INTRODUCTION
Sidney Homer's "Saucer":
Supra-Secular Rhythm of Interest Rates
and the Evolution of Civilization
Originally published July 22, 2016
Last edited June 12, 2017
By Michio Suginoo

​[Ancient Civilizations and their Credit Frontiers]
In his masterpiece, A History of Interest Rates (Homer & Sylla, 2005), Sidney Homer (1902–1983) [1]—one of the most distinguished, innovative bond investment experts of his time—compiled historical interest rates for four millennia, from Babylonian times to the 20th century. In the first five chapters of his book, Homer projected centennial minimum floors for interest rates (I’ll call it the centinnial “best credit frontier” for discussion purposes) throughout three ancient civilizations—Babylonian, Greek, and Roman. His chart of the best credit frontier depicted the presence of a common supra-secular rhythm among all three civilizations (Homer & Sylla, 2005, p. 63). In other words, he raised a notion that the state of money has something to do with the evolution of western civilization. Chart 1.1 reproduces Homer’s work on the best credit frontiers of these three civilizations.

Best credit frontier

The best credit frontier, defined as the lowest interest rate during each given period, represents the  lowest cost of funding realized during each corresponding period [2]. At any given point in time, the lowest interest rate is granted to the best credit record holder. Therefore, the trajectory of the centennial best credit frontier traces the best frontier of credit conditions during each century [3]. In other words, arms’ length, or ordinary, interest rates [4] never drop below the best credit frontier throughout each century. Here, we are not interested in tracing the detailed short-term progression of interest rates during each period. In a way, the best credit frontier marks the frontline in the advancement of credit conditions during each corresponding period.

Interest rates represent the cost of finance. Therefore, under ordinary circumstances, the lower they go, the easier it becomes for borrowers to take out credit. A decline (rise) in the lowest interest rate signifies an advancement (setback) in credit conditions. Accordingly, we use the following phrases interchangeably:
  • decline (rise) in the level of lowest interest rates;
  • decline (rise) in the credit frontier;
  • advancement (setback or deterioration) in credit conditions or activities.
 
In Homer’s chart, throughout the three civilizations (Babylonian, Greek, and Roman), the best credit frontier started at a higher level at the earliest life stage of each civilization and gradually declined, demonstrating advancement of credit activities. At the peak of credit conditions, it formed the bottom floor; then it reversed, starting a new momentum of a rising credit frontier (ascending to a higher cost level). Despite their differing profiles in terms of geographical setting, culture, and social structures, these three civilizations demonstrate a remarkable similarity in the rhythm of credit evolution along the time horizon. Homer stylized the common rhythm manifested among the three historical cases in the shape of a “saucer.” (Homer & Sylla, 2005, p. 64)
 
Along the “saucer” shape, Homer divided the best credit frontier into three parts—descending slope, flat bottom, and ascending slope. Two remarks by Homer explain his characterisation of the saucer shape:
  • “In all three cases interest rates seemed to decline from earliest history until a period of late commercial developments, and later to advance (in its level) during the final centuries of political breakdown” (Homer & Sylla, 2005, p. 64); and
  • “Rates declined during the early centuries of development and expansion, bottomed out in the centuries of commercial activity, and finally rose again with the disintegration of social and commercial life” (Homer & Sylla, 2005, p. 560).
In his hypothetical supra-secular stylization in the form of a “saucer,” the transformation of commerce is associated with the life stages of civilization:
  • advancement of commerce during the descending slope, where credit conditions advance;
  • the period of commercial prosperities at the flat bottom, where credit conditions at their culmination;
  • the period of social and commercial disintegration and political breakdown during the ascending slope, where credit conditions deteriorate & Sylla, 2005, pp. 64, 560).
These associations are reflected in the transformation of the best credit frontier. Homer’s formulation appeals to intuitive notions: each life stage of civilization and the commercial evolutions are both mutually reinforcing; and credit plays a significant role in interlinking them.


Best credit frontier: successive decline

Furthermore, these series of best credit frontier bottoms kept descending throughout the three civilizations. Then, at the culmination of credit conditions during the Roman period, the frontier reached 4%, a level comparable to the modern prime rate (Homer & Sylla, 2005, p. 62). Between credits in our time and the Roman time, there is no significant difference in terms of the level of interest rate for best credits. The successive decline in the best credit frontier across three civilizations indicates a continuity among them as a larger system (Homer & Sylla, 2005). For our discussion purposes, we may call it, with some risk of criticism, the greater Western ancient civilization.

Another salient feature worth mentioning is that the time horizon of the bottom becomes consistently shorter from the Babylonian to the Roman era. It is not clear what caused this supra-secular trend in the compression of the bottom.

Last, but not least, Homer addressed a significant caveat from Chart 1.1: after its culmination during the Roman time, somehow the greater Western ancient civilization lost its successor. Thereafter, the continuity of the greater Western ancient civilization vanished into the Dark Age along with a coherent extension of credit development (Homer & Sylla, 2005, p. 64).

Overall, economic data in the ancient world are patchy and could be misleading. However, certain milestone political events are recorded with reasonable precision. We might gain some insight by locating a bifurcation point between the Roman Republic and the Roman Empire along Homer’s Saucer.


Julius Caesar:
Political paradigm shift at the bottom of the Best Credit Frontier

The assassination of Julius Caesar, one of the proxies for the bifurcation point, was staged at the culmination of credit conditions (very bottom of the best credit frontier) in Roman civilization. Apart from his military achievements, Julius Caesar made a series of successful reforms in many spheres of Roman territory. His presence, once his dictatorship was proclaimed, came to pose a potential threat to some of the Roman oligarchs in the Senate. Although the oligarchs’ motive in assassinating Caesar was to preserve their power, the assassination ended up destroying it by triggering social unrest and another civil war. The oligarchs underestimated the consequence of their plot.

In an analogy to the general rule of the microeconomic oligopoly model, collusion is an essential cornerstone of oligarchy: once the balance of power is breached, it becomes difficult to restore the collusion bond among oligarchs. Failure in collusion can lead to a transient state of chaos in search for a new order.

In the Roman case, it took Augustus to physically purge the dissident oligarchs in order to establish a new order in the Roman world: the result was the birth of the Roman Empire, the imperial dictatorship regime. In this analogy to the general micro-economic principle, the dissolution of the Roman republic system—the failure of collusion in the general ephemeral oligopoly equilibrium—transformed its political machine into an imperial dictatorship, a monopoly system.

Fewer than five centuries after the Romans overthrew their monarch in 509 BC, the political techtonic shift from republic to imperial regime took place in the middle of the very bottom of its Homer’s Saucer. It was the precursor for the forthcoming supra-secular decline of the western Roman world, which unfolded during its subsequent ascending slope in Homer’s Saucer.

For readers’ reference, the notion presented here of evolution in western civilizations—from monarchy to republic to tyranny—accords with the stylized metamorphosis implied by Oswald Spengler, a German philosopher and historian (1880-1936) as well as the political cycle conceived by the Greek philosopher, Socrates in Plato's "the Republic."

[Post-Dark-Age Western World and Credit Frontier]​
Chart 1.2 roughly captures the trajectory of the half-century best credit frontier throughout the post–Dark Age Western world since 1200. This is a modified version of another Homer’s chart[5]. The best credit frontier in this chart is comprised of various constituents across the time horizon. Those different states appearing along the horizon are the constellation of major core power states across different periods throughout the post-Dark Age Western civilization. In comparison with the Greek and Roman civilizations, the post-Dark-Age western civilization experiences chronic shifts in its centre from one geographical location to another in a supra-secular time scale. To see the post-Dark-Age western civilization through a comparable scale with its ancient peers, this chart chains states with the lowest best credit frontier across the horizon. (For each historical monarch and republic in the graph, the name of its modern sovereign descendant is substituted.)
Looking at the trajectory of Chart 1.2 in centennial instead of half-century units, the best credit frontier of the post–Dark Age Western civilization, emerging at 8% in the 13th century, declines gradually with continuity; despite a minor violation in the 20th century, it maintains its momentum toward the downside by renewing its record below 2% in the 21st century, the lowest level since Babylonian times.

In the Homer’s Saucer analogy, Chart 1.2 corresponds with the descending slope of the “saucer” in the post–Dark Age Western civilization and possibly together with its bottom floor. The current position of Homer’s Saucer, below 2%, does not seem to offer much room for long-term interest rates to descend. With short-term interest rates at near-zero across major contemporary economies—or even at negative levels in some cases—we might be already sitting at the bottom or even close to the reversal point of the current best credit frontier.

Homer’s Saucer is mainly relevant in a supra-secular context: it provides us a “mega scope.” Any insight derived from the mega scope would not be relevant to our lifetime experience, except for a single notion: In our lifetime context, the only relevant notion is that we are living in an ephemeral period of highly integrated international commerce at the culmination of more than 800 years’ formation of the post–Dark Age Western civilization.

Messages from Ancient World to Our Future
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Although this supra-secular analogy may be beyond the scope of our much shorter lifetime context, it might well intellectually inspire us to contemplate some inquiries, such as:
  • whether we can see early glimpses of a supra-secular political breakdown in today’s political system;
  • whether we see any parallels with the Roman example—any analogy in the collapse of its republic before its imperial regime emerged;
  • whether there exists any emerging power that qualifies as a convincing successor to assume the next central power, or hegemon, to extend the life of the supra-secular evolution of the current civilization, which so far we owe significantly to the Western world; and
  • whether we can avoid another Dark Age, or whether a new Dark Age is inevitable.

If Homer were alive today, he would surely be pondering these questions. (Homer & Sylla, 2005)

In brief, Homer raised a notion that the state of money might have something to do with the evolution of western civilization. Roughly speaking, in a “mega scope,” Roman civilization started with monarchy, then made a dramatic transition into its republic, an oligarchy, ultimately degenerating into dictatorship. Then, the Dark Age. How did the Romans themselves assess their situation? Miriam Griffin (1988) provides us with insight into the Roman view on the collapse of the republic:

“why did leading members of the Roman governing class, who themselves had most to gain from the existence of the Republic, destroy it, thereby committing political suicide?

The Roman (…) thought of the issue in terms of moral degeneration. They believed that, whereas their ancestors had aspired to glory through service to the state, their contemporaries had come to put their own ambitions above the public welfare. The catalyst in the decline of traditional morality they felt to be the increase in Rome’s power and wealth. The enormous opportunities for ruthless self-aggrandizement by individuals threatened the state in two directions. …” (Griffin, 1988, p. 109)


Caesar, Crassus, and Trump: auspice of secular political disintegration

The post–Dark Age Western world started with monarchies; as time went on, it gave rise to some prominent magnificent republics, such as Venezia; and finally, since the turn of the 20th century, it has gradually made a transition to democracy.
Now faced with our modern reality, potentially positioning at or the near bottom of the best credit frontier, do we see any analogy to the Roman transition from oligarchy to dictatorship?
  • Is the self-interest pursued by the oligarch-like special interest group—for example, through “regulatory capture”[6]—not only sacrificing so much of the state interest, but also risking the power of the modern core power state, like the Romans at the end of their republic?
  • Is there any Julius Caesar of our time? Maybe not yet; maybe never.
With history as a guide, the evolution of the post–Dark Age Western civilization might resemble that of Roman civilization in some aspects. In this historical analogy, a compelling notion would be that the modern world might be positioned just before the forthcoming dictatorship regime. Although the future does not exist in the past, and we reserve the potential to change the future, it is a compelling analogy.

For your reference, here is a link to an impressive analogy drawn by an American intellectual of our time, John David Ebert (2016): http://cultural-discourse.com/on-the-ominous-significance-of-donald-trump/. In this article, Ebert makes a remarkable analogy between Donald Trump and Crassus of the Roman period.
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Last, but not least, it is worthwhile revisiting the remark of Dr. Henry Kissinger, the grand master of macro-management in international politics: "The future is so different from the past. (…) In the end, we can only learn from history. It’s the only laboratory we have, unfortunately. History only tells you the results of analogous situations. But each generation has to figure out for itself what is analogous. That is not automatically clear.” (Kissinger, 1994)

This section briefly visited Homer’s analogy of supra-secular rhythm in ancient interest rates. In the following sections, we narrow our scope to a secular scale to come one step closer to our lifetime experiences by examining the historical rhythm of long-term interest rates since the 19th century.
Notes
1. Sidney Homer (1902–1983) was a prominent Wall Street bond investment specialist whose career lasted from 1923 to 1971—through the Great Depression, with an interruption at WWII. Homer was one of the pioneers of applying the modern quantitative approach to bond investment management practices. In 1961, he joined Solomon Brothers, where he founded and headed its bond market research department (UPI, 1983). In 1997, after his death, he was inducted into the Hall of Fame of the Fixed Income Analyst Society, Inc. (FIAS, 1997).
2. Since they did not have any risk-free assets at that time, prime loans would be an appropriate description.
3. Due to lack of data, the Babylonian period is not supported by centennial data. The Greek and Roman periods are supported by centennial data.
4. Ordinary refers to an absence of a special relationship between borrower and lender. An example of a special relationship would be a father lending money to his daughter for no interest rate and with no predetermined repayment schedule.
5. The original chart, Chart 78 on p. 560 of A History of Interest Rates, employs a decennial average for UK and US yields data, and also includes other countries’ floor yields for the modern time. Instead of replicating Homer’s work, Chart 1.2 employs annual average yields for UK and the US for the modern time, and excludes other countries’ data.
6. In the modern context, where political decisions are expressed by elected legislators, a limited number of oligarch-like special commercial and political interest groups can still capture legislators’ political decision-making processes in crafting regulations to promote their interests at the expense of the public interest. This “principal-agent problem” notion in modern politics, expressed by George Stigler, is known as “regulatory capture.”
Reference

​Copyright © 2016 by Michio Suginoo. All rights reserved.
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