This is the first book I have read by Duncan and I find it very thought provoking. Note that Duncan approaches the subject of the contemporary economy from an American perspective, and I, also being an American, will discuss it from a US-centric perspective.
I believe his most central concept is that we currently operate under an economic system that is based on an ever-increasing expansion of credit, which he calls, for lack of a better word, "Creditism". He seems to substantially share the view of the Austrian school of economics that this state of affairs, which was triggered by the abandonment of the gold standard, and aggravated by a virtual elimination of any capital reserve requirements for the issuance of debt, is a tragic one.
A number of other books I have read recently on the economic crisis have also emphasized the key role that debt expansion has played in the economy being where it is today. He is perhaps unique, however, in asserting that debt is in fact now the cornerstone of our economic system.
He asserts that economic growth or decline is caused by the expansion or contraction of credit, and provides what appears to be some pretty good evidence of how ups and downs in the economy were caused by fluctuations in total credit. ("TCMD" Total Credit Market Debt) And that overall there has been an exponential increase in TCMD over the last 60 years or so, which was the cause of the prosperity that has prevailed during that period.
That assertion makes a good deal of sense to me, although another explanation of the prosperity of the late 20th century that some have made is that it was driven by the availability of abundant cheap energy. That seems to me to also be a pretty credible hypothesis. I am inclined to believe that both probably played a major role.
With regard to the post-2008 crash in the US, he shows how the short-term ups and downs in the economy since then were caused by the specific actions taken by the Federal Reserve.
Another key point he makes is that Ben Bernanke is incorrect in claiming that China's heavy purchase of US government debt is funded with savings. He contends that it is in fact funded by Yuan freshly-printed by the Chinese central bank.
I was interested in his opinion on China. He seems to share the mainstream view that China has no choice but to continue buying up government debt from the west else the Chinese economy would collapse. He asserts that China cannot switch from an export economy to a domestic-based one because Chinese cannot afford the goods produced by Chinese factories, only westerners can. For those familiar with the views of Peter Schiff, you will recognize that not everyone agrees with that assessment. Schiff believes the west is in fact an economic albatross around China's neck, and it would prosper more if it would simply redirect its focus to its domestic economy and transition out of exporting.
Another point Duncan makes in the book, is that we have undergone a lengthy period of massive debt expansion in which price inflation has not been commensurate with that debt expansion, and the reason is that highly inflationary economic policies have been accompanied by a huge drop in labor costs associated with the replacement of domestic labor with low-wage foreign labor. This is a point contemporary Austrians such as Peter Schiff have also made. Schiff points out that the most prominent mandate central banks tend to be tasked with is price stability, while he points out that deflation is actually a characteristic of a healthy market economy- it means that higher productivity is lowering prices and making products more affordable. In Duncan's final chapter on inflation and deflation he cites past periods of them and it appears the latter 19th century was deflationary along the lines of what the Austrians would characterize as "healthy deflation".
Despite the numerous instances in which Duncan asserts that the Austrians have correctly diagnosed the economic realities of our times, his prescription for the future bears no resemblance to theirs. He opposes austerity measures for the US on the basis that they will trigger a depression. He believes the "cold turkey" approach of the Libertarians (disciples of the Austrian school) of switching to a system of free-market economics would cause a catastrophic Depression. Duncan feels that if the originators of Austrian economics were around today they would see things his way, although I sincerely doubt it. Certainly the contemporary followers of that philosophy do not.
It seems to me Duncan raises a very legitimate question regarding the Libertarian solution. Would the transition really simply be a short bout of economic pain followed by a glorious return to an economy based on free market capitalism that would provide long-term prosperity? Or could the transition last decades or longer, and involve a complete collapse of the economy, leading to tyranny, violence, mass starvation? Even if that is the path to the Promised Land, if is impossible to travel that path without dying on the way, then it is of dubious merit. Or as Duncan puts it, it took hundreds of years to get from the fall of the Roman Empire to the Renaissance.
Duncan's prescription for the future is basically massive government stimulus to keep the credit expansion continuing. He seems to feel that this could lead to a stronger economy if that stimulus were spent very wisely.
However, here it appears to me that he is on extremely shaky ground.
This has probably been said by others before, but it seems worth stating: It is far easier to refute than to assert.
Duncan wants a "moon shot" type program to transition the US to solar energy. Well, I am not an economist but I am a retired engineer and although I was not in the energy field I do have done a fair amount of reading on the subject. And, one thing I try to impress on people is that while I believe solar energy is in all probability the primary energy solution for mankind in the long term, it will be many decades before solar will have the ability to provide a substantial portion of our energy. And throwing massive amounts of money at it will not necessarily speed it up much. There are major breakthroughs still needed. There have been incredible advances in photovoltaic cells that have improved their efficiency while drastically lowering their cost. But, since solar is an intermittent source, the solar cell is only one piece of the puzzle. I believe Duncan is totally incorrect that the price of gasoline could be brought way down. His $1 a gallon is in my view delusional. As to the electric car, which he also advocates, I believe it has great potential, but battery technology is still a long way from being adequate to produce an electric car with comparable functionality to an internal combustion vehicle. Furthermore, there are all sorts of essential uses of fossil fuels for which we are a lot further still from having any substitute. Aviation fuel, plastics, agricultural fertilizers are a few examples.
It seems that often these days people, particularly those on the political left, seem to feel that scientific advances can be created by government decree. And such a view is not totally unfounded, as evidenced by the example of the program to put a man on the moon. But to overly generalize that concept is in my view foolhardy. Suppose the government decreed that scientists develop a mechanism to "beam a person up" to an inhabitable planet elsewhere in the galaxy within ten years, and that they will be given a virtually unlimited budget to assure their success. How many people would bet that such a program would succeed? Only a handful of disturbed individuals would. What this shows is that while a large-scale project driven by the government can be successful, it must not only be well-run but be directed at a realistically achievable objective.
The only solid point I would grant him is that Creditism does serve as an ENABLER for the sort of massive government stimulus he proposes. Because interest rates are forced to artificially low levels by the economic policy-makers, and it appears that state of affairs can be continued for the forseeable future, despite the unprecedented spiral of debt, the US government still has the capacity to engage in massive additional borrowing.
I believe there may also be some parallel in Duncan's economic prescription to that proposed by the adherents of "Modern Monetary Theory". I wanted to get familiar with that philosophy and bought Wray's book "Understanding Modern Money", which seemed to be the most respected book on the subject. However, I stopped when I got to what seemed to be his first major proposal, that government employment of the unemployed be used as a mechanism to regulate inflation. It seemed to me that idea has obvious fatal flaws. However, my curiosity is picking up again and I look forward to continuing with that book now that I have read Duncan's.
I believe the energy situation is almost opposite of how Duncan views it. Fossil fuels will be becoming scarce in coming decades. Renewables will be incapable to replace them to any meaningful degree for decades. Nevertheless, we need to AGGRESSIVELY fund energy research to expedite the transition from fossil fuels as quickly as possible. However, for several decades, renewable energy will NOT be an economic boon, it will be a money sink, as we spend billions toward government-funded research that will have no economic payoff for decades. In fact, if Duncan were right that throwing hundreds of billions of dollars at deployment of solar energy would have an economic payoff in the near term, the private sector could do it.
Read more ›
