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The New Depression Reviewed In THE ECONOMIST

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This week my book, 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
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.


  1. Richard, I’ve read your books overs the last 10 years – after which I find it much easier to interpret the day to day details on economics that appear in the news and all thats related with the economic crisis. I studied some degree economics in the past but even then it was difficult to put it all in perspective. Both your books and George Soros’ help me to make some sort of sense of the big picture.

    Not everyone has the time to devote to understanding economic issues, especially when they have a 9-to-5, a house, a family, debts, friends and washing up to see to. A viewer friendly, layman entertaining explanation of your ideas on TED would be so very accessible to many many people (and spread more easily). I hope you give this idea some thought as I don’t see a lot of political will coming round to your ideas which I whole-heartily agree with and feel that we as a society desperately need to come to terms with and adjust our economic strategies if we are to come out of the current problems in a constructive manner.


  2. I find that reading your books is like a daily running commentary on what is actually happening in the world economy. Its like watching a slow motion replay. Of course there are many slightly different intrepretations,as above in the economist , but the overall framework stays intact. I have made decisions on investment having read your intial book in 2006 , and still feel that I am heading in the right direction. I begining to realise that maintaining the Capital you got is important , as everything else is sliding downwards. It will be surprising how near the top this realisation will result in,in five years time.

  3. I’m finishing up The New Depression for the first time and just like The Corruption of Capitalism I’ve extremely satisfied with the purchase of the book. Richard’s in depth analysis and explanations are very beneficial in helping one understand how we got to where we are, and where we’re going depending on fiscal and monetary policy. I will read Richard’s new book a second time just like I read his last book twice and still refer back to it at present time.

    I recently listened to Richard’s interview with Peter Schiff and while I’m a fan of Schiff and his books it seemed like Schiff could not understand Richard’s point that if credit is allowed to contract it will likely be a rapid and devastating contraction that could damage the global economy for a very long time. Even as a conservative thinker, I agree with Richard that the government must run very large budget defecits in order to delay deflation and must invest the money into sectors that will promote jobs and growth not just for the next few years, but for the next several decades.

    1. And then the whole thing comes crashing down, taking modern society with it,….an interesting variation on Spengler, but with the same ultimate fate.

  4. One other comment I have is the idea that returning to a gold standard would lead to massive deflation like was seen in the Great Depression. As Jim Rickards explains, it was the gold price that was wrong, not gold. If we were to return to a gold standard the price of gold would have to exceed the amount of total credit so that total credit would have to “catch up” with gold. This would actually be inflationary and the price of gold could be adjusted upwards when needed in order to allow credit to continue to expand if gold production does not expand at the same rate.

  5. The New Depression describes more investment by the government sector..I have just finished a canal cruise in Burgundy..I marveled at the engineering and investment in canals across France and the UK put down hundreds of years ago.Still earning today.then by luck visited Majorca and discovered superb new infrastructure..so first hand I experienced the old and new..I look forward to analysis on the the following .1.impact of 9 billion people and a debate on should there be a reduction by all countries in their population numbers.2 The compounding wealth of the present new communication technology..I believe we are in a global revolution and finding it difficult to understand..it is more than creditism ,a shrinking globe ,,the clash of ignorance,the exit of religion to be replaced by???? ,no secrets so governments are like a rabbit in a spotlight…five regions .Europe,Africa,Asia,North America,South America..all connected and wanting more..it has to be bigger than solar investment..is it education..is it virtual universities,is it an apt for everybody..as we repeal ignorance we have to fund aspiration and that may answer the mystery of the hidden (lost) trillions..my vegetable garden is to be doubled in size,and after fifty years I return to building a hen house to house my new poultry flock..protein will be a tradable item..

  6. Historically fiat money systems have always failed. Why should this time be any different just because the entire world is involved in its perpetuation. I just finished reading your book The New Depression. Before that I read Paper Money Collapse by Detlev Schlichter. Both books set very convincing arguments, you in favor of continuing with fiat currencies world wide because the current system is so ingrained that any attempt to alter it would lead to world wide depression ending in possible war, and Schlichter saying that no matter what is done the current system of elastic fiat money will eventually end disastrously and any attempt to save it prolongs the inevitable. This leaves me wondering if it might be possible over a period of perhaps 10 to 20 years that a slow return to commodity backed inelastic currency might be the only end result. I have never had to live under a gold redeemable money system but just the fact that imbalances and monetary dislocations are corrected automatically and human intervention to alter any outcome impossible under such a system, would be vastly preferable to a system that is so easily manipulated and gamed to the advantage of the banks and, because of that, leads to corruption and collusion between the banks, regulators and our government, would be doomed to end in eventual disaster. I believe it is naive to think otherwise.

  7. Richard, I just saw your interview on RT’s Capital Account show. You make a lot of sense. I especially like your prescription for addressing the fiscal situation in the USA. You say that continued Gov’t deficit spending is required to supply demand to the economy as the private sector is deleveraging. You go on to say that there is a smart way to do this. Invest in America’s competitive future by investing the Gov’t deficit spending in new clean energy technologies. Put people back to work and build a better future. Makes a lot of sense! There is just one point that I would like you to address, please. You recognize that Japan has successfully carried a 2:1 debt to GDP ratio for better than 20 yrs, while maintaining a full employment economy and quality of life outcomes far exceeding those in the USA. But then you go on to say that eventually this must end in tears. Why? As long as the country maintains a productive GDP the Gov’t debt is nothing more than gearing and as such can be rolled over indefinitely. I think all the focus on credit and money mechanics can lead us to ask the wrong questions. If instead we focused the discussion on full employment, quality education, eliminating poverty, improving health outcomes, enabling a productive work force and building competitive advantage in new environmental friendly technologies, then solutions for dealing with the money economy and wealth distribution would be fall into place.

  8. Richard… I too caught the interview with Lauren and also reviewed your interview with Beck… ditto what Krause said. but have one question regarding the Japanese model of Kicking Death Down the Road: Actual 3 points to one conclusion: 1) Japan’s ability to maintain their phony lifestyle was built on the backs of their population’s incredible savings culture. That has slowly been devastated by the govn’ment’s policies – that source of funding is not avail and they turn to ?? to buy their debt?. 3) The demographics of population have changed with their boomers in retirement and looking to government for social security – sales of bonds to finance these costs to ?? 4) The slowdown in global economy has brought an end to the trade imbalances for their incredible cash machine. Questions (finally): don’t you see the same pattern for US economy? Japan will implode first (Bass was right!!) but that is our fate… and, with these weights how do you see government spending buying us out of that picture… we sell our new solar and nanotech to whom???

  9. Richard Duncan is an incisive thinker. I am convinced that the right prescription (for the U.S. at least) is a continuation of federal budget deficits. On the other hand, the rhetoric surrounding the 2012 presidential election is all about the trillion-dollar-year-to-year-deficits, and how to reduce them. I take comfort in the fact that there has been next-to-no correlation between electioneering rhetoric and actions by the president (whoever he is) post election. My guess is that whomever is elected, the large deficits will continue, and that will be a good thing–for a while.

    The difference will show up in how the money is spent. During his term, Obama has favored union workers and pie-in-the-sky start-ups. In other words, “Obama money” has evaporated. What will Romney do different if elected? I have no clue.

  10. Isn’t interest paid on debt?….and isn’t the interest on multi-trillion debt rather significant. Where does this $$$ come from….maybe the taxpayers, or does the gov print this $$$ also?

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