During my Asia, Australia, and South Pacific cruise last fall, I was very fortunate to meet a gentlemen
who shares many of the same concerns I do about the US economy and the failures of the US government and Federal Reserve in
managing our economy and money. He recommended that I read Richard Duncan's new book, The New Depression - The Breakdown
of the Paper Money Economy. After a couple of months of looking for the book in bookstores I ordered the book
from Amazon.
Mr. Duncan explains what has happened
to the US economy and our money over the past 100 years in the first six chapters of the book. I have read many
books and articles concerning monetary history. This book is the best by far. Mr. Duncan doesn't waste words telling
the reader the facts of what has happened. He illustrates the critical points with official published data. You
don't have to be an economist to understand what has happened. Mr. Duncan makes many critical points in the
book that we must all think about as we consider how to manage our financial affairs going forward. I have selected
a few areas from the book for review that I think are important and added some thoughts of my own. I suggest
you read his book to get more details and a broader context for his thoughts.
President Lyndon Johnson ended the requirement for the US dollar to be backed at some level by gold in 1968
by asking Congress for legislation that broke the link. Congress complied and Johnson signed the bill
into law. "This decision fundamentally altered the nature of money in the United States and permitted an unprecedented
proliferation of credit." The gold standard was getting in the way of Johnson's guns and butter programs,
Vietnam War funding and expanded entitlement programs. The bottom line is that Johnson and his advisers began the process
of destroying the US dollar and creating US economic bubbles. President Richard Nixon ended the convertibility
of US dollars into gold by shutting the gold window in 1971.
"Credit has replaced money as the key economic variable." Since there has been no requirement
for our money to be backed by anything tangible since 1968, the amount of credit in the United States has exploded.
"Total credit in the United States surpassed $1 Trillion for the first time in 1964. Over the following 43 years,
it increased 50 times to $50 Trillion in 2007. That explosion of credit changed the world."
"Globalization resulted in a 95 percent drop in the marginal cost of
labor by bringing a billion people from the developing world into the global industrial workforce. Never in history has the
cost of labor fallen so far, so fast." Extreme labor price deflation for imported manufactured goods caused
US price inflation to remain low despite massive US credit growth. "If globalization had not occurred...the rapid
credit growth in the US would have produced crippling rates of inflation..., just like it did in the 1970's". Let
there be no doubt that the US economy has become fully intertwined with the rest of the world in a global economy. The US
is impacted by every significant economic development that occurs in the world.
The big four US banks, Bank of America, Wells Fargo, JP Morgan Chase and Citibank are so large relative to the economy
that they are "too big to fail". "Never before in the history of the United States has there been such
a high degree of concentration in the banking sector." The recent Dodd-Frank legislation passed by Congress
and signed into law has done nothing to address this issue. The financial derivatives exposure of these banks is
so large and so difficult to value that is possible that some of them may be effectively bankrupt, regardless of what is officially
reported.
The final four chapters of The New Depression
deal with future expectations beginning in late 2011. Mr. Duncan accurately forecasted that the US government would
continue to run massive budget deficits and that the Federal Reserve would implement QE3, another round of quantitative easing
(printing about $1T per year in fiat money). When you read the book you will discover that this was a very easy forecast
to make. When you understand more fully the economic/financial situation that the US government and Federal
Reserve have created and are managing you will understand they have no choice but to keep printing money/increasing
credit to keep the US economy, and the world economy, from collapsing in a deflationary depression. Since so much debt
has been created and the private sector has generally maxed out the amount of debt it can carry, governments and central banks are
increasing their debt and balance sheets to keep the fiat money economies from collapsing. Unfortunately, there are
limits as to how long the debt/fiat money creation merry-go-round can continue before excessive inflation is created which
brings down the entire global financial system. However, the precise timing as to when the limits will be reached
is not clear. From a long term perspective there is no good outcome that will result from the path we are on today.
The only question is when the process will break down of its own weight or will some extraneous event bring it down.
We all must face the truth with regard to how the US economy has evolved over
the past 100 years. In capitalism the economy is driven by savings and investment, this is no longer the case in the
US. Our economy today is driven by borrowing and consumption. "This is not capitalism. Market forces
no longer drive the economy. The current system is government directed, but not planned. Government policy is
determined through a process of compromise between the demands of competing power blocks." "Deficit spending and
fiat money allowed the government to satisfy all those competing demands for more than a generation."
With all of his expertise and historical knowledge, Mr. Duncan had difficulty
forecasting accurately the financial outcome that resulted within 18 months of the completion of his manuscript
accurately. This is not a criticism. The world and US economies, actions of governments, and reaction of markets
to those actions are extremely difficult to predict accurately. I don't think anyone really knows where the global
economy is headed. That makes the global financial environment extremely dangerous.
Mr. Duncan doesn't really provide much useful advice in terms of how one can deal with the risks associated with
the environment other than to be diversified from an investment perspective. This is not a criticism. I am not
sure anyone in the world knows how to deal with the situation from a long term perspective. He also suggests that the
solution to our broader economic problems is a massive government spending program, funded by more debt. He suggests
that the government invest in societal changing technological change, like converting much of the US electrical grid to solar
power. My view of Mr. Duncan's suggestions is that they are overly simplistic. I don't have my own solution
to offer at this point, other than to let the system crash and rebuild the global economy. The pain involved in such
an outcome would be extreme and Mr. Duncan points out that it is likely that millions of people around the world
could die from starvation as a result.
The New Depression
is a sobering book. The facts are facts. Mr. Duncan's analysis is backed by hard data. There is very
little to argue concerning his analysis of our economic situation. Each of us must deal with the situation that has
been created for us. There is much more solid information in Mr. Duncan's book that I haven't touched in this
article. I encourage everyone that cares about their financial future and our nation to read The New Depression.
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