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The New Depression: The Breakdown of the Paper Money Economy


Praise for The New Depression

"The economic philosophies of John Maynard Keynes and Ludwig von Mises are obsolete. The world needs a new economist with a new economic philosophy. Richard Duncan is that new worldly economist. For years, I have recommended everyone read his books, The Dollar Crisis and The Corruption of Capitalism. Richard's latest book, The New Depression, is more than recommended reading. It is essential reading."
--Robert Kiyosaki, founder of the Rich Dad Company and Cashflow Technologies, Inc.

"Richard Duncan makes a strong case for paying greater attention to the role of credit creation in understanding macroeconomic performances. He makes an even stronger case for aggressive government borrowing and spending in those areas that are critical for the society's future when the private sector is unable to perform that role. This view is particularly relevant at present when private sectors in so many countries are faced with seriously impaired balance sheets following their involvement in housing bubbles. With the private sector no longer maximizing profits but minimizing debt instead, a failure to implement Richard Duncan's fiscal policy recommendations may well result in an unnecessary implosion of the world economy."
--Richard Koo, Chief Economist, Nomura Research Institute, Tokyo

"Richard Duncan's The New Depression is firstly a masterful analysis of how the credit bubble expanded and why conventional economics failed, leaving policymakers asleep at the switch. Credit, as Duncan explains, was left totally unmoored by the ending of the gold reserve requirement and by changes that allowed banks to create credit almost at will. His Quantity Theory of Credit is compelling, and once accepted, his accounting of how the depression plays out is frightening and all too believable. This book will open your eyes and leave you clutching your wallet."
--James Saft, columnist, Reuters, with works appearing in the International Herald Tribune

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.
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