Q & A with Richard Duncan, author of The New Depression
This is a very ambitious book. Its theme is that a new credit-driven economic system has replaced Capitalism in recent decades and is now at risk of breaking down into a New Great Depression. Is that correct?
|Richard Duncan |
Yes. In 1968, when the United States stopped backing dollars with gold, the nature of money changed. The distinction between money and credit became blurred and the constraints on credit creation were eliminated. Over the next 40 years, total credit in the US expanded 50 times from $1 trillion to $50 trillion. That explosion of credit financed unprecedented global prosperity. There is now a grave danger that this new credit-fuelled economic paradigm will break down into depression because the private sector cannot bear any additional debt. But why do you call this a new economic paradigm? Isn't that just the way Capitalism works?
No. Capitalism was an economic system in which the private sector created growth through a process of investment, profit and capital accumulation (hence Capitalism), in an ongoing cycle. The government played very little role. Our economic system has not worked like that for decades. The US government now spends $25 out of every $100 spent in the economy (25% of GDP) and the central bank "creates" the money and manipulates it value. That is not Capitalism. Moreover, the economic dynamic is no longer driven by investment and capital accumulation. Our system is driven by credit creation and consumption. Creditism is a more appropriate name for it. Creditism has created extraordinarily rapid growth for decades, but now seems to have hit its limit to create more growth because the credit that has already been extended can no longer be repaid. Therefore, no further credit expansion appears possible. Why do you believe credit growth is so vital for economic growth?
Since 1952, there have only been nine years when total credit (adjusted for inflation) grew by less than 2% in the United States. Every time there was a recession; and the recession did not end until there was another large surge of credit expansion. In this book you introduce the Quantity Theory of Credit. What is that?
The Quantity Theory of Credit is an adaptation of the centuries-old Quantity Theory of Money--adapted to make it pertinent to this new age of fiat money. It is a simple, but powerful, analytical framework that explains all aspects of this crisis: its causes, the government's policy response to it thus far, what's likely to happen next and the impact that future developments will have on asset prices. On the topic of asset prices, will this book help individuals make better investment decisions?
Yes. Chapter Seven lays out scenarios of how events are likely to unfold between now and 2015; and describes how asset prices would be impacted under each scenario. Chapter Ten discusses why asset prices now move in unexpected ways compared with the way they would be expected to behave within a Capitalist system. It also discusses the prospects and consequences of inflation and deflation, as well as the advantages offered through diversification. Finally, do you believe the global economy will collapse into a New Great Depression and what will happen if it does?
The flaws of our new economic model, Creditism, are all completely obvious now. However, there are extraordinary opportunities that exist within this system that we as a society have not yet grasped. They are described in Chapter Nine. My goal in writing this book was to point out what those opportunities are so that we can avoid the terrible economic calamity that may be inevitable otherwise. Should we fail to understand and take advantage of the opportunities our new economic system presents, the economic and geopolitical consequences are likely to be dire. Chapter Eight, Disaster Scenarios, spells out just how bad things could become if we don't come to grips with the nature of our new economic system and implement a bold and imaginative strategy that ends this crisis.
The book is well worth reading for its analysis. (The Economist, 7th July 2012)
'Contains a fascinating and powerful diagnosis of how we got to our current pass...he makes an astonishing proposal at the end that made my jaw drop.' (Wealthbriefing.com, 14th August 2012)