Guest 745- Registered: 27 Mar 2012
- Posts: 3,370
#1
The New Depression: The Breakdown Of The Paper Money Economy, was reviewed in the Buttonwood column of The Economist. Please find the review copied below.
The Economist
Buttonwood
Duncan dough notes
A thought-provoking analysis of the debt crisis
Jul 7th 2012 | from the print edition
FEW can claim to have predicted the scale of the financial meltdown of the past few years, but Richard Duncan, an economist with a career in finance, made a good attempt. His book "The Dollar Crisis", published in 2002, argued that the post-Bretton Woods financial system had led to huge global imbalances and a credit bubble that would end in collapse.
Mr Duncan erred in thinking that the crisis would be prompted by a dollar implosion. But his analysis, again highlighted in his latest book, "The New Depression"*, still seems acute. Ending the Bretton Woods system of fixed exchange rates, and the dollar's link to gold, enabled countries to finance persistent current-account deficits. This in turn sparked huge and occasionally destabilising flows of cross-border capital and a massive burst of credit creation. Total credit in the American economy passed $1 trillion in 1964; by 2007, it had exceeded $50 trillion.
This debt explosion showed up not in consumer prices but in asset prices, notably in property. The cycle was self-reinforcing: banks lent money to people to buy property, causing prices to rise, making banks more willing to lend, and so on.
To explain the process, Mr Duncan outlines his "quantity theory of credit"—adapting Irving Fisher's equation on the relationship between money supply and prices. Instead of MV=PT (the money supply times the velocity of circulation equals the price level times the number of transactions), he suggests CV=PT. The C stands for the total credit in the economy, while V is the turnover of credit. More credit, extended more often, means higher asset prices.
This bit of the book needs more detail, and some data on how his theory is supposed to have worked. The Fisher equation is a truism: the amount of money spent equals the value of goods bought. It is not intuitively obvious that the Duncan equation meets the same standard. Some debt is used to buy consumer goods, some to buy financial assets such as shares, some to buy real assets such as property. It is not clear how these should be aggregated, or indeed how to treat those assets and goods that are not bought with credit.
Still, Mr Duncan has surely grasped a wider truth. During the boom, policymakers ignored rising asset prices—and indeed welcomed them as evidence that all was well—and disregarded accompanying private-sector credit growth. But when asset prices collapsed, and the banks got into trouble, some of that private-sector debt ended up on the public balance-sheet, leading to the current phase of the crisis.
At this point, you might expect Mr Duncan to call for a return to the gold standard. Far from it. The debt deflation that would be necessary to return the credit supply to a level commensurate with the gold standard "would destroy the world as we know it", he writes.
Nor does Mr Duncan have much truck with the demands of the tea-party types. He thinks the American government should run big fiscal deficits for the foreseeable future to counteract the lack of private-sector demand for credit. Japan has been able to finance a much higher government debt (in relation to its GDP) without difficulty. But he thinks this spending should be used to improve the economy's long-run potential. He calls for a programme, costing perhaps $1 trillion over ten years, to invest in solar energy. This might cut the cost of energy by 90%, he claims, delivering a huge productivity gain.
Sadly for Mr Duncan, there is no real prospect of such a project receiving political approval in America. And the massive fiscal stimulus which he thinks "the most probable scenario" for 2013 is unlikely to occur even if there is a Democratic sweep in November's elections.
That may leave the economy reliant on the Federal Reserve, and more quantitative easing (QE), a policy which Mr Duncan believes is having diminishing returns. A third round of QE will have a short-term wealth impact (via the stockmarket) but will quickly lead to higher inflation. Much more apocalyptic scenarios may unfold.
If some of Mr Duncan's predictions look unlikely, the book is well worth reading for its analysis. Policymakers interfere heavily in the modern economy, not just via tax-and-spend policies but also through monetary policy, manipulating the level of interest rates to boost demand. This is not capitalism, he suggests, but "creditism". It is this system which has broken down, and unless you understand it, you will not be able to fix it.
* "The New Depression: The Breakdown of the Paper Money Economy", published by John Wiley.
howard mcsweeney1- Location: Dover
- Registered: 12 Mar 2008
- Posts: 62,352
#2
you really need to edit that keith, space it and put it into paragraphs so that it is digestible.
Guest 696- Registered: 31 Mar 2010
- Posts: 8,115
#3
Extremely interesting, Keith.
Is it so that you have written this book?
The topic is interesting, let's hope this thread brings up great discussion.
The property market is over-valued, and too many economists have been declaring that a fall in (over-valued) house prices in the UK is a bad sign, whereas I believe the cost of houses should fall by two thirds at least, just to get them in line with real-market values.
So there's the ball rolling.
Guest 714- Registered: 14 Apr 2011
- Posts: 2,594
#4
Keith speaks a lot of sense on here
Guest 745- Registered: 27 Mar 2012
- Posts: 3,370
#5
No sorry Alexander. That bit crept in.
It is nicked of the net, some thing we all do in some way.
Richard Duncan (Author)
howard mcsweeney1- Location: Dover
- Registered: 12 Mar 2008
- Posts: 62,352
#6
interesting article but i think there is nothing anyone can do about property prices, just a simple case of supply and demand.
sadly for the first time in my memory the majority of people starting out are in the position of not having the choice between buying or renting.
Guest 696- Registered: 31 Mar 2010
- Posts: 8,115
#7
Well keep up the discussion anyway, Keith, on this thread, the whole topic needs hammering out. QE and paper-money printing and all that, and debt-based economy...
I make sure my pantry has got at least £20 worth of goods stacked up in it, but would like to bring its value to at least double.
Guest 745- Registered: 27 Mar 2012
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#8
Supply of money to perches over valued assets, and encourage home owners to borrower agents that inflated asset.
howard mcsweeney1- Location: Dover
- Registered: 12 Mar 2008
- Posts: 62,352
#9
it will double in value with quantitive easing alex, the problem is that you will still have the same amount of food in there.
Guest 688- Registered: 16 Jul 2009
- Posts: 268
#10
Where do you think confidence fits into that scenario,Keith,both structural and consumer based.
Guest 725- Registered: 7 Oct 2011
- Posts: 1,418
#11
This stuff has occurred on a regular basis over the past few centuries. Just the natural business/human cycle. It will happen and it will be very ugly and will take decades to get back to any semblance of what we consider normality. The key is to prepare yourselves as best you can and not necessarily financially.
This fits well into the Kondratieff long wave cycle.
Guest 745- Registered: 27 Mar 2012
- Posts: 3,370
#12
The over printing of money to service government spending will one day collapse the economy.
Confidence structural and consumer based, john
This Cannot come form a quick fix's of the printing press.
The money stashed in offshore banks, needs to come back and work in the real economy, industry investment creating proper jobs,So money can do its job circulate.
Guest 705- Registered: 23 Sep 2010
- Posts: 661
#13
So the business /human cycle is what we know as boom and bust. Build up an imaginary confidence and people borrow(increasinly to excess). This is so called 'Growth'. Surely an expanding economy should be incidental not paramount-eliminate the governmental obsession with growth and short termism - and we have 'Steady'. Philip do I detect a little bit of financial doomsday prepping-are you saying that the 3 main parties are going to take us back to a bucolic Britain?
Moreover if you are saying that we are on a merry-go-round of long and short term cycles and this is all human nature-what's the point? If all this is inevitable it might as well be every man and his wallet for himself...grab what you can while you can...and to hell with the consequences.
Never give up...
Guest 725- Registered: 7 Oct 2011
- Posts: 1,418
#14
No not at all Richard. It's really just part of the natural cycle. Growth and retraction - that's it really. There's little we can do to change this phenomenon just as there is nothing we can do about, say, the climate. Man's arrogance always thinks that he can out-do the natural order (Gordon Brown eat your heart out along with Al Gore and all those warmist types) but there is little we can do but to accept it and make plans to do one's best to get through it as best one can.
I didn't make the fundamental laws of climate or economic up but some really think that they can change this. They can't!
There's no financial doomsday thinking in what I'm saying it's just that so many people are in denial and find themselves at a loss because the inevitable crunch hits them like a locomotive.
Witness youtube footage of what were considered to be contrarians before the 2008 crash on the financial channels vilified by the mainstream thinkers as doomsday casandras.
But those who knew what was about to happen managed to see through the recieved wisdom and make money or at least lose the least.
One other thing it is inevitable but that does not mean that it's every man for himself. If anything one of the strategies one should adopt is a more "spiritual", though not necessarily religious, way of thinking and develop deeper links with friends, family and neighbours.
The worst thing you can do is to wring your hands in despair. It's an opportunity to actually become a better, stronger person.
But I'm getting all Waltons now and that is no good.
Guest 710- Registered: 28 Feb 2011
- Posts: 6,950
#15
Ignorance is bliss, bliss is happiness, I am happy...to draw your attention to the possible connectivity in the foregoing.
Guest 696- Registered: 31 Mar 2010
- Posts: 8,115
#16
The very best investment in the economy is to have functional agriculture and industry, and a surplus rather than a deficit.
If all paper money and shares went bust overnight, people would realise then that what we need is really accommodation, food and essential manufacture.
The present system has made accommodation absurdly expensive, beyond economic reasoning, has largely dismantled the industry and is busily using farmland to build new housing estates, not because we need the houses, but simply as a means to keep "the short term growth" up, and attract money to bankrupt councils.
Guest 655- Registered: 13 Mar 2008
- Posts: 10,247
#17
Interesting thread but I will resist participating as I will not have the opportunity to engage much in the next few days....
Lots of good points, lots of total misunderstandings of what has been said, failure by some to appreciate the working of banks and lots of fantasy.....
Guest 696- Registered: 31 Mar 2010
- Posts: 8,115
#18
Yes Barry, you do really believe that I believe one word of your economic fantasies?
howard mcsweeney1- Location: Dover
- Registered: 12 Mar 2008
- Posts: 62,352
#19
i find this totally absorbing, the main theme seems to be governments all following each other in refusing to believe that their spending was unsustainable.
the problem is where do we go from here.
Guest 714- Registered: 14 Apr 2011
- Posts: 2,594
#20
We go to bankruptcy howard, we are borrowing more and more, eventually there is nobody left to borrow from and the creditors want their money back.
At least 90% of the population are oblivious to the situation
