The New Depression: The Breakdown of the Paper Money Economy PDF
Preview The New Depression: The Breakdown of the Paper Money Economy
Contents Preface Chapter 1: How Credit Slipped Its Leash Opening Pandora’s Box Constraints on the Fed and on Paper Money Creation Fractional Reserve Banking Run Amok Fractional Reserve Banking Commercial Banks The Broader Credit Market: Too Many Lenders, Not Enough Reserves Credit without Reserves The Flow of Funds The Rest of the World Notes Chapter 2: The Global Money Glut The Financial Account How It Works What Percentage of Total Foreign Exchange Reserves Are Dollars? What to Do with So Many Dollars? What about the Remaining $2.8 Trillion? Debunking the Global Savings Glut Theory Will China Dump Its Dollars? Notes Chapter 3: Creditopia Who Borrowed the Money? Impact on the Economy Net Worth Profits Tax Revenue Different, Not Just More Impact on Capital Conclusion Note Chapter 4: The Quantity Theory of Credit The Quantity Theory of Money The Rise and Fall of Monetarism The Quantity Theory of Credit Credit and Inflation Conclusion Notes Chapter 5: The Policy Response: Perpetuating the Boom The Credit Cycle How Have They Done so Far? Monetary Omnipotence and the Limits Thereof The Balance Sheet of the Federal Reserve Quantitative Easing: Round One What Did QE1 Accomplish? Quantitative Easing: Round Two Monetizing the Debt The Role of the Trade Deficit Diminishing Returns The Other Money Makers Notes Chapter 6: Where Are We Now? How Bad so Far? Credit Growth Drove Economic Growth So, Where Does that Leave Us? Why Can’t TCMD Grow? The Banking Industry: Why Still Too Big to Fail? Global Imbalances: Still Unresolved Vision and Leadership Are Still Lacking Notes Chapter 7: How It Plays Out The Business Cycle Debt: Public and Private 2011: The Starting Point 2012: Expect QE3 Impact on Asset Prices 2013–2014: Three Scenarios Impact on Asset Prices Conclusion Notes Chapter 8: Disaster Scenarios The Last Great Depression And This Time? Banking Crisis Protectionism Geopolitical Consequences Conclusion Note Chapter 9: The Policy Options Capitalism and the Laissez-Faire Method The State of Government Finances The Government’s Options American Solar Conclusion Notes Chapter 10: Fire and Ice, Inflation and Deflation Fire Ice Fisher’s Theory of Debt-Deflation Winners and Losers Ice Storm Fire Storm Wealth Preservation through Diversification Other Observations Concerning Asset Prices in the Age of Paper Money Protectionism and Inflation Consequences of Regulating Derivatives Conclusion Notes Conclusion About the Author Index Copyright © 2012 Richard Duncan. Published in 2012 by John Wiley & Sons Singapore Pte. Ltd. 1 Fusionopolis Walk, #07–01, Solaris South Tower, Singapore 138628 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07–01, Solaris South Tower, Singapore 138628, tel: 65–6643–8000, fax: 65–6643–8008, e- mail: [email protected]. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the Publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought. Neither the author nor the Publisher is liable for any actions prompted or caused by the information presented in this book. Any views expressed herein are those of the author and do not represent the views of the organizations he works for. Other Wiley Editorial Offices John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley & Sons Australia Ltd., 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany ISBN 978–1–118–15779–4 (Hardback) ISBN 978–1–118–15780–0 (ePDF) ISBN 978–1–118–15781–7 (Mobi) ISBN 978–1–118–15782–4 (ePub) Preface When the United States removed the gold backing from the dollar in 1968, the nature of money changed. The result was a proliferation of credit that not only transformed the size and structure of the U.S. economy but also brought about a transformation of the economic system itself. The production process ceased to be driven by saving and investment as it had been since before the Industrial Revolution. Instead, borrowing and consumption began to drive the economic dynamic. Credit creation replaced capital accumulation as the vital force in the economic system. Credit expanded 50 times between 1964 and 2007. So long as it expanded, prosperity increased. Asset prices rose. Jobs were created. Profits soared. Then, in 2008, credit began to contract, and the economic system that was founded on and sustained by credit was hurled into crisis. It was then that the New Depression began. There is a grave danger that the credit-based economic paradigm that has shaped the global economy for more than a generation will now collapse. The inability of the private sector to bear any additional debt strongly suggests that this paradigm has reached and exceeded its capacity to generate growth through further credit expansion. If credit contracts significantly and debt deflation takes hold, this economic system will break down in a scenario resembling the 1930s, a decade that began in economic disaster and ended in geopolitical catastrophe. This book sets out to provide a comprehensive explanation of this crisis. It begins by explaining the developments that allowed credit in the United States to expand 50 times in less than 50 years. Chapter 1, How Credit Slipped Its Leash, looks at the domestic causes. Chapter 2, The Global Money Glut, describes the foreign causes, debunking Fed Chairman Bernanke’s global savings glut theory along the way. Chapter 3, Creditopia, discusses how $50 trillion of credit transformed the U.S. economy. Chapter 4, The Quantity Theory of Credit, is introduced. This theory explains the relationship between credit and economic output. Therefore, it is an indispensible tool for understanding every aspect of this credit-induced calamity:
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