons of silver back home.
For a while, it had incredible effects. Wealth was overflowing. New cathedrals and palaces sprang up. Art and culture flourished.
But eventually, all this new money started causing problems. From 1500 to 1600, prices quadrupled. And this was after centuries of price stability.
The introduction of so much money disrupted the entire economy. Savers saw their wealth evaporate.
Wages didn’t keep up with the price of food and goods.
The monarchy spent too much on wars defending their empire, and debt became a major problem.
Local industries died off as the nation increasingly relied on imported goods.
In 1569, Tomás de Mercado, a friar and proto-economist, wrote: “The Indies bring us silver, but we turn it into smoke and the wind carries it away.”
When silver imports from the Americas slowed in the late 1500s, the monarchy was forced to mint copper coins. Classic monetary debasement.
Despite the unprecedented riches, within a century it had mostly been squandered.
This was the beginning of a period of decline for Spain, and it would be a while before their star rose again.
Similarities and Lessons
The story of 16th century Spain isn’t a perfect parallel to modern America. But we can learn important lessons from it.
Like Spain in the 1500s, America has been the center of the monetary universe for many decades.
The U.S. dollar being the world’s reserve currency is both a blessing and a curse. Our fiat currency has been far stronger than anybody else’s.
This makes our imports cheap, but has weakened our export market. As a result, our manufacturing sector is in terminal decline. The dollar is simply too strong, which makes our goods uncompetitive in the global market.
Our primary export today is dollars, just as Spain’s was silver.
The American economy has become over-financialized. A huge chunk of our economy is essentially shuffling money around in increasingly creative ways.
We also spend unsustainably on our military. A classic mistake of empires in decline. Once the military becomes such a large part of the economy and foreign policy, it is difficult to change.
As Aldous Huxley wrote, “That men do not learn very much from the lessons of history is the most important of all the lessons of history.”
No Easy Solutions
The U.S. today stands at a crossroads. We’ve reached the point where it is apparent to everyone that something needs to change.
What’s concerning is that we might change in all the wrong ways.
Young people are struggling to make ends meet. They can’t afford houses, and aren’t having enough kids. Many are turning to socialism and/or communism as a last resort.
Mamdani’s election in NYC is a disturbing sign of what could lie ahead. Hopefully this experiment fails as miserably as we expect, and the country learns a lesson from it (be sure to read Sean Ring’s recent letter on this if you haven’t yet!)
And while Trump is attempting some ambitious reforms, it seems our political system is irreparably broken. It’s going to take a real crisis to provide the necessary wakeup call.
No matter what, the U.S. has a date with a reckoning. This pile of debt isn’t going to deal with itself. We will see incredible amounts of money printed in the decade ahead. The global financial crisis and COVID were just warm-ups.
So unlike in 16th century Spain, where a flood of gold and silver were the problem, today they are part of the solution.
I believe strongly that everyone should have at least a 5-10% allocation to gold, silver, and miners. I’m comfortable with as high as 20%.
And right now, we should all be working on getting significant exposure to other hard assets.
Next week, we’ll talk more about how to prepare our portfolios for the next decade. It’s going to be a rocky road, but our goal is to help you navigate it.
