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When Will This New Depression End?

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The following comments, written specifically for the Spanish language edition of The New Depression, were written in early March 2013, sixteen months after the original manuscript was completed at the end of October 2011.

In The New Depression, I wrote that the fate of the global economy depended on whether credit would once again begin to expand quickly enough to drive economic growth. It hasn’t. During the fourth quarter of 2012, the combined GDP of the 34 member states of the Organization of Economic Co-operation and Development (OECD) shrank by 0.6%. This has only occurred in 12 other quarters during the last 50 years.

In the United States, total credit has expanded by only 3.2% (or by $1.7 trillion) since the first quarter of 2009 (the pre-contraction peak). During the 14 quarters between then and now, private sector debt in the US contracted by $2.7 trillion (or by 5.8%); but the debt of the federal government expanded by $4.5 trillion (or by 65%). That expansion of government debt prevented the global economy from collapsing into a new great depression; but the government did not spend in a way that would lay the foundations for sustainable growth. Rather than investing, it continued to spend on consumption and war.

Worse still, the United States has now begun to implement fiscal austerity through higher taxes and decreased government spending, an approach guaranteed to further weaken the economy and exacerbate unemployment. The US budget deficits were $1.3 trillion and $1.1 trillion in 2011 and 2012, respectively (considerably more than the Congressional Budget Office was projecting when this book first went to print). Now, however, the CBO forecasts a reduction in the deficit to $845 billion in 2013 and to $616 billion in 2014. Tragically, the US is not alone in doing the wrong thing at the wrong time. The European Union and the United Kingdom are also inflicting unnecessary damage on their economies through ill-timed government austerity.

Monetary policy alone is keeping the global economy afloat. The European Central Bank (ECB) adopted aggressive measures – and just in time – in December 2011. The European banking system – and, therefore the global banking system – was then verging on systemic collapse. Rumors of the imminent failure of large European banks were rife. Equity investors were near panic. The S&P index was rapidly moving down toward 1100. ECB President, Jean-Claude Trichet, had vowed that his institution would not resort to large-scale money creation as the Fed had done. Luckily, his successor, Mario Draghi, taking office on November 1, 2011, abandoned that position and, in an extraordinary reversal, made roughly Euro 1 trillion of new liquidity available as loans to European banks at very low interest rates for three years. That program, known as Long-Term Refinancing Operation (LTRO), occurred in two stages, in December 2011 and in February 2012. As a direct result, panic was averted, financial sector stability was restored and stock prices shot higher all around the world, which, in turn, created a wealth effect that supported consumption and global economic output.

When that stock market rally began to grow tired in the middle of the year, the US Federal Reserve let it be known that it might soon launch yet another round of Quantitative Easing. Stock prices took the hint and moved higher still. In September, the Fed launched QE 3 with the creation of $40 billion of new money each month. In December, the Fed doubled the dosage to $85 billion a month – an amount which, if annualized, amounts to more than $1 trillion a year.

The results have been just as the Fed had hoped. The S&P index is now flirting with new all time highs and is more than 33% above where it stood just before LTRO was launched. Even US property prices now appear to have bottomed and to have begun to move higher. The net effect is that household net worth in the US has risen to $65 trillion, up $14 trillion from its crisis low point of $51 trillion and only $2 trillion below the all time high it reached in 2007. This rebound in net worth has helped underpin the economy by encouraging consumption. Despite all this, there is still very little core inflation in the United States. The Consumer Price Index ex-food and energy rose only 1.9% in December 2012.

The duration of the earlier rounds of Quantitative Easing was delineated from the outset. This time, however, the Fed announced that this round will continue until it works, by which they mean until the unemployment rate in the US drops substantially (from 7.9% currently). In consequence, some commentators have begun to refer to this round as “QE infinity”. With austerity beginning to bite, unemployment in the US is more likely to rise than to fall during 2013. Therefore, there is no obvious end in sight for Quantitative Easing. Furthermore, the Bank of England and, most recently, the Bank of Japan are also aggressively expanding their balance sheets by creating fiat money.

So, while fiscal austerity threatens to sink the global economy, monetary policy is doing all that it can to keep it above the waves. This aggressive money creation should continue to support asset prices. The danger is that it may also drive food prices much higher, too. If drought conditions in the United States persist, reduced crop production combined with robust money creation could create a very dire environment for the world’s poor. If so, hunger-inspired uprisings could once again undermine geopolitical stability in the developing world.

Meanwhile, in the economically advanced nations, a political backlash against fiscal austerity seems to already be underway. In December 2012, Japanese voters elected Shinzo Abe as Prime Minister on the back of his promise to stimulate Japan’s moribund economy with aggressive fiscal and monetary measures – despite the fact that the ratio of Japanese government debt to GDP is already 240%. Then, in late February 2013, Italian voters rejected a continuation of austerity in their country by strongly supporting the anti-establishment, anti-austerity 5-Star Movement in parliamentary elections. These election results in Japan and Italy suggest that a Democracy will not long tolerate austerity. The Conservative Party in the UK and the Republican Party in the United States should take note. They may be next to suffer from the public’s refusal to tolerate austerity during a depression.

The outlook for 2013 and 2014 is deeply disturbing. Unless the United States enters a new war, credit in that country will not expand enough to drive economic growth – there or elsewhere around the world. Super-aggressive monetary policy may prevent the bottom from dropping out from under the global economy, but it threatens to produce another spike in food prices which would inflict suffering on the two billion people on earth who live on less than $2 a day. Meanwhile, the political atmosphere in the developed world could easily become much nastier. Political gridlock in Washington seems set to make a bad economic environment there much worse. And, in Europe, with unemployment at 11.9% and rising (and with youth unemployment at 24%), the situation is potentially explosive.

Let us hope that reason prevails and that the public rejection of austerity that has begun in Japan and Italy quickly takes hold throughout the rest of the OECD countries. This is the time for governments to invest in the future. The governments of the United States, the UK, and Germany can all borrow money for ten years at interest rates below 2%. Japan’s government can borrow at less than 70 basis points. This is the time for them to do so aggressively. This is the time for governments to borrow and invest in transformative 21st century technologies on a scale sufficiently large to restructure their economies and put their people back to work.

Only then will this new depression end.


  1. How has core inflation in the U.S. remained so low? 1.9%???

    With $85 Billion new dollars per month being created each month, this seems like a mathematical impossibility. That’s not including QE 1 and 2…

    1. There is no inflation at the CPI level because of Globalization, which is very Deflationary. Globalization has caused a 90% drop in the marginal cost of labor. Before factory workers earned $200 a day in the US and Europe. Now they earn $5 to $10 in Asia. That’s why.


  2. richard,
    i enjoy following your work and find myself mostly agreeing with your logic.

    the core premise of the argument you make as to how the western industrialized world wound up in the current predicament appears to be the abandonment of the gold standard, and what was believed to be a limited view of money. when the west shifted from the objectively defined gold standard to the subjective new world of abstract reality our fate was essentially sealed. this new abstract fiat system led to massive credit expansion. i understand and agree with the bulk of this premise.

    where i am having difficulty is you seem to think that we are in need of a kind of “hair of the dog” remedy – i’m from new orleans and it is local custom to drink more the next morning to cure hangovers – my problem with your rationale is you mention in this piece that hopefully the western world will come to its senses and act more like japan by continuing to expand credit. for your logic to be sound one with have to conclude that if you lived in new orleans you would be standing on bourbon street screaming at revelers to keep drinking. i think drinking is our problem and the pain associated with the hangover may be the only thing that makes us stop making poor lifestyle choices. i hope you can respond. thanks for your work. i have learned a great deal from it. brad

    1. Hi Brad,

      Thanks for your comment.

      I believe that our only chance of getting out of this crisis alive is for us to invest our way out. And I believe that only the government can invest on the scale required to succeed.

      Credit growth has been driving economic growth since World War II. If credit now begins to contract, our civilisation won’t have a hangover. It will die. The “pain” which everyone one seems to think is necessary to atone for our economic sins would not just last for a couple of years. It would last for decades. Think of the 1930s and the 1940s.

      We don’t have to go through that again – even though the causes of this depression and the Great Depression were the same. We can invest our way out.

      For my full argument, please read my latest book, The New Depression: The Breakdown of the Paper Money Economy.


      1. it’s been my observation that when we use phrases like “get out of this alive” or “It will die” we incorporate emotion into the thought process. countless spiritual mystics believed that all fear is ultimately a fear of death. perhaps this explains why all matters of finance arouse our deepest fears and insecurities. i believe credit is going to contract because western consumer societies are realizing that at some point with enough credit the consumer becomes the consumed. the solution can’t possibly be to catalyze more consumption. although i agree that government needs to reprioritize how it spends precious capital. wars on both terror and drugs are incomprehensible to me. not too long ago we tracked down women and burned them at the stake believing they were witches. seems like such insane behavior today. perhaps we’ll come to see the war on terror in much the same way 100 years from today?
        this crisis to crisis lifestyle we’ve become accustomed to is the economy’s way of revealing it is ill. human beings are evolutionary creatures and it is only natural that the systems we create constantly evolve also. i don’t think we are dying…just an outdated way of engaging in mutual exchange is. six years ago i lost every material possession i owned to a flood. had someone warned me ahead of time that this event might transpire i would have been scared to death leading up to it…it turned out to be the best thing that ever happened to me. something tells me 2008 was going to be the west’s katrina. the abstract subjectivity of a fiat system allowed us to temporarily wave off the flood waters. it has been my experience that floods while devastating in appearance, have profound replenishing characteristics. we’ll see….ill be sure and read your book. if you have any interest in reading mine it can be found here: http://www.dearkatethebook.com
        thanks so much for your reply!

  3. Richard,ur insight into the world economy is always enriching and breathtaking…I read ur article regularly on the Richdad website and I want to say that ur insights hv transformed my view of the world and its economies…I am working assiduosly to escape the follies of central planners and their political friends.Once again I say thanks and I hope for more of ur articles.

  4. Richard- I’ve read most of your stuff and greatly appreciate your insights.

    I have three observations that I think may cause the economy and markets to be more buoyant than total credit as a percent of GDP might indicate and was hoping you would comment.

    Household Debt service
    Increasing Asset values
    QE and its effect on Debt to GDP

    1. Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP)

    This metric is on the low side of the past 30 years. That would seem to indicate the consumer can borrow again (demographics aside).

    2. Increasing Asset Values:
    If I own a stock and it’s worth $50, I could offer someone to provide a service or product worth $50 in exchange for this stock. If the stock doubles in value (even if just thru PE expansion) and is worth $100, I can double my purchase. No more credit is created but my purchasing power has doubled. So the $14 Trillion increase in household net worth that you indicate in your piece, seems under appreciated and very important.

    3. QE seems to make public debt somewhat of a non-factor. If the Fed prints close to $3Trillion to buy Government debt and continually purchases new bonds with maturing proceeds, it seems they can do this for a long time without a burden on the population (assuming no large increase in inflation). It’s almost like the debt is not owed.

    It appears that we have exchanged lowering private credit (a good thing) for increasing public debt (which is QE-ed). If we can do this until private debt as a percent of GDP gets to a level that is more reasonable, this may be the best outcome.

    I am generally in your camp on the economic environment but have been somewhat confounded by the substantial rise in asset values. It appears the Fed, by lowering interest rates, has frontloaded all the return on assets. From here, if the assets don’t generate enough revenue to pay the debt service, the Fed has no room to lower debt service any further and then we will have our spiral down.

    Nonetheless, in the near term (5 years?), with the consumer able to expand their balance sheet, household net worth providing money to spend and the Government able to borrow without cost, it seems we could see a more buoyant economic environment.

    So my question is, do the 3 metrics above cause you to think we could be more buoyant than total credit as a percent of GDP indicates?

    1. Thanks for the question, Jim. Yes, my view is that the current “Government Life Support” in the form of trillion dollar budget deficits and trillions of dollars of paper money creation can (an probably will) continue to keep us from collapsing into a new Great Depression for the next 5 to 10 years. But, these policies can’t go on forever. If QE stops, the stock market will crash, interest rates will rise and property prices will fall. The economy will begin to spiral downward. And, eventually, the US government will be just as bankrupt as Greece if it continues having trillion dollar budget deficits. But, for now, those policies are 1) supporting Personal Disposable Income, 2) Increasing Asset Prices, and 3) QE is funding the government debt.

      My point is that we need to take advantage of the window of opportunities that now exists to find a permanent solution, rather than just blowing another bubble. The government can now borrow trillions of dollars at 2%. It should do so and invest aggressively in transformative technologies. If is did, it could induce a new technological revolution that would be so massively profitable that this crisis would quickly end and be forgotten. Richard

      1. The problem with your theory is that even after another 10 years of this policy we do not get growth then what happens? This is a possibility given that there has been no growth after 5 years and that too not for want of trying. Do you think we would have dug a bigger hole for ourselves by continuing our spending for 10 more years if no growth then also?

        This kind of open ended spending without concrete, measurable and quantifiable results cannot be the answer.

        Also this kind of “QE or End of civilization” is the kind of stuff that Hank Paulson used to had over tax-payers to the banksters.

        Last five years have only seen 2 things: 1) Stock Market making new highs 2)Banksters once again smiling all the way to the bank.

        If we can expect meaningful change only by a depression then so be it! But meaningful change is more important than keeping these zombies alive.

        1. I disagree. I think staying alive is the most important thing. Our civilisation might not survive a New Great Depression. The one that followed the Fall of Rome lasted 1,000 years. Please see my book The New Depress for my full views.

  5. Dear Mr. Duncan

    I always read your articles and essays very carefully, if I only can get them. You’re one of the brighter minds between economists today, I think
    Aren’t You seeing our chances for escaping the worst a little too small?
    Economical history of the tells us, big superpowers, the engines of the global growth, almost everytime went out of the troubles beacuase of new technological revolution, pulling out of the swamp the rest of the World
    It’s the basic idea of your latest “New Depression…” book too, let the governements of US, EU and Japan to borrow more money and spend it for creating a new one, I know it.

    But couldn’t we go out of the swamp without active promoting of the new tech revolution by govts?
    Couldn’t the new massive spending by corporations and their decision of leveraging help us even without govt spending on tech revolution?
    Corporations now seat on the big mountain of cash. If they decide to spend it (seeing new tech revolution looming from the dark) they could ignite new credit supercycle without govt’s help, as it was a few times before:

    Isn’t the shale gas technology a part of this spontaneus originating new tech revolution?
    I don’t think crisis stop next year, it colud happen next ten years or so, but aren’t we see a small seeds of future new tech revolution now?

    1. Hi Piotr, Yes, it is possible that a technology revolution could save us. The Shale Oil Revolution and 3D Printing, for example, could be game changers. We’ll have to wait and see. I’m not sure they will prevent Creditism from collapsing, however. I think we need to see medium income rise in order to have sustainable growth. Because of Globalization, medium income is falling in the developed world. I’ll keep an eye on credit growth and medium income. I think they will tell us where things are going. Richard

    1. Wilson, Thanks for your question. I have been surprised that Gold is not moving higher. I think the reason is that the US Dollar has been quite strong against other paper currencies. As the Fed keeps printing $85 billion a month, I believe Gold will go higher. There is a new important factor at play, however. The United States is just beginning to benefit from the “Shale Oil Revolution”. I understand the US could be energy independent by 2020. If that happens, the US trade deficit will become much smaller. If that happens, the Dollar could strengthen and that could be bad for the price of Gold. This is something I intend to watch carefully. Right now, QE is putting upward pressure on Gold and the stronger Dollar is putting downward pressure on Gold. We’ll have to watch how this plays out. If I sell my Gold, I’ll write a blog about it. I have no plans to do that as of now. However, I think rental property may be a more interesting investment opportunity at this stage, because it offers cash flow as well as the possibility of capital gains. Richard

  6. I borrowed The New Depression: The Breakdown of the Paper Money Economy from the library and couldn’t read it because of the tiny print. Is there any possibility your publisher will bring out a large type (or larger type) edition?

    1. Hi John,
      Unfortunately, there are no plans for a new version of the book with larger type. However, I have just published a video course on the causes of the crisis. Please see my latest blog post. Richard

  7. Hi, Richard
    I fully understand your point, that the governments around the world cannot bring their budgets under control, because this would mean a GDP contraction.
    You nailed it, it is “creditism”, the new religion.
    Let look at it from this perspective – GDP = Investments(Savings) + Consumption+Government Spending+Net Exports.
    In the world of creditism there are no Savings and Net Exports are deteriorating.
    So either the people should consume more or the government should spend more or both to boost GDP.
    At the same time GDP nominal growth rate should be higher that the interest rate on the government debt, in order to be able to reduce debt to gdp ratio.
    The real problem is that there is no easy way to reduce debt to gdp, the risk is mounting…

    1. In your book The Dollar Crisis you said that interest rates would probably stay low because of the excess amount of paper dollars and the low demand for loans. In another chapter you said that if the trade deficit was not reduced we would probably be looking at inflation as other countries offload extra dollars buying U.S. assets. It does not look like we are seeing much for inflation even though the trade deficit is still high. What are your thoughts on inflation or deflation now? Thanks.

      1. Hi Pat, Where did I say there could be inflation? There was a chapter in The Dollar Crisis (Chapter 8) called Deflation. There are three kinds of inflation. 1) Core CPI inflation. We don’t have much of that because globalization is pushing down wage rates. 2) Asset price inflation (for example in stocks and property). We have a lot of that now. That is the Fed’s goal in printing money. That is how the Fed is trying to revive the economy, by creating a Wealth Effect. 3) Commodity price inflation including food prices. We had a lot of this during QE 2, but not yet with QE 3. In part, this lack of commodity price inflation so far (since QE 3 started) must be due to the very weak global economy. China is buying less, for example. Also, food prices were pushed up by the US drought last year. We’ll have to see if the drought will continue this year or not. If it does, food prices are likely to go higher and cause all kinds of political problems around the world. Hopefully, that won’t happen. Richard

        1. Hi Richard, I have read all of your books and find your arguments the best explanation of the financial crisis that I’ve come across. The issue of globalisation and its effect on the global marginal wage rate seem key to me. In the West I don’t think is any where near enough understanding of where the process of globalisation is likely to take the western worker and western living standards. The whole process is one of labour price arbitrage and therefor a redistribution of real wages globally. Since there are not enough resources in the world for all of the West’s and the emerging powers’ people to live at today’s Western living standards (just think about oil here – per capita consumption in the West is apx 20 barrels per capita per year compared to 1-3 barrels in China/India – there is not nearly enough for all of these people to be consuming 20 (and the same analysis can be done for a host of commodities)); therefor, if there is to be a closing of the global wage arbitrage gap, the math says Western consumption per capita must fall (of course this assumes that technological/efficiency gains are not fast enough to counter this problem). Further, since the West makes up only about 12% of the world’s population, the decline in western per capita consumption will need to be very large in percentage terms. Do you agree with this view and that QE is not only aimed at asset price inflation but also to increase the competitiveness of western workers in this new globalised labour market? Is the Fed, ECB, BOE and BOJ desperately trying to push down real labour rates in their countries in recognition of the fact that we are now competing in a global marketplace where the emerging powers can offer hundreds of millions of workers at a fraction of current real western wage rates? It is this, for example, that explains the sky high youth unemployment in Europe with its minimum wage levels that are a multiple of what the market wage is in China?

          1. Hi Ray,

            I think the purpose of QE is to push up asset prices and create a Wealth Effect to push up Consumption and GDP growth. That seems to be the only way the government can think of to create purchasing power, since globalization is pushing wages down.

        1. I think that the Obama plan to reduce social security and up the age on medicare will cause deflation and send the economy over the cliff because of the number of broke baby boomers. Am I wrong?

  8. Sir, I found your latest book very enlightening and thought provoking. This AM, I discussed it with a fellow economic conservative. Re your policy advice of more Gov’t spending, on ‘investments that will provide a return above borrowing costs’, he asks:
    Why wouldn’t a stimulus in the form of lower personal tax rates be more effective than the added Gov’t debt-funded stimulus spending? Thanks

    1. Hi Tom,
      I would like to see debt-funded government investment in transformative new industries and technologies. If done on an aggressive enough scale (i.e. on a scale that the private sector cannot finance), it could generate such profits that the government could pay off the national debt…. and fund medicare FOREVER. For a more detailed answer, please read my new book, The New Depression. Richard

  9. Richard: I’ve been reading your “New Depression” book this past week and the other night I told my wife that this is the scariest book I have ever read. It wasn’t until I got to page 143 that I smiled and murmured that all might be okay. My wife and I were born at the beginning of the Great Depression and have lived through all of this transition to the economy we now have. I don’t know that there are many folks who share the dismay and frustration we feel; since retirement we have installed solar hot water and solar voltaic systems that have cut our overall home energy bills by 2/3rds. We know that this stuff works. Your conclusions regarding the country-wide effects of spending the money for such installations are absolutely on target. I have written letters to the President, our Senators and Representative expressing similar ideas and conclusions. In return we receive form letters. The country needs leadership and it is sadly lacking. Regards, Russ Day

  10. Richard,
    Thank you for all of your commentary and hard work in this very confusing time. I have read all your books and have recommended them to my friends and family. Im in my mid-30’s and very nervous about protecting what little wealth I have. In Chapter 7 of The New Depression you stated that when QE3 was announced, asset prices would rise and you specifically mentioned gold and silver would “spike higher.” We’re now in QE-ternity and gold and silver are down significantly which seems absolutely counter intuitive. Any comments you have on PM’s would be greatly appreciated.

    Thank you!

    1. David, Thanks for your question. I have been surprised that Gold is not moving higher. I think the reason is that the US Dollar has been quite strong against other paper currencies. As the Fed keeps printing $85 billion a month, I believe Gold will go higher. There is a new important factor at play, however. The United States is just beginning to benefit from the “Shale Oil Revolution”. I understand the US could be energy independent by 2020. If that happens, the US trade deficit will become much smaller. If that happens, the Dollar could strengthen and that could be bad for the price of Gold. This is something I intend to watch carefully. Right now, QE is putting upward pressure on Gold and the stronger Dollar is putting downward pressure on Gold. We’ll have to watch how this plays out. If I sell my Gold, I’ll write a blog about it. I have no plans to do that as of now. However, I think rental property may be a more interesting investment opportunity at this stage, because it offers cash flow as well as the possibility of capital gains. Richard

      1. Hi Richard,
        I think your analysis is correct. I read both your books and the essay above. It matches up with everything I learned since the inflationary 1970s. I am attempting to identify potential developments which could prolong the artificial “better times” that the Fed has been able to engineer. You mentioned the Shale revolution and the drought as having an unknown impact. What if everything goes in the right direction this year? Such as oil prices down to $80/barrel from expanding US production and corn prices to $4.75/bushel (from $7.25 now), as predicted by some, because the rains come and the drought disappears. Would those two developments be enough to keep consumers spending and the US economy growing (despite the fiscal contraction)? I’d be interested in your thoughts on this and also what other potential factors/developments might occur (if we are lucky) and be enough to keep the N.Am. economy and stock market on a positive track for a while longer.

        1. Hi Wayne,
          Thanks for your comment and question. Regardless of what happens with oil prices and the drought, I think the main driver of the economy and asset prices this year will continue to be QE 3. With the Fed creating $85 billion a month and buying bonds, that is pushing up asset prices (stocks and property) and that is creating a powerful Wealth Effect that is supporting consumption and economic growth (at least relative to what would have occurred otherwise). The MAJOR PROBLEM, of course, is that QE won’t go on forever. When it stops, there is likely to be a very big selloff and negative consequences on a big scale. That said, it does look like QE 3 will continue for the foreseeable future. When the Fed signals that it will stop or slowdown QE 3, investors had better be prepared for the selloff.


  11. You have argued for more borrowing to stimulate “investment”, but I am curious; if the Treasury, with the backing of Congress, just decided to distribute $50,000 (to pluck a number from out of thin air) to every American citizen, wouldn’t that achieve the same result? Why do you not advocate forcing money into the hands of every American? (Not that I’m advocating it, but my advocacy is for massive global default and monetary re-set.)

    1. I would much prefer to see an aggressive government investment program in new technologies and industries. Those investments would be extremely profitable and would generate dividends and jobs year after year into the future. A cash hand out would all be quickly spend on consumption goods, and therefore wasted. That’s more or less what the government is doing now (and likely to continue doing). I fear that a “global default and re-set” would destroy most of the wealth in the world and send us back into the Middle Ages.

      1. Of course, the fallacy in your argument lies in that you just assume that government will magically pick out profitable technologies and not waste any money on unprofitable ones, something that the private sector is incapable of even identifying. We need look no further than Solyndra to see that that is not true.

        As for your argument that a global default would “destroy most of the wealth of the world”, you assume that destroying debt is destroying wealth. In such case, you would then argue that no one should be allowed to declare bankruptcy, because destroying their debt “destroys wealth”. You fail to see that it also frees the debtor, destroying poverty in an equal amount. Our true wealth remains – the buildings that have been built using debt remain, the products made using debt still exist. Wealth is the real things that surround us, not the paper representations, otherwise we could just run the printing press to ‘create more wealth’.

        1. The government has had a lot of important successes in the past picking out profitable technologies: The Erie Canal, The Manhattan Project, The Interstate Highway System, Apollo, and the Internet. Solyndra is insignificant. Please see my book, The New Depression, for a more complete explanation.

          One person’s debt is another person’s asset. If the government had not intervened in 2008 and bailed out the banks and the economy, all the banks would have failed; and all the savings in the banks (the deposits) would have been destroyed. That would have resulted in a New Great Depression.

  12. Hello Richard,
    Perhaps its a metaphysical/philosophical question but isn’t it possible that we are all (humanity) just spectators powerlessly watching events unfold around us. When unusual events occur our monkey brains look for some patterns which preceded the event and then ascribes them as causes. Our brains are great at finding patterns where there aren’t any – just look take a look at Orion in the night sky and you’ll immediately understand that point. In reality we are never in a position to predict anything . Of course there are so many opinions and predictions out there that some peoples predictions coincidentally align with outcomes.

    Human beings prefer theories which are aligned with our sense of control and order. As an example many individuals are of the opinion that the “free market …” is a great economic model. The market is evolutionary, the strong survive, the weak perish. Stated in that way there is an implied sense of cause and effect. Of course that is not what might actually be happening in a free market. A free market might be chaotic in nature and we, looking for our patterns, see that some organisations thrive and others perish. We decide that the ones who have survived have some “property” which allowed them to do so. The strong survived and the weak perished we say. But of course this is really just ascribing properties after the event. The organisations by virtue of surviving we ascribe the property strong (until it is their turn to perish) and the non- survivors at the point of collapsing were of course weak. Here is my point – despite our subjective perceptions of whats actually going on one of our most beloved theories “the free market economic model” to me is one in which, by its very nature, is entirely unpredictable and chaotic. In that sense it is not a model at all. But we paper over this major flaw and focus on what we like about it – i.e. the free market doesn’t challenge us to predict outcomes. Yet we fail to grasp that by accepting it we are really accepting the random chaotic nature of the world around us.

    I read your book and it was a fantastic read. I haven’t enjoyed a book so much in ages. But I sense reading the article above that enough time has elapsed since you wrote the book that you are beginning to realize that you really have absolutely no idea whats going to happen. Being a human you will be able to explain in 10 years from now why things turned out so vastly different than you predicted. You will site seven or eight good reasons which aren’t obvious to you then but which will reveal themselves in due course as they randomly arise. (By now you must be aware of one or two of these factors)

    Put it another way… there are a trillion possible futures out there in ten years from now and the chances that your predictions align themselves with the future we get is …. a trillion to one. At least that’s what I predict! But i digress the world is a better place with your book in it. It was a genuine thrill to read it.


  13. It looks as if the Dow and S&P 500 are in a bubble. Margin debt in brokerage accounts is rising to all-time high levels, volume has declined during the entire four year rally, the overall sentiment is extremely bullish, and yields on junk bonds have hit all time lows. There are so many signs of a bubble and regardless of what the Fed and governments do this stock bubble will implode like the last two.

    It’s also worth mentioning that Gold, silver, oil, copper and the Euro all topped in 2011 and have been breaking down since. As these entered bear markets in 2011 the dollar began to strengthen and is getting stronger. Despite QE, it appears that deflation is still lurking and winning the battle.

  14. Hello Richard,

    I’m interested to know what effect you think the shale gas revolution will have on the balance between the trade and budget deficit. You mention in the New Depression that if the gap between them widens then the Fed will need to finance the difference with QE because the financial account surplus will be smaller than the budet deficit. Increased Tax revenues from the shale gas industry may be enough to offset this effect, but is it possible that increased energy independence might actually complicate and worsen the picture for the Fed and Treasury or is it always going to be a good thing?

    I wonder also what you think the impact will be on global asset prices of the BOJ’s latest move to monetize 1% of Japan’s GDP a month and again how it will affect the US trade/budget deficit issue above.

    I’ve really enjoyed your books,


    Arthur Kazantzis.

    1. Hi Arthur,

      Yes, that is a very interesting question. If the shale oil revolution plays out as expected by many, then the US could be energy independent by 2020. That would bring the US current account deficit almost back into balance; and that would reduce global liquidity and be a negative for asset prices. And, if the US current account moves back toward balance (instead of being in a large deficit), that could cause the dollar to strengthen.

      On the other hand, as you mentioned, the higher tax revenues from shale oil should reduce the government’s budget deficit. If the budget deficit shrinks, the government would borrow less. That would suck less liquidity out of the global economy, which would be positive for asset prices.

      We’ll have to watch how this plays out to see which effect will be greater (the reduction in the current account deficit or the reduction in the budget deficit). At this stage it is still not certain that the US will be able to produce as much oil as is currently being forecast by 2020. Some people are forecasting 12 million barrels a day, up from 7 something now. It may be possible. I just don’t know the oil market well enough to say.

      As for Japan, the BOJ’s massive money creation spree should inject significant liquidity into the global economy. It will also cause the Yen to depreciate more against the US dollar. That will cause the US trade deficit against Japan to worsen.

      Thanks for the questions.


  15. Richard,

    I read your book, most of your commentary, and follow this idea rather closely. I am also very familiar with Richard Dalio’s work on the concept of the “beautiful” deleveraging that must be managed subsequent to the bursting of a credit bubble. Richard illustrates that there are several historical periods where this has been “successfully” accomplished. I put these words in quotes because depending on the perspective these may neither be beautiful nor successful but from the perspective of the party accomplishing the deleveraging they have been. The story has been that Central banks create easy money, devalue their currency, and pay their debtors less in real terms. For instance, after the Great Depression TCMD to GDP rose to about 252% and was brought down to about 168% from 1933 to 1937 after the government devalued the dollar vs. gold. This “beautiful” deleveraging ended in 1937 after the Wagner act and a Fed rate hike. Similarly post WWII UK reduced their debt/GDP from about 395% to 146% over a 20 year period by devaluing the Pound and setting easy money policies. During these deleveraging periods the easy money helped risk assets substantially.

    We also take research from the Economic Cycle Research Institute (ECRI). ECRI told their members and the public that the US economy was headed for recession at the end of Q3 2011 and later revised that to say the recession would likely start by mid year 2012. They now believe a recession in the US did begin in mid year 2012. So, what I am trying to figure out is which force is likely to win this. On the one hand we have the QE in US, EU, and Japan. On the other hand we have recessionary economies in the developed world and slowing economies in the developing world. We also have stretched valuations, at least on a normalized earnings basis. In this context do you continue to believe ongoing QE will be supportive to risk asset prices?

    1. Hi Ken,

      Thanks for that thoughtful comment. The short answer is: Yes. I think QE will continue to be supportive of risk asset prices AS LONG AS IT CONTINUES. However, when QE stops (or even when the Fed begins to hint that it will stop), I think risk assets are likely to tumble.

  16. When has any government’s voluntary debasement of currency actually created value and ended in something good? I agree in your belief that government INVESTMENT rather than just spending and handing money out would lead to growth and recovery, but that hasn’t ever worked has it? It’s the PRIVATE sector that innovates, invests and creates new technology most efficiently and reliably. Debt on top of debt seems like the worst solution and will only lead to eventual default (via hyperinflation) and a permanent haircut for US treasury holders. At that point, we will lose our Reserve currency status which is being frivolously thrown away with our current policy.

    1. Government Investment resulted in The Erie Canal, The Manhattan Project, the interstate highway system, the Apollo Program, the internet and global military dominance for the United States.

      For the full argument on why I believe more government investment is necessary to get us out of this terrible mess, please read my book, The New Depression.

  17. Richard,

    I just reread The New Depression. I appreciate your clear, concise writing style. It would seem to me we are somewhere between scenario 2 and scenario 3 that you describe as possible ways the crisis will play out. The one oddity is the price of silver and gold have fallen. Any thoughts on why?


  18. Richard,

    The QE, at least in the US, has been almost entirely dollar for dollar captured as excess reserves on the balance sheet of the Federal Reserve. The Banking Act of 1933 prohibits banks from using required or excess reserves in speculative activities such as buying stocks. However, clearly the increase in QE and its decrease, have been closely correlated with movements in risk asset prices. This brings a couple of questions to mind. First, do you believe banks may be engaged in shadow banking activities to buy equities? If not, is the QE effect based only on the low cost of capital (equity risk premium) or solely a psychological phenomnenon, i.e. that because people believe it will work that it continues to work? I am interested in your opinion on this.

  19. Jim Bianco at Bianco Research believes QE is killing credit creation because it is starving hedge funders of quality collateral. This is demonstrated through the lackluster growth in shadow vs. traditional bank lending …

    1. Dear Richard,

      I’ve noticed that the latest estimates for the Budget and Trade deficits indicate that they may be roughly equal at around $5-600bn this year and next. If this turns out to be correct and the Fed continues with QE well beyond what is required to fund the budget deficit (as it apparently intends) then the possibility of further strong asset price rises and higher inflation looks quite high.

      I wonder what you think of this? Is it possible that we may see another asset price bubble form which the Fed will have to burst by raising interest rates leading to another 2008-9 situation?

      Also, I wonder, do you find a place for the use of technical analysis of charts in your view of the macro-economic picture? I ask because the relationship between the the ‘fundamentals’ and the crowd behaviour expressed in price charts seem to throw up intriguing questions about the direction of causality between the two.


      Arthur Kazantzis.

      1. Arthur,

        Yes, if the Fed keeps printing $85 billion a month (that’s $1,020 billion a year), that will be 57% more than what is needed to pay for (i.e. monetize) the entire US budget deficit, which is expected to be about $650 billion this year. So, the extra money will push up asset prices. It is already pushing up asset prices! As far as normal (CPI) inflation goes, I’m not so sure it will rise any time soon. There is so much excess capacity of everything globally.

        I’m not an expert on technical analysis, but I do believe it pays to keep an eye on the charts.

        Thanks for the questions.


  20. What an optimistic title. This won’t end. It can only get worse. A system based on infinite consumption of finite resources can only end in one place. “the great depression” will be like a quaint bedside story compared to what is coming. It’s happening already it’s just being hidden behind smoke and mirrors.

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