The mythological King Midas was famed for his ability to turn anything he touched into gold. Naturally this wish, granted by the god Dionysus, led to some unexpected problems for the Lydian monarch. When everything he touched turned to gold, all the roses in his garden lost their fragrance, he could no longer eat or drink, and he even managed to kill his own daughter.
This cautionary tale reminds us that it is possible to have too much of a good thing, including money, the excess supply of which can produce profoundly negative effects on an economy over time. For example, economic historians have argued that though the abundant flow of gold and silver from the New World made the Spanish Empire the greatest power in Europe for two centuries, this “easy money” may have sowed the seeds of the empire’s decline.
The loose monetary policies and strengthening yen of 1980s Japan is another case in which a state suffered long-term economic decline resulting from an expansionary monetary policy combined with a strengthening currency. Another equivalent may be found in the present-day US, a nation whose ability to monetise its debts could ultimately produce negative economic effects similar to those that afflicted the Spanish empire.
In the 1400s Europe experienced a shortage of gold due to the depletion of local mines. This shortage was compounded by a trade imbalance, as Europe imported luxury goods such as silk, spices and other commodities from Asia with little to offer in return other than precious metals. This shortage of gold spurred on explorers, and ultimately saw nations such as Spain and Portugal “discover” the Americas in search of new sources of wealth.
As hundreds of ships carrying tonnes of gold crossed the Atlantic, the deflation and stagnation of 15th-century Europe was replaced by economic growth and inflation, with Spain emerging as the most powerful state in the world. However, the rapid increase in the money supply meant gold bought more goods outside Spain and the metal soon departed, leading to trade deficits and a decline in local industries.
Energy independent and the world’s largest exporter of services, today’s US is a far better, more diversified economy. But obvious parallels remain. Possessing the world’s dominant currency has seen a similar build-up of debt in the US and a strong dollar has led to large US trade deficits. This has led to de-industrialisation and the social and political turmoil that inevitably follows.
The political polarisation that results from de-industrialisation was on display for all to see in the recent US presidential election results, with Democrats winning urban areas while Republicans took the rural counties. Frustration with the status quo has radicalised both parties in opposing directions, with the triumphant Republicans calling for mass deportations of illegal immigrants and the re-industrialisation of the US economy.
While Donald Trump has emerged with a clear electoral mandate to pursue this agenda, these policies contradict one another. The US is already relatively uncompetitive in manufacturing due to high labour costs, and has come to rely on immigrants as an important source of labour. As such, Trump has already reduced his threatened tariffs on Chinese goods from 60% to 10% since the election, and it may be that only immigrants who commit crimes end up getting deported.
Nevertheless, the rise of religious nationalism in the US, exemplified by the pro-natalism of the Republican Party, is eerily similar to 16th-century Spain, where hundreds of thousands of non-Christian immigrants were expelled. This led to labour shortages, which accelerated the decline of Spain’s domestic economy. Trump implemented a travel ban on Muslim-majority countries during his first term in office and has promised to deport millions of undocumented immigrants as soon as he re-enters the White House.
Costly wars are another similarity. The Spanish monarchy declared bankruptcy several times due to unsustainable debt levels incurred from constant warfare. This is not dissimilar to the extremely expensive US military adventurism of recent decades.
The US’s post-9/11 wars alone are estimated to have cost the government more than $8-trillion. Combined with Trump’s 2017 tax cuts, the Covid stimulus and even larger budget deficits during Joe Biden’s years as president, it appears the US government has a spending habit reminiscent of the Spanish monarchs.
As it turns out, having the world’s reserve currency — whether it’s Spanish silver or the US dollar — can have negative economic effects over the long run despite short-term advantages. Due to the dollar’s status as the world’s main reserve currency, the Federal Reserve has been able to monetise government debts while attracting investment capital to the US over high-growth Brics economies with more volatile currencies, such as Brazil and India.
Unfortunately, this extraordinary privilege, much like Midas’ ability to create gold with the tips of his fingers, can also lead to negative outcomes, such as unproductive investments, unsustainable debt levels, de-industrialisation, social inequalities and political fragmentation.
And none of these problems can be solved militarily, making it somewhat irrelevant that 16th-century Spain, like the US today, had the biggest and most powerful military in the world. In this respect, at least Trump and his vice-president elect, JD Vance, recognise that the US cannot bomb its way out of debt.
Ironically, it was the Spanish monarchy that funded Columbus’ discovery of the Americas, and it was Spain’s defeat by the US in the Spanish-American War that in effect finished off the Spanish empire. That said, the seeds of Spain’s decline may have been sowed a lot earlier, the inevitable result of the curse of having access to too much easy money.
The increased strength of the dollar since Trump’s election victory may give the impression that everything he touches turns to gold. However, when considering the various parallels between 16th-century Spain and the US today, one is inevitably reminded of history’s tendency to rhyme — and the curse of the Midas touch.
• Shubitz is an independent Brics analyst.
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