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The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan
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.
The Economist review 2012 “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.
dragonnet review by Mark Baraniecki 2012 “… So why is this Quantity Theory of Credit equation superior? Because he convincingly shows that Credit (C) and Money (M) are nowadays virtually the same thing and C can be expanded indefinitely since the price level (P) is locked down by a massive fall in production costs through global outsourcing. …
In terms of the QTC equation, credit volume (C) is hitting its limits with minimal interest rates, and QE now funding budget deficits and compensating for consumer deleveraging. Should the economic activity still contract then the US government could 1) accept it with the risk of forced leverage induced liquidation – i.e. an economic crash or 2) go into hyper-C mode and give the public a large tax cut or just packets of newly printed money 3) support the present broken system while it gradually fails.
This reviewer would opt for 3) with a long term stagnation in growth and employment (particularly the quality kind).”
ftadviser.com 2013 Geoffrey Wood “This is good book and interested readers should not be put off by the asserted importance of the end of link with gold. That assertion is accepted as incorrect in the book’s first sentence. “Credit-induced boom and bust cycles are not new.” The author does go on to write: “What makes this so extraordinary is the magnitude of the credit expansion that fed it.” And that is certainly true.”