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The New Depression: The Breakdown of the Paper Money Economy

ISBN: 978-1-118-15779-4
179 pages
April 2012
The New Depression: The Breakdown of the Paper Money Economy (1118157796) cover image
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.

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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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Richard Duncan is the author of two earlier books on the global economic crisis. The Dollar Crisis: Causes, Consequences, Cures explained why a worldwide economic calamity was inevitable given the flaws in the post-Bretton Woods international monetary system. It was an international bestseller. The Corruption of Capitalism described the long series of US policy mistakes responsible for the crisis. It also outlined the policies necessary to permanently resolve it.
Since beginning his career as an equities analyst in Hong Kong in 1986, Richard has served as global head of investment strategy at ABN AMRO Asset Management in London, worked as a financial sector specialist for the World Bank in Washington, D.C., and headed equity research departments for James Capel Securities and Salomon Brothers in Bangkok. He also worked as a consultant for the IMF in Thailand during the Asia Crisis. He is now chief economist at Blackhorse Asset Management in Singapore.
Richard studied economics and literature at Vanderbilt University and international finance at Babson College, and, between the two, spent a year travelling around the world as a backpacker.
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Link to CNBC "Squawk Box" interview on August 20. 2012

http://video.msnbc.msn.com/cnbc/48722546/#48722546

 

August 10, 2012
The New Depression: The Breakdown of the Paper Money Economy

Bestselling author Richard Duncan is back with a new book warning that the world is heading into a depression, and that drastic and farsighted action must be taken immediately to avoid an economic collapse.

The New Depression: The Breakdown of the Paper Money Economy (Wiley; April 2012; Hardcover and ebook; $29.95; ISBN: 978-1-1181-5779-4) traces the origins of this crisis back to the abandonment of the gold standard in 1968.  Over the following four decades, total debt in the United States expanded from one trillion dollars to 50 trillion dollars. That explosion of paper money-denominated debt transformed the world by generating unprecedented wealth, profits, jobs and tax revenues. In 2008, however, the debt could not be repaid and the global economy was plunged into crisis. 

Duncan argues the current economic system is not Capitalism, but Creditism; and that Creditism requires credit growth to survive. Yet the overloaded private sector can bear no additional debt and the government’s creditworthiness is deteriorating rapidly. Should total credit begin to contract significantly, the economy will enter a New Depression with disastrous economic and geopolitical consequences.

“The first step toward finding a lasting solution to this crisis is to form a realistic understanding of the nature of this economic system – not as it used to be and not as any particular group thinks it should be, but as it really is,” writes Duncan. “Only then will it be possible to devise a strategy that could correct its faults.”

Duncan’s solution is bold and contrarian.  He argues this crisis has created an unprecedented opportunity for governments to borrow at historically low interest rates and invest in transformative industries such as renewable energy, nanotechnology, genetic engineering and biotechnology. Large scale, government-financed investment programs in those industries would generate enormous investment returns and set off a new technological, productivity-enhancing revolution that would end the crisis and improve the wellbeing of everyone on this planet.

Duncan also 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. 

Other topics in The New Depression include:

  • The causes of the global imbalances that have destabilized the world
  • How the economic crisis will evolve over 2013 and 2014
  • The geopolitical consequences of a new great depression
  • Wealth preservation through a diversified portfolio

Using historical data and practical investment knowledge, Duncan offers solutions on how to avoid the worst of The New Depression

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