Richard Duncan's New Depression Claims the U.S. Employs Creditism Not Capitalism

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Richard Duncan first came to the public's attention with his 2003 international bestseller The Dollar Crisis , a book which basically saw him predict the global economic crisis that came soon afterwards. The New Depression is his third book, and he spoke to Benzinga to tell us about it.

First of all, could you provide a little background on yourself?
I have spent most of my career working in Asia. I worked out to Hong Kong in 1986, and started my career then. Since then, in backward order, I was the global head of investment strategy for ABN AMRO Asset Management based in London. Earlier on I was at the World Bank in Washington as a financial sector specialist for a couple of years. Before that, I was in Bangkok as the head of the research team for Salomon Brothers and James Capel Securities.

What led you to write this book?
This is my third book on the global economic crisis. The first one was called The Dollar Crisis , and it was published in 2003. The other books have followed on from that. The reason I wrote that is because I lived in Thailand during the Asia crisis. I was here from 1990 to '96. It hadn't quite started in '96. It was completely obvious that Thailand had been drawn into an enormous economic bubble. I was managing quite a big research department, so I could see how that worked. I initially didn't understand what had caused it, and I didn't understand why it didn't pop sooner. After it did pop, I had a chance to figure it out and I realized that it wasn't just Thailand, it was all the Asia crisis countries. Furthermore, I also realized that the same thing had happened in Japan for the same reasons, and more or less the same things were happening in the United States. It was only a matter of time before this crisis of global imbalances led to a worldwide economic disaster. That was the theme of The Dollar Crisis .

The second book came out in 2009 after the crisis had started. It was called The Corruption of Capitalism . It laid out a long series of policy mistakes made by the United States that led us to this disaster. This new book is very specifically focused on the role that credit has played in creating the global crisis.

You believe that the current economic system in place in the U.S. is not capitalism?
That's right. I think the biggest misperception to resolving this crisis is the misunderstanding that we have a capitalist economy. For example, the Financial Times ran a two-week-long series called "The Crisis in Capitalism". That's a waste of time. We don't have a crisis in capitalism. Capitalism died out a long time ago. We have a completely different kind of economic system now.

You call that creditism?
Capitalism was an economic system that was driven by the private sector. The government had very little role. The growth dynamic of capitalism worked like this - businessmen would invest, some of them would make some profit, they would accumulate that capital (hence capitalism) as savings, and they would repeat the process. Investment, profit, savings. That was the growth dynamic under capitalism, and that was slow and hard. Our system hasn't worked like that for decades. First of all, the U.S. government spends 24% of the U.S. GDP at the federal level. On top of that, the Central Bank creates the money and manipulates its value. That's not capitalism. Even more important than that, the growth dynamic now is completely different. Rather than being driven by investment and capital accumulation, our economic growth dynamic has been driven by credit creation and consumption, then more credit creation and consumption. That has created very rapid economic growth for the last 40 or 50 years. The problem is that this new debt-fuelled economic paradigm, creditism, can't create any more growth because the private sector can't bear any more debt. Total debt in the U.S. first went through $1 trillion in 1964. Over the next 43 years, it expanded 50 times to $50 trillion in 2008. Then the private sector defaulted and couldn't pay its debts. It created the world we live in and made it much more prosperous than it might have been otherwise. It was only to have so much credit because we broke the link between dollars and gold, starting in 1968. The law was changed. The Fed was no longer required to keep it in gold backing. The paper currency was the foundation upon which the $50 trillion of credit was built.

What are you aiming to achieve with the book? Who is it aimed at?
My main target is public opinion. I would like to influence public opinion, thereby influencing policy makers' opinion. At the same time, it's also directed at investors who work at an institutional level and a retail level. It's not really that complicated to understand. In the book, I introduce something I call the Quantity Theory of Credit, that is a very useful analytical framework for understanding how we got into this disaster, what the policy response is, and why the policy response is what it is, what's going to happen next and how that's going to impact asset prices.

What will happen if the U.S. stays on the creditism path?
There doesn't seem to be any way for it to stay on the path, other than by the government borrowing much more money. When the private sector effectively defaulted in 2008, we would have spiraled into a new great depression then and there had the government not jumped in with trillion dollar budget deficits every year, financed to a certain extent by paper money creation. It's that government life support that kept us from collapsing into a great depression. We must continue to have that in order to prevent us from collapsing into a great depression in the years ahead.

What needs to be done to prevent that? True capitalism?
I don't think there's any way to go back to true capitalism. A lot of people, libertarians for instance, they all have good intentions but they seem to think we can all take one step back and find ourselves in some sort of laissez faire Garden of Eden. What they don't realize is that if you take one step back, you fall off a cliff and out civilization crumbles. The government has three options. Every economy is made up of four components. There's personal consumption and expenditure, business investment, net trade, and government spending. You add those together, and that's the GDP. In the U.S. now, the government's spending about 24% of GDP. Here are the options. The first is to do what the Libertarians say they want and radically reduce government spending, in which case the economy in the U.S. and around the world will immediately spiral into a great depression with disastrous economic and geopolitical consequences. That's not a very good idea. The second option is for the government to continue doing what it's doing now, which is borrowing and spending massive amounts through trillion dollar budget deficits, financed in part through quantitative easing. Keep spending the way they've spent now, essentially mostly directed at consumption purposes. That's the second option. They could probably keep doing that without difficulty for another five years, and maybe even as long as ten years. In ten years from now, they will go bankrupt just like Greece, and then we will collapse and enter a great depression. That's better than the first option, but that isn't a very good option either. The third option is for the government to keep borrowing and spending, but to change the way it's spending. Rather than spending on consumption related purposes, the government should invest very aggressively in transformative 21st century technologies, on such an aggressive scale that they can't possibly fail to succeed. I'd like to see them put a trillion dollars in solar energy over the next ten years, and another trillion in nanotechnology, and another trillion in genetic engineering and biotechnology. That would give the U.S. an unassailable lead in 21st century technologies. We could develop new industries that the government could tax, new products that would balance our trade deficits. Essentially, it would assure generations of future prosperity, and we could all live happily ever after.

Follow me @BCallwood .

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This article appears in: Investing , Commodities , Economy , International

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