The New Depression : The Breakdown of the Paper Money Economy Hardback
Why the global recession is in danger of becoming another Great Depression, and how we can stop it When the United States stopped backing dollars with gold in 1968, the nature of money changed.
All previous constraints on money and credit creation were removed and a new economic paradigm took shape.
Economic growth ceased to be driven by capital accumulation and investment as it had been since before the Industrial Revolution.
Instead, credit creation and consumption began to drive the economic dynamic.
In The New Depression: The Breakdown of the Paper Money Economy, Richard Duncan introduces an analytical framework, The Quantity Theory of Credit, that explains all aspects of the calamity now unfolding: its causes, the rationale for the government's policy response to the crisis, what is likely to happen next, and how those developments will affect asset prices and investment portfolios.
In his previous book, The Dollar Crisis (2003), Duncan explained why a severe global economic crisis was inevitable given the flaws in the post-Bretton Woods international monetary system, and now he's back to explain what's next. The economic system that emerged following the abandonment of sound money requires credit growth to survive.
Yet the private sector can bear no additional debt and the government's creditworthiness is deteriorating rapidly.
Should total credit begin to contract significantly, this New Depression will become a New Great Depression, with disastrous economic and geopolitical consequences.
That outcome is not inevitable, and this book describes what must be done to prevent it. * Presents a fascinating look inside the financial crisis and how the New Depression is poised to become a New Great Depression * Introduces a new theoretical construct, The Quantity Theory of Credit, that is the key to understanding not only the developments that led to the crisis, but also to understanding how events will play out in the years ahead * Offers unique insights from the man who predicted the global economic breakdown Alarming but essential reading, The New Depression explains why the global economy is teetering on the brink of falling into a deep and protracted depression, and how we can restore stability.
- Format: Hardback
- Pages: 192 pages, illustrations
- Publisher: John Wiley & Sons Inc
- Publication Date: 15/05/2012
- Category: Economic forecasting
- ISBN: 9781118157794
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Review by Miro
This impressive book coins the term “Quantity Theory of Credit” which places the growth (or decline) in credit squarely at the centre of world economic affairs.What the author, Richard Duncan, does, is to show what happens in a genuine capitalist free market system of world trade (with asset backed currencies and traditional reserve banking) and compare it with the present ersatz system in which currencies lack asset backing and bank liquidity reserves are minimal.He shows the consensus Monetarist economic equation: MV=PT = GDP (Amount of money x How fast it circulates = Price level x Volume of goods in circulation = Annual level of economic activity). Where an increase in money (M) can lead to an increase in the price level (P) or it can lead to an increase in the amount of goods bought and sold (T). The important point being that too much M will send up P = inflation = higher interest rates, so M can only be increased within certain limits.Duncan's equation is, CV=PT = GDP (Amount of credit x How fast it circulates = Price level x Volume of goods in circulation = Annual level of economic activity).So why is this Quantity Theory of Credit equation superior?Because he convincingly shows that Credit (C) and Money (M) are nowadays virtually the same thing and C can be expanded indefinitely since the price level (P) is locked down by a massive fall in production costs through global outsourcing.He gives the example of Michigan auto workers who recently earned $ 200 a day while Chinese and Indians can now do the same job for $ 5 a day, and, although he doesn't mention it, service jobs are now going through the same process (e.g. a study undertaken in 2006 by a Princeton economist and former Vice-Chairman of the Federal Reserve, Alan Blinder, which concluded that approximately 42 million US jobs were potentially off-shoreable, with his focus not on manufacturing jobs but on the high-tech service occupations that were supposed to compensate for the loss of manufacturing jobs).Basically the QTC (Quantity Theory of Credit) shows that since the 1968 abandonment of gold backed dollars, credit/money could be expanded by big multiples (actually 50x from 1964 to 2007) to generate record levels of economic activity.Isn't this good? Well, yes and no.Since we are looking at an integrated global economic system then maybe the results have to be evaluated globally. The Chinese force the undervaluation of the Yuan (overvaluation of the $) by purchasing $ trade surpluses with newly printed Yuan and sending the $ straight back to the U.S.A. usually in the form of bond purchases. The dollar stays strong and the Chinese can develop their productive skills and industries on the back of U.S. demand so the Chinese gain in employment/ development and wealth.The U.S.A. contracts giant debts (mostly for unproductive consumer and government spending) while the outsourcer corporations book record profits and the borrowed money itself feeds into speculation.However, the author shows that even the best parties eventually come to an end which seems to be where we are now., and in Chapter 10 he interestingly looks at different resolutions to excessive national indebtedness.In terms of the QTC equation, credit volume (C) is hitting its limits with minimal interest rates, and QE now funding budget deficits and compensating for consumer deleveraging. Should the economic activity still contract then the US government could 1) accept it with the risk of forced leverage induced liquidation - i.e. an economic crash or 2) go into hyper-C mode and give the public a large tax cut or just packets of newly printed money 3) support the present broken system while it gradually fails.To take a guess, and treating economic relations in a more holistic way to admit political and sociological influences:Starting with the events of 9/11 and their economic and political fallout, they certainly worsened the credit position of the US, with the most surprising and remarkable new development being the widely acknowledged collapse of the official 9/11 story itself (just Google “WTC7” and keep reading) with its possible consequences.Since many of the individuals who enabled the uncontrolled leverage/credit boom (allowing 30x leverage and breaking the Glass-Steagall Act) and who headed the banking sector/bailout and subsequently headed/head the FED and Treasury are Jewish and the principal new suspects of 9/11 are Israelis and American Zionists, then the hyperinflation option may be the chosen route to, 1) produce a chaotic distraction 2) give the troublesome 911 Architects & Engineers something else to worry about 3) further enable the "Homeland Security" paramilitary force 4) to position ahead of time by taking out fixed loans in dollars placed in foreign currencies and real assets.As the author says, “in past periods of very high or hyperinflation, debtors and sophisticated speculators have been the beneficiaries at the expense of those with savings”. At least this was the way it went in Weimar Germany in the early 1920's with many of the same actors.