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. InThe 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 DepressionIntroduces 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 aheadOffers 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.
Richard Duncan is the author of two earlier books on the global economic crisis.The Dollar Crisis: Causes, Consequences, Cures explained why a worldwide economic calamity was inevitable given the flaws in the post-Bretton Woods international monetary system. It was an international bestseller.The Corruption of Capitalism described the long series of US policy mistakes responsible for the crisis. It also outlined the policies necessary to permanently resolve it.
Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington, D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in Thailand during the Asia Crisis. He is now chief economist at Blackhorse Asset Management in Singapore.
Richard studied economics and literature at Vanderbilt University and international finance at Babson College, and, between the two, spent a year travelling around the world as a backpacker.
Preface xi
Chapter 1 How Credit Slipped Its Leash 1
Opening Pandoras Box 1
Constraints on the Fed and on Paper Money Creation 3
Fractional Reserve Banking Run Amok 5
Fractional Reserve Banking 5
Commercial Banks 7
The Broader Credit Market: Too Many Lenders, Not Enough Reserves 10
Credit without Reserves 12
The Flow of Funds 13
The Rest of the World 15
Notes 15
Chapter 2 The Global Money Glut 17
The Financial Account 18
How It Works 20
What Percentage of Total Foreign Exchange Reserves Are Dollars? 23
What to Do with So Many Dollars? 24
What about the Remaining $2.8 Trillion? 26
Debunking the Global Savings Glut Theory 28
Will China Dump Its Dollars? 31
Notes 32
Chapter 3 Creditopia 33
Who Borrowed the Money? 33
Impact on the Economy 38
Net Worth 39
Profits 41
Tax Revenue 41
Different, Not Just More 41
Impact on Capital 45
Conclusion 49
Note 49
Chapter 4 The Quantity Theory of Credit 51
The Quantity Theory of Money 52
The Rise and Fall of Monetarism 55
The Quantity Theory of Credit 57
Credit and Inflation 59
Conclusion 60
Notes 61
Chapter 5 The Policy Response: Perpetuating the Boom 63
The Credit Cycle 64
How Have They Done so Far? 65
Monetary Omnipotence and the Limits Thereof 66
The Balance Sheet of the Federal Reserve 67
Quantitative Easing: Round One 69
What Did QE1 Accomplish? 71
Quantitative Easing: Round Two 72
Monetizing the Debt 73
The Role of the Trade Deficit 75
Diminishing Returns 76
The Other Money Makers 78
Notes 83
Chapter 6 Where Are We Now? 85
How Bad so Far? 85
Credit Growth Drove Economic Growth 86
So, Where Does that Leave Us? 88
Why Cant TCMD Grow? 89
The Banking Industry: Why Still Too Big to Fail? 96
Global Imbalances: Still Unresolved 101
Vision and Leadership Are Still Lacking 104
Notes 105
Chapter 7 How It Plays Out 107
The Business Cycle 107
Debt: Public and Private 109
2011: The Starting Point 111
2012: Expect QE3 112
Impact on Asset Prices 114
20132014: Three Scenarios 114
Impact on Asset Prices 118
Conclusion 119
Notes 120
Chapter 8 Disaster Scenarios 121
The Last Great Depression 121
And This Time? 126
Banking Crisis 126
Protectionism 127
Geopolitical Consequences 128
Conclusion 132
Note 132
Chapter 9 The Policy Options 133
Capitalism and the Laissez-Faire Method 134
The State of Government Finances 140
The Governments Options 142
American Solar 143
Conclusion 146
Notes 147
Chapter 10 Fire and Ice, Inflation and Deflation 149
Fire 150
Ice 151
Fishers Theory of Debt-Deflation 152
Winners and Losers 155
Ice Storm 157
Fire Storm 157
Wealth Preservation through Diversification 158
Other Observations Concerning Asset Prices in the
Age of Paper Money 160
Protectionism and Inflation 165
Consequences of Regulating Derivatives 166
Conclusion 166
Notes 167
Conclusion 169
About the Author 171
Index 173
