Why the global recession is in danger of becoming another Great Depression, and how we can stop it When the United States stopped backing dollars with gold in 1968, the nature of money changed. All previous constraints on money and credit creation were removed and a new economic paradigm took shape. Economic growth ceased to be driven by capital accumulation and investment as it had been since before the Industrial Revolution. Instead, credit creation and consumption began to drive the economic dynamic. In The New Depression: The Breakdown of the Paper Money Economy, Richard Duncan introduces an analytical framework, The Quantity Theory of Credit, that explains all aspects of the calamity now unfolding: its causes, the rationale for the government's policy response to the crisis, what is likely to happen next, and how those developments will affect asset prices and investment portfolios. In his previous book, The Dollar Crisis (2003), Duncan explained why a severe global economic crisis was inevitable given the flaws in the post-Bretton Woods international monetary system, and now he's back to explain what's next. The economic system that emerged following the abandonment of sound money requires credit growth to survive. Yet the private sector can bear no additional debt and the government's creditworthiness is deteriorating rapidly. Should total credit begin to contract significantly, this New Depression will become a New Great Depression, with disastrous economic and geopolitical consequences. That outcome is not inevitable, and this book describes what must be done to prevent it. * Presents a fascinating look inside the financial crisis and how the New Depression is poised to become a New Great Depression* Introduces a new theoretical construct, The Quantity Theory of Credit, that is the key to understanding not only the developments that led to the crisis, but also to understanding how events will play out in the years ahead* Offers unique insights from the man who predicted the global economic breakdown Alarming but essential reading, The New Depression explains why the global economy is teetering on the brink of falling into a deep and protracted depression, and how we can restore stability.
Preface ix CHAPTER 1 How Credit Slipped Its Leash 1 Opening Pandora's Box 1 Constraints on the Fed and on Paper Money Creation 3 Fractional Reserve Banking Run Amok 5 Fractional Reserve Banking 5 Commercial Banks 7 The Broader Credit Market: Too Many Lenders, Not Enough Reserves 10 Credit without Reserves 12 The Flow of Funds 13 The Rest of the World 15 Notes 15 CHAPTER 2 The Global Money Glut 17 The Financial Account 18 How It Works 20 What Percentage of Total Foreign Exchange Reserves Are Dollars? 23 What to Do with So Many Dollars? 24 What about the Remaining $2.8 Trillion? 26 Debunking the Global Savings Glut Theory 28 Will China Dump Its Dollars? 31 Notes 32 CHAPTER 3 Creditopia 33 Who Borrowed the Money? 33 Impact on the Economy 38 Net Worth 39 Profits 41 Tax Revenue 41 Different, Not Just More 41 Impact on Capital 45 Conclusion 49 Note 49 CHAPTER 4 The Quantity Theory of Credit 51 The Quantity Theory of Money 52 The Rise and Fall of Monetarism 55 The Quantity Theory of Credit 57 Credit and Inflation 59 Conclusion 60 Notes 61 CHAPTER 5 The Policy Response: Perpetuating the Boom 63 The Credit Cycle 64 How Have They Done so Far? 65 Monetary Omnipotence and the Limits Thereof 66 The Balance Sheet of the Federal Reserve 67 Quantitative Easing: Round One 69 What Did QE1 Accomplish? 71 Quantitative Easing: Round Two 72 Monetizing the Debt 73 The Role of the Trade Deficit 75 Diminishing Returns 76 The Other Money Makers 78 Notes 83 CHAPTER 6 Where Are We Now? 85 How Bad so Far? 85 Credit Growth Drove Economic Growth 86 So, Where Does that Leave Us? 88 Why Can't TCMD Grow? 89 The Banking Industry: Why Still Too Big to Fail? 96 Global Imbalances: Still Unresolved 101 Vision and Leadership Are Still Lacking 104 Notes 105 CHAPTER 7 How It Plays Out 107 The Business Cycle 107 Debt: Public and Private 109 2011: The Starting Point 111 2012: Expect QE3 112 Impact on Asset Prices 114 2013-2014: Three Scenarios 114 Impact on Asset Prices 118 Conclusion 119 Notes 120 CHAPTER 8 Disaster Scenarios 121 The Last Great Depression 121 And This Time? 126 Banking Crisis 126 Protectionism 127 Geopolitical Consequences 128 Conclusion 132 Note 132 CHAPTER 9 The Policy Options 133 Capitalism and the Laissez-Faire Method 134 The State of Government Finances 140 The Government's Options 142 American Solar 143 Conclusion 146 Notes 147 CHAPTER 10 Fire and Ice, Inflation and Deflation 149 Fire 150 Ice 151 Fisher's Theory of Debt-Deflation 152 Winners and Losers 155 Ice Storm 157 Fire Storm 157 Wealth Preservation through Diversification 158 Other Observations Concerning Asset Prices in the Age of Paper Money 160 Protectionism and Inflation 165 Consequences of Regulating Derivatives 166 Conclusion 166 Notes 167 Conclusion 169 About the Author 171 Index 173
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