Now that sums up the current situation nicely.
From the article:
“This is not going to be a 1921-style two-year recession that we bounce back from after a little bit of pain and unpleasantness. After a 50-year global economic boon involving what is now a $59 trillion expansion of credit in 50 years, this isn’t going to be a one or two-year hard recession. This is going to be a multi-decade global depression and I’m not sure that anyone alive today would live long enough to see the recovery. I mean, it’s like Rome: when Rome fell, there was a recovery, but it was 1,000 years later. This is the kind of depression we’re looking at if we allow this $59 trillion credit bubble of ours to implode.”
– Richard Duncan: The Real Risk Of A Coming Multi-Decade Global Depression (Peak Prosperity, April 5, 2015):
Richard Duncan, author of The Dollar Crisis and The New Depression: The Breakdown Of The Paper Money Economy, isn’t mincing words about the risks he sees ahead for the world economy.
Essentially, he sees the past 50 years of economic prosperity fueled by globalization and easy credit in serious danger of being unwound, as the doomed monetary policies currently being pursued by the word’s central banks result in a massive multi-decade depression that spans the globe.
The first version of The Dollar Crisis, the hardback, came out in 2003, so I wrote it in 2002. And at that time, the dollar against gold was $300. So the dollar has lost more than 75% of its value since The Dollar Crisis was written, and I don’t think it’s going to stop here. I expect it to continue to lose value over the years and decades ahead.
But what we’re seeing is that the real theme of The Dollar Crisis was that the post-Bretton Woods international monetary system was fundamentally flawed because it couldn’t prevent trade imbalances between countries. And the US had developed an enormous trade deficit with the rest of the world and this blew the trade surplus countries like Japan and China into bubbles. And then, the dollars boomeranged back into the United States and blew it into a bubble, as well. I didn’t know when the housing bubble was going to pop in the US but I knew it would. And I wrote in The Dollar Crisis that when it did, we would have a severe global economic recession/depression that would involve a systemic banking sector crisis in the United States and necessitate trillion-dollar budget deficits and unorthodox monetary policy to prevent a Great Depression from occurring.
And so that’s what we’ve seen. The crisis arrived in 2008 and the government responded with trillion-dollar budget deficits and quantitative easing on a multi-trillion-dollar scale. So they have managed to keep this immense global economic bubble inflated through unprecedented fiscal and monetary stimulus in combination. And so that’s where we are now. We still have a massive global economic bubble that the policymakers have continued to keep inflated. And that’s what they intend to continue to do because they believe – rightly so, I think – that if they allow it to melt down, then it’s going to result in a depression at least as bad as that of the 1930s and 1940s. And they’re going to do everything in their power to prevent that from happening for as long as possible.
I think it’s horribly regrettable that we find ourselves in a position where we are on government life support. We should’ve stayed on the gold standard in 1968. The global economy would be much smaller today than it is, but we wouldn’t now be in this position where we have to rely on money creation on a trillion-dollar scale to keep our global economy from collapsing. But now that we are here, I’m not sure that there are other alternatives other than 1) keeping the thing inflated or 2) allowing a new Great Depression to wipe away globalization. And not just the savings of the American public, but a huge part of the global economy altogether.
This is not going to be a 1921-style two-year recession that we bounce back from after a little bit of pain and unpleasantness. After a 50-year global economic boon involving what is now a $59 trillion expansion of credit in 50 years, this isn’t going to be a one or two-year hard recession. This is going to be a multi-decade global depression and I’m not sure that anyone alive today would live long enough to see the recovery. I mean, it’s like Rome: when Rome fell, there was a recovery, but it was 1,000 years later. This is the kind of depression we’re looking at if we allow this $59 trillion credit bubble of ours to implode.
It’s hard for Duncan not to see this great economic unwinding as inevitable, but he does hold out some hope that if central banks are going to continue to print (as they very likely will), funneling that new capital into investment in new technologies and infrastructure is our best hope of potentially creating solutions that may enable us to extricate us from this mess. An exposition on this thinking can be read here.
Click the play button below to listen to Chris’ interview with Richard Duncan (58m:17s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, of course, Chris Martenson. Well, here we are, it’s 2015, and the central banks have been doing everything they possibly can to extend, pretend, they’ve pumped, they’ve primed. They’ve given us NIRP, they’ve given us ZIRP, they’ve given us everything you possibly can from a monetary standpoint. But these high priests and priestesses of the monetary system have done their rain dances but it’s like we’re in California, no rain is falling. Economic growth remains weak, tepid, possibly even negative going forward. We’re seeing an extraordinary wealth gap between the uber wealthy and everybody else. Real incomes aren’t going anywhere. All of this is very befuddling if you happen to be one of the people running the models at the Fed, at the ECB, the Bank of England, Bank of Japan, nothing seems to be working.
So what we’re going to do today is we’re going to continue on talking in the vein that we were talking with Steve Keen last week and we’re going to be examining the role of money in debt. Because you have to understand the role of money in debt in today’s world if you want to understand where we’re going. And I can’t think of anybody better to help us talk about this today. We get to talk with Richard Duncan, author of numerous books including The Dollar Crisis: Causes, Consequences, Cures. I believe that came out in 2005. I couldn’t wait to get my hands on it. Actually turned out it was a hard book to get a hold of at the time. And more recently, The New Depression: The Breakdown of the Paper Money Economy. Richard has had all kinds of financial experience, a wide-ranging career – asset management in London and Washington DC, in Bangkok. And he has been all over the news. You’ve seen him possibly on CNBC, CNN, BBC, Bloomberg, etc., very sought after, to talk about what is going on from a macro perspective. Can’t wait. Richard, so good to be talking with you finally.
Richard Duncan: Chris, thank you for having me as a guest.
Chris Martenson: So I need to start here. You know, 2005, I read The Dollar Crisis. Like you, I was of a mind that the dollar was clearly headed towards a crisis. And as we look at it, the only crisis I can see in the dollar lately is that it shot up 20% compared to all the other currencies. How do you view what’s going on in the dollar compared to what you were writing about in 2005?
Richard Duncan: Okay, well, actually, the first version of The Dollar Crisis, the hardback, came out in 2003. So I wrote it in 2002. And at that time, the dollar against gold was $300. So the dollar’s lost more than 75% of its value since The Dollar Crisis was written and I don’t think it’s going to stop here. I expect it to continue to lose value over the years and decades ahead.
But what we’re seeing is that—the real theme of The Dollar Crisis was that the post Bretton Woods international monetary system was fundamentally flawed because it couldn’t prevent trade imbalances between countries. And the US had developed an enormous trade deficit with the rest of the world and this blew the trade surplus countries like Japan and China into bubbles. And then, the dollars boomeranged back into the United States and blew it into a bubble, as well. And I didn’t know when the housing bubble was going to pop in the US but I knew it would. And I wrote in The Dollar Crisis, when it did, then we would have a severe global economic recession-depression that would involve a systemic banking sector crisis in the United States and necessitate trillion-dollar budget deficits and unorthodox monetary policy to prevent a Great Depression from occurring.
And so that’s what we’ve seen. The crisis struck in 2008 and the government responded with trillion-dollar budget deficits and quantitative easing on a multi-trillion-dollar scale. So they have managed to keep this immense global economic bubble inflated through this unprecedented fiscal and monetary stimulus in combination. And so that’s where we are now. We still have a massive global economic bubble that the policymakers have continued to keep inflated. And that’s what they intend to continue to do because they believe – rightly so, I think – that if they allow it to melt down, then it’s going to result in a depression at least as bad as that of the 1930s and 1940s. And they’re going to do everything in their power to prevent that from happening for as long as possible.
Chris Martenson: A depression as bad as the 30s here in the US, potentially, but let’s be clear. That’s already happening in Greece, it’s already happening in some other places. What you’re saying is the natural consequence of overexpansion of credit – and I’m with you on this, Richard. Because the one chart, if somebody says, “I’ll give you one chart to explain what’s happening,” I start that chart in 1970. I look at total credit market debt and the United States was growing its credit market debt at twice the rate of GDP growth. As much as I think GDP growth is actually falsified through misuse of statistics, even with the overexpanded version of GDP that we use now, we were still growing our credit at twice the rate of the underlying economy.
In your mind, how do we – I look at that, it’s so simple. A child could understand that that’s an unsustainable model. The Fed seems thoroughly intent on ignoring that fact and just continuing that model. Is it really as simple as I’ve just laid it out? Is it truly that you can’t grow your credit faster than your economy forever and the Fed is missing that? Or how do we understand their policy moves from a – let’s call it a rational framework. How do we rationalize what they’re doing?
Richard Duncan: Well, I think you’re right to look at that total credit number. That, I think, is the most important number for all of us to be aware of. Total credit in the United States, debt and credit, are two sides of the same coin. It first went through one trillion dollars in 1964. And over the next 43 years, it expanded 50 times from one trillion to 50 trillion in 43 years. So we’ve had a 50-fold expansion of credit by the time this blew up in 2007, 2008. And the only reason that was possible for credit to expand so enormously was because we broke the link between dollars and gold. And once we stopped backing dollars with gold in 1968, that removed all the constraints on how much credit could be created. And so credit absolutely exploded. And this also allowed the United States to start running very large trade deficits with, initially, Japan and Germany but later, all of the world, primarily China. And to finance these trade deficits with paper money or treasury bonds denominated in paper money.
So this explosion of US credit in combination with a US trade deficit, they created the 800 billion dollars in 2006, that created the greatest economic boom in history. It completely transformed our world. We’re all much more prosperous materially than we would have been if we’d remained on a gold standard. But now, we’re on the verge of collapsing into a new Great Depression because all of this credit can’t be repaid and it’s resulted in massive excess capacity across all industries globally.
And of course, from the point of view of the policymakers, I think the Fed and the Treasury, now of course, these people are not the same people who are responsible for breaking the link between dollars and gold in 1968. That was effectively Lyndon Johnson. So these people have evolved over time. Most of them had no idea this global credit bubble was unsustainable. And as of 2008, suddenly they realized that we were in very great danger of collapsing into a new Great Depression. And so all of their policies have been designed to keep this global bubble inflated because they once again fear that it will be just like 1930 when the credit couldn’t be repaid. The international banking system collapsed and global trade collapsed and policymakers really didn’t know what to do and they didn’t do much of anything. And at that point, trade barriers went up around the world, globalization broke down. The unemployment rate in the United States went to 25% and we had a ten-year depression during the 30s. And at that time, Europe was taken over by fascist Germans and Asia was taken over by militaristic Japanese. And then, World War II started and killed 60 million people.
So that is the outcome that they don’t want to occur this time. So just like before, the credit couldn’t be repaid in 2007. This time, rather than letting market forces reestablish a market-determined equilibrium such as occurred in the 1930s, this time, the policymakers are doing everything in their power to prevent market forces from reestablishing a market-determined equilibrium for fear that we would once again have to live through the worst horrors of the 1930s and the 1940s. So all of their policies are directed at keeping the global bubble inflated for as long as possible.
Chris Martenson: I guess you have to break a few eggs to make an omelet. You know, Bernanke just yesterday had a quote where he said he, too, was worried about the impacts on seniors of his policies. Not enough to obviously change his policies because obviously, the Federal Reserve threw Granny under the bus with their low interest rate environment. But they did that, in your mind – and I agree, I think, with this analysis – that they looked at it and they said, “Wow, we really have two really bad options here. One is to allow all of these overinflated too-big-to-fail banks to eat their consequences of their actions and fail, and so we’ll see a big wipeout in the financial industry; it will get pared down probably in a brutal sort of a pruning process. And then, we’ll all have to pick through the rubble and it will be a long, slow climb out of that. Our other alternative is to just print and protect these big banks. They’re going to get stinking rich on the back of this, obviously. We’re going to really reward them for having probably some of the worst fiduciary responsibility on display in history but we’re going to reward that behavior.”
Really, it was that binary of an outcome. I know that’s the talking point of the Fed. It was either, you know, we’re on a knife edge. It’s either hell and damnation on one side or this less awesome, not perfect, but at least workable solution on the other side. Is it really – weren’t there other options available to us, though?
Richard Duncan: Well, let me be very clear about this. I think it’s horribly regrettable that we find ourselves in a position where we are on government life support. We should’ve stayed on the gold standard in 1968. The global economy would be much smaller today than it is but again, we wouldn’t now be in this position where we have to rely on fiat money creation on a trillion-dollar scale to keep our global economy from collapsing. But now that we are here, I’m not sure that there are other alternatives other than keeping the thing inflated or allowing a new Great Depression to wipe away globalization. And a huge part of not just the savings of the American public but a huge part of the global economy altogether.
I believe very strongly that many people who criticize the policy response in terms of the trillion-dollar budget deficits and the trillions of dollars of fiat money creation – they’re absolutely right to criticize the policies that led to this disaster. But once the disaster started in 2008, I believe that the policies have been the only ones that could’ve kept us out of a new Great Depression. And so I think that people who have criticized these policies since 2008 don’t understand the severity of the depression that would occur without them over the last six years and without them over the six years ahead of us to come, and then some. This is not going to be a 1921-style two-year recession that we bounce back from after a little bit of pain and unpleasantness. After a 50-year global economic boom involving what is now a 59-trillion-dollar expansion of credit in 50 years, this isn’t going to be a one or two-year hard recession. This is going to be a multi-decade global depression and I’m not sure that anyone alive today would live long enough to see the recovery. I mean, it’s like Rome. When Rome fell, there was a recovery but it was 1,000 years later. This is the kind of depression we’re looking at if we allow this 59-trillion-dollar credit bubble of ours to implode.
Chris Martenson: Well, and that 59 trillion is just the US. The McKinsey study says there’s now 200 trillion of debt across the whole world with tens of trillions of dollars in new debt having been layered on in response to the crisis just in the last seven years.
So Richard, if we look at this then and we say – and I agree – that allowing a 50-year credit bubble to burst gives you a very, very prolonged, ugly sort of a slump. That’s if you’re interested in preserving the purchasing power of the currencies involved. Right now, it looks like the whole world has said, “We’re going to all engage in currency debasement.” I seriously would not want to – I’d feel so badly for the people in Japan who live there who are keeping their savings in yen because they have a very, very determined central bank that’s going to ruin the value of their holdings over time and they’ve done a fantastic job in the last three years with that, just fantastic. And I think they’ll continue to have great success with that.
But when you look at that whole situation of everybody being in the same boat with a 200-trillion-dollar debt overhang, I understand how the policies of the Fed and other policy responses have kept us out of this cauldron of depression. How do they go down the – tell me, paint this road. Here’s my problem. I can’t see the road that they’re on has any other ending except that same ending we just talked about. It’s just a question of when it comes and how high up the stepladder we are when it begins. And that stepladder, the rungs of that are made by additional tens of trillions of debt. We seem to be higher up that ladder to me, not lower than we were in 2008. But I’d be interested in your impression of that.
Richard Duncan: Okay. Well, so I think there’s one thing we haven’t discussed thus far. Trillions of dollars of fiat money creation that we’ve seen from the central banks, this was supposed to create very high rates of inflation or even hyperinflation a long time ago, but it hasn’t. In earlier periods, it always did, but this time it hasn’t.
So what’s different this time? Well, what’s different this time is we have globalization. And globalization is extremely deflationary. I live in Asia. I’ve lived in Asia for more than 25 years now. And the first thing an economist recognizes in Asia is that labor costs $10 a day at the most. So you no longer have to pay someone in Michigan $200 a day to build a car. Your next worker’s going to cost you $10 a day. And that means your marginal cost of labor has fallen by about 90%. Nothing like this has ever happened in history before. And so we have a complete collapse in the marginal cost of labor. This is extremely deflationary, and this deflationary pressure is completely offsetting the inflationary pressure that should be occurring as a result of all of the paper money creation.
So we’re really in a unique moment in history where what we have seen and what the last six years have shown us, for sure, is that at least for the last six years, it is possible for central banks to create trillions of new paper dollars and to finance trillions of dollars of budget deficits. And it’s stimulated the economy and kept it from collapsing into depression without causing high rates of inflation. In fact, we’re verging on deflation.
So this is a crucial variable that everyone really needs to incorporate in their thinking. It is possible to print money and finance trillion-dollar budget deficits without creating hyperinflation. So I believe this creates new opportunities that we should fully take advantage of.
Chris Martenson: Well, let me get to those opportunities in a minute. One more piece to the puzzle, hopefully, you can explain because this one’s been real puzzling for me, is the behavior of commodities beginning with the most aggressive round of quantitative easing in world history with the 85 billion a month that the Fed embarked on. Almost to a day, we saw that correlate with a long-sustained fall in the price of commodities starting in 2011 with oil recently following in that. I would think even with marginal labor costs low that still, demand for commodities – cement, copper, steel, oil, things like that – that those would have somehow responded. But they actually responded in the opposite. How do we understand deflating commodities in money printing? How do those go hand in hand?
Richard Duncan: Well, I think during the second round of quantitative easing, we did have very significant commodity price inflation. Price inflation during QE2 globally, food prices went up 60%. And this was the thing that sparked off the Arab Spring. Arab Spring was sparked off because people were hungry, not so much because they were agitating only for democracy. So I was very concerned that when the third round of quantitative easing came – which I expected that this would lead to even higher food prices and even more food riots, revolutions spreading all around the developing world – but that didn’t happen. And I think the reason it didn’t happen is because, well, it was just an old fashioned supply response. When food prices and copper prices went to very high levels, then farmers planted a whole lot more corn and wheat and copper miners dug more mines and we got a surge of new supply coming into the market. Just at a time when demand in China was weakening because China has had such an enormous bubble fueled by all of the dollars entering China because of China’s massive trade surplus with the US.
But China’s built enormous access capacity across every industry. You probably know well the Financial Times article a few months ago stating that China expanded its – was it, I think, cement capacity – more in two years recently than the United States did during the entire 20th century. So China’s expanded so much capacity for things like steel that steel prices are now collapsing because the world just doesn’t need the kind of steel supply that China alone can supply.
So those are the reasons commodity prices have gone down despite the third round of quantitative easing.
Chris Martenson: Yeah, so that’s always been just a little puzzling to me. Because even during that run from 2011 to now, China was still on an absolute commodity guzzling boom. I think China’s about to hit a hard landing here for a variety of reasons. The cement statistics are eyebrow-raising but the really – the big shockers for me with China are the overall amount of credit expansion. If you think the United States’ credit expansion in the banking system was extraordinary, you will be truly shocked by what China was up to. It’s just been absolutely astonishing to me.
So I think China’s slowing down, that’s part of the explanation. But certainly, that linkage between quantitative easing and commodity prices that we saw in QE1, QE2, not so much in Operation Twist, that didn’t surprise me. But QE3 surprised me quite a bit because it seemed that was the one area out of all the asset classes that didn’t respond. Because we saw everything else respond to QE, right? We saw bonds, equities, real estate – virtually everything but commodities. Again, that, to me, was a surprising outcome.
Richard Duncan: I was surprised, as well. I thought that food prices would go higher.
Chris Martenson: All right. So before, we were talking about the possible opportunities that come out of this labor arbitrage scenario in response to QE. And you said there was something there that we need to understand but there are opportunities there. What are those?
Richard Duncan: Okay, so here’s the situation that we’re facing. We have a lot of global excess capacity across all industries but wages aren’t going up in the United States or the western world because wages are being pushed down by competition from developing countries, all the off-shoring and the factories have been relocated to places where there are $10 a day labor. So this is creating a situation now where we’re stuck. For decades, credit growth drove economic growth. And it’s interesting, Chris: Any time going back to 1950, any time the United States had less than 2% credit growth adjusted for inflation, then the US went into recession. And we didn’t come out of the recession until we had another big surge of credit expansion.
So let me repeat. There were only nine years when credit grew by less than 2% adjusted for inflation. And every time, the US went into recession. And the ratio of total credit to GDP in the US, as you hinted at earlier, rose from 150% of GDP in 1980 up to 370% of GDP in 2007, from 150 to 370. So the credit growth drove the economic growth in the United States and in the world. But since 2008, credit has not been growing in the United States by 2% because the household sector has so much debt they can’t repay the debt they have already, even at these super low interest rates. And they can’t take on more debt because their income is not going up.
So the Fed has been forced to take over and drive the economy through fiat money creation, three-and-a-half trillion dollars of paper money creation that they’ve used to buy financial assets, and push up the financial assets. And that’s driven up household sector net worth now to 83 trillion dollars. This is 27 trillion dollars more than it was at the bottom of the crisis.
So this is the kind of government life support that’s kept us from collapsing into a new depression. They have kept the global economic bubble inflated.
So here we are. What comes next? Well, we find ourselves in the position where the private sector has no growth in income so they can’t drive the economy. And they can’t take on more credit because they can’t afford more credit. But still, we’re in a world where there’s so much excess capacity that product prices are falling and profits are becoming worse and the economy’s very weak. And interest rates have fallen into negative territory on at least two trillion dollars worth of bonds around the world.
So in Germany now, the ten-year government bond yield is about 20 basis points and in Japan, it’s 30 basis points. And in the US, it’s a massive 1.9% or so. So we’ve never had lower government bond yields in history. And we have no inflation despite all of the stimulus that’s been provided on the fiscal side and on the monetary side.
So I believe this creates a once-in-history opportunity for us to have the US government – I’ll use an example of US government – I believe the US government should borrow more at very low interest rates and invest this money in new industries and new technologies to restructure the US economy. So over the next ten years, for instance, I’d like to see the US government borrow a trillion dollars and invest it in genetic engineering, another trillion investment in biotech, another trillion in nanotech, another trillion in green energy and a grid to transmit it on across the US. This kind of investment would induce a new technical revolution that would not only restructure the US economy – create new jobs and new industries, technological miracles and medical marvels – it would end all talk of a new depression and basically, improve the wellbeing of everyone on this planet.
So that’s the kind of opportunity that exists. We can – the government can borrow trillions of dollars at extremely low interest rates or even at no cost whatsoever with the Fed monetizing it without causing high rates of inflation.
Our alternatives are not to sit back and do nothing and let this 50-year global bubble implode into a 50-year depression that destroys our civilization. That’s not the only option. We can actually grow our way out of this by aggressive government borrowing and spending, but not government borrowing and spending that is wasteful, on consumption and war the way we have been doing. But rather, government borrowing and investing in new industries and technologies so that we can grow our way out of this and all live happily ever after.
Chris Martenson: Well, that’s an interesting idea. For me, that happily ever after still has a timer on it because eventually, we discover that our civilization runs on energy and energy is not infinite and we’re actually working on finite supplies. I personally, Richard, I have very large concerns about going to nine, maybe ten billion people over the same timeframe that we’re going to see peak oil firmly in the rearview mirror and we will not have made the sorts of investments you just talked about, at least judging by past experience.
So let me just pick on one of those areas because for me, this would be my personal passion. The one limiting feature of alternative energy right now – wind, solar, stuff like that – is that we can’t store it. And so if we had a concerted national program, maybe a trillion dollars of investment, to figure out the next battery technology, I would be jumping up and down doing my little happy dance saying that’s the right thing to be doing.
Richard Duncan: So let’s do that. Let’s form a movement and let’s make this happen. This is the solution, let’s do it. We have a democracy. Let’s go forward and make this happen.
Chris Martenson: Well, I’d be so for that. Because that would be at least something I could point to and I would say this is a positive development. I’ll be honest. My cynic comes out when I say I notice that everything that my government is currently choosing, prioritizing to spend money on, are wasteful things. And so bailing out bankers, great. But if we could’ve gotten that money into the hands of people that would’ve spent it, we probably would’ve seen a very different macroeconomic response at this point.
So I’m of a mind that the Fed is going to discover that printing money and handing it to bankers gets you a very, very tiny pop for your buck but that they still have more policy options. And I think one of the next stages is what Jim Rickards talked about is something like a tax rebate or a tax cut or something that basically has the Fed print money, hand it to the Treasury so that it can come straight back into our pockets in one fashion or another. Do you agree that the Fed is going to have to try something more aggressive like that?
Richard Duncan: I think the Fed is going to do a fourth round of quantitative easing. You know, there’s a reason they give these things numbers – QE1, QE2, QE3 – it’s because they keep happening. And when the first round stopped, the stock market fell and the economy got weak so they started QE2 and it went back up again. The economy improved, the stock market improved. QE2 ended, the stock market got weak and the economy weak. And so they did QE3 and the stock market went up and the economy recovered. Now that QE3 is over, the stock market is flat and the economy is very weak again, as we’re seeing in all of the first quarter economic data.
So I think it’s only a matter of time before they do QE4 and when they do, it’s likely to push up asset prices further and drive down bond yields further. And this will push us ahead for another two or three years and that will give them some additional time to think about what they’re going to do next.
Chris Martenson: All right, I want to get back to that opportunity, though, because I like this. So the basic theme is that we’ve got almost – what – eight, nine years of experience that says you can print trillions, tens of trillions, and you’re not going to get inflation. There’s a variety of large structural reasons for that. Those reasons aren’t going anywhere, right? The overcapacity, the cheap labor, things like that. So this idea that if we’re going to have a QE4 instead of – I would really be excited to figure out how to agitate for something other than taking QE4, dumping it into the asset markets, watching stocks get even pricier. Because this is what most people don’t understand: The stock market doesn’t create wealth, it doesn’t do anything. It’s a secondary market. The shares are always 100% fully owned by somebody at some point. So when share prices go up, there’s still just as much money in the market as out of the market. Nothing really happens for capital formation. All you get are some secondary effects with an easier IPO market and things like that when you can raise actual capital.
But if we’re going to print money, why wouldn’t we print it and put it into things that we can identify are clearly going to help improve our collective future?
Richard Duncan: Absolutely.
Chris Martenson: Yeah, your argument is why wouldn’t we do that.
Richard Duncan: Yeah, so just think, QE3 at its peak was 85 billion dollars a month. Now just imagine the kind of results that would come from just one 85-billion-dollar investment in battery storage capacity. That was what you mentioned. Or an 85-billion-dollar investment in genetic engineering or biotech. That’s just one month of QE. This is enormous amounts of money that we have, you could say, to invest. And I don’t care if the first 80 billion dollars of that is completely wasted; if the last five billion of that gives us free, eternal, limitless energy, then of course, it’s well, well worth it. And this is an opportunity that – this is a once-in-history opportunity. We should take advantage of it.
Now, let me mention one other thing related to this. Quantitative easing effectively is debt cancellation. When the Fed buys government bonds, it effectively cancels that government bond as long as the Fed never sells that bond and keeps rolling it over when it matures. Let me explain. The Fed has something like now two trillion dollars – 2.5 trillion dollars – of government bonds. So the Treasury Department has to pay interest on those bonds to the Fed. But at the end of every year, the Fed takes all of its profits – almost all of its profits – and gives it right back to the Treasury, including the interest income the Fed earned on those Treasury bonds. So last year, the Fed gave the government 97 billion dollars, reducing the budget deficit last year by about almost 20%. And since 2008, the Fed has given the government 500 billion dollars. So the Treasury pays the Fed interest on the government bonds but then the Fed gives all of that interest back to the Treasury. So in other words, the government is paying interest to itself, which means the government is paying no interest. Which means those bonds – the QE bonds – are effectively canceled.
And that applies not only to the United States but to England and Japan, as well. The Bank of England owns 24% of all government debt in the UK. So the Bank of England – so the Treasury is paying itself interest on 24% of all the government debt, effectively canceling it.
In Japan, the government’s debt is 250% of GDP. But now, the Bank of Japan has bought up so many government bonds that it owns 50% of GDP worth. So the more government bonds the Bank of Japan accumulates and effectively cancels, the less risk there will be of a fiscal crisis in Japan. Because right now in Japan, the government debt is so high – 250% of GDP – and it only pays a bond yield of 30 basis points. So if the yields in Japan never went to 3%, that would cause a fiscal crisis unless the Bank of Japan owns a great deal of those bonds. Because in that case, the government of Japan would have to pay the higher interest to the Bank of Japan, the central bank. But then, the Bank of Japan would just repay all of that money to the government. So the larger the proportion of government bonds that the Bank of Japan owns, the less likely a fiscal deficit or a fiscal crisis in Japan will be.
So this suddenly makes sense of Japan’s very aggressive quantitative easing program – QQE as they call it. They’re buying up twice as many government bonds every month as the government is selling. And they finally figured out that QE is debt cancelation. As long as the central bank doesn’t sell those bonds and keeps rolling them over, then that debt has been canceled. And that’s what all the central banks are doing. They’re all rolling it over when it matures and not one of them has sold any of the government bonds they’ve bought yet.
So quantitative easing cancels the debt. So the more quantitative easing and debt cancellation we can do, the better. And if we can tie this in with a fiscal program of government borrowing and investing in transformative new industries and technologies, then this is not just once in a lifetime but a once-in-history opportunity that we really must take advantage of.
Chris Martenson: Richard, I have to ask. If it’s this easy, that if you can just print your way to prosperity, why aren’t we all speaking Latin? Because certainly, the Romans would’ve figured this out. People have tried to just print money for a long time and it hasn’t worked in the past.
Let me ask it this way: If you take this to its logical conclusion, you basically come up with something like the Swiss option, which is let’s just have our central bank print money and just give it to people. Why should anybody work? That’s the really, really far, illogical conclusion of all of this. But we’re halfway there with government debt monetization, aren’t we?
Richard Duncan: I don’t think we should print money and give it to people. That would just end up in more wasteful consumption and more imports from China. We need to print money and invest that money at home, creating new industries so that our economies can compete globally and not collapse to a Third World level, in which is the direction in which they’re currently heading.
Chris Martenson: My question then is this idea of debt monetization. I was really worried that we were going to go down this path ten years ago, and here we are. But what you’re saying is that when you look at how this is actually played out, there’s a rare kind of unique opportunity. Maybe not going so far as to say this time is different but to say that there’s a rare constellation of global circumstances that exist, which relate to the pace and extent to which China, industrialized labor, arbitrage, and global capital flows, all of which have come together at the moment in history to give us this strange opportunity. Which is we can print a lot of money maybe for a period of time, not forever, but there’s a window. And we can either take this window and fritter it away by sort of kicking the can down the road and continuing with typical government wasteful policies. Or you’re saying we can take this window and do something extraordinary and unusual, maybe once in history, all of history sort of unusual. Yeah, I like that idea. I do.
Richard Duncan: So let me give you an example of how things have changed. In the 1960s when President Johnson spent too much money—government deficit spending on the Vietnam War and on the Great Society Programs at home—we had a national economy. And we had the Bretton Woods system. And under that system, trade between countries had to balance. So we had balanced trade; we had a national economy. We didn’t have a trade deficit. Countries didn’t have trade deficits under the Bretton Woods system, to speak of.
And so when he spent too much money, it overstimulated the US economy and it led to full capacity across all the industries and full labor capacity. So pretty soon, there was full employment and we had wage push inflation that quickly led to double digit inflation rates in the 1970s, which then forced Volcker to high cap interest rates and crush the inflation in severe recession.
But then, in 1980, President Reagan did the same thing Johnson did but even on a bigger scale in terms of—President Reagan had massive budget deficits – 5% of GDP for five or six years in a row. But this time, instead of overstimulating the US economy and leading to very high rates of inflation, by this time, the Bretton Woods system had collapsed and the US started running very large trade deficits with the rest of the world. We started buying things from other countries.
By 1985, the trade deficit was 3.5% of GDP, something that had never occurred. So we no longer encountered domestic bottlenecks. We didn’t have a domestic economy. We could buy things from other countries, and other countries had limitless capacity to supply us with those things. So now, we’re not confined by domestic bottlenecks leading to inflation. We have a global economy and in this global economy of ours, there are two billion people who live on less than three dollars a day.
So we are never going to get to capacity constraints in labor leading to wage push inflation for decades. And that means that we can step on the stimulus accelerator – a combination of fiscal and aggressive monetary stimulus – without worrying about getting to high rates of inflation in the United States. This is something that we should take advantage of through investing in new industries and technologies to restructure the Western countries’ economy so that we have some way of competing against ultra low wage countries who are beginning to overtake us and driving down our standard of living in the West. This is an opportunity for us to invest in new industries and grow and prosper.
Chris Martenson: Now, if we look at where the Federal Reserve and the Bank of England and ECB and everybody currently is, and in the absence of taking advantage of this opportunity to invest in an appropriate way for the future, how do you see all of this playing out assuming normal politics sort of takes hold? And we conduct a few extra wars and you know, fritter it away on transfer payments and do the usual things like that? How do you see this playing out on its current trajectory?
Richard Duncan: Well, somewhat as you’ve described. The most probable outcome is that we’re going to have more of the same. So we will have a QE4 that will keep us from going back into a significant recession for the next couple of years by pushing asset prices even higher, which would allow more consumption to occur even though wages don’t increase. And this will keep the global economic bubble inflated.
But there seems to be a limit. I believe there’s probably a limit as to how long monetary policy alone can keep driving the economy. There’s a very useful ratio to look at is the ratio of household sector net worth to disposable personal income. And in other words, it’s a ratio of wealth to income. I don’t have the chart in front of me but the ratio is – the average for the last 50 years – just bear with me, these numbers are off but the idea is correct. The ratio is something like 250%, on average, for the last 50 years. Well, in 2000, that went up from 250 on average to about 350 and then it corrected back to the average. And then in 2007, it went to 370% and then it corrected back to the average. Now, it’s quite close to that all-time high again. In other words, the ratio of wealth to income is exceptionally extended, which suggests that there’s only so much higher the Fed can push asset prices before the asset prices are too expensive relative to income for the people to continue to be able to finance those assets at the inflated asset prices. And so that’s why there is a growing risk of an asset price correction, a stock market correction. Now again, the numbers I gave you are not the right numbers but the meaning is correct.
So if we don’t get more fiscal stimulus now from Congress – and it doesn’t look like we will in the next couple of years – then we may be running into limits as to how long the Fed can keep the global bubble inflated by itself. So it would be much easier if the fiscal policy and the monetary policy cooperated to keep the global bubble inflated. Right now, the budget deficit, I believe the government budget deficit as a percentage of GDP, is something like 2.6%, which is about half the level that it was during most of the Reagan administration. So the budget deficit’s very low, or quite low by historic standards. And there is certainly no reason why the US couldn’t run a significantly larger budget deficit for several more years. I mean, when Japan’s economic bubble popped 25 years ago, Japan’s government debt was 60% of GDP. Well, they had to have very large budget deficits every year afterwards to keep their bubble from collapsing into a Japanese Great Depression. And because of the very large budget deficits every year for the last 25 years, they’ve taken their government debt now up to 250% of GDP where US government debt is only 100% of GDP. So that suggests that the US government can borrow and spend another 17 trillion dollars – that’s the size of our economy – before they even got to 200% government debt to GDP and that’s assuming 0% GDP growth. Whereas, of course, if the government borrowed and spent 17 trillion dollars, the economy would grow by 10% a year and would never reach 200% government debt to GDP.
So my point is we have enormous capacity on the fiscal borrowing and spending side that we are not taking advantage of. Now traditionally – and I don’t mean this in a partisan way – but history shows that the Republicans have been very aggressive in fiscal deficit spending when the Republicans controlled the presidency. Normally, this is spending on the military and on military adventures abroad. And that stimulus – fiscal stimulus – generally provides a lot of economic support for the economy, as fiscal stimulus does.
So what I’m proposing is that rather than having another war and another massive military buildup in the United States, let’s invest in a different way. Rather than having our government invest in our military, which is what President Reagan did, accomplishing complete global military dominance through that government investment, let’s have our government invest in industry and technology and energy production and we’ll have global dominance in those areas, as well.
And there are many ways that we could do this. The government could act as a giant venture capital company. It could raise the money and then allocate this money to the most promising 1,000 American entrepreneurs across all fields and establish joint venture companies with them. And when one of these joint venture companies invents a cancer vaccine, they could list that on NASDAQ for five trillion dollars. And it would not only prevent cancer but it would be enormously profitable and pay for itself many times over.
So this is the sort of opportunity that we have, this unique moment in history combining globalization and paper money for the first time. It is, as you said, it won’t last forever. It is a window of opportunity and we should grasp it.
Chris Martenson: Now let me ask you a really big picture question because this is—my whole analytical framework says that when we say things like GDP or economy, we’re talking about goods and services. And if you chase those back to their source, you discover that it always involves a resource of some kind, right? People need to eat food to provide services so they have the energy to do that, we need electricity, which is typically sourced from fossil fuels at this point in time to run a lot of industrial processes and keep our food cool in our home fridges, and we need oil to move everything from Point A to Point B.
Now, when I wander over to the Congressional Budget Office and I look at their long-term projections to the United States, economic growth projections, and then those are used to funnel into the entitlement programs so that we can come up with NPV shortfall calculations for Social Security, Medicare, and Medicaid, right? Flows in, flows out, and at some sort of a discount rate, here’s the shortfall measure in the tens of trillions.
For all of this to really keep working, what all of the central banks are operating towards, Richard, for me, is this idea that we have to entertain the idea of endless growth. So even if you look at what the CBO has calculated, they’ve said, “Well, we’re going to look at a long-term run of about 3.5% economic growth, which means that we’re going to double our economy if we have 3.5% economic growth roughly every 20 years or so. And so you double it and it goes from 17 to 34 and then we’re going to double it one more time after that so we’re going to go from 34 to 68 trillion. And next thing you know after just a couple doublings, the United States economy is as large as the world’s economy is today. Do you see a flaw in that program somewhere along the line?
Richard Duncan: You know, it’s interesting. Since the industrial revolution started in the late 1700s, we’ve not only had something like roughly 3% real economic growth a year but we’ve also, at the same time, had an explosion of the population globally. So the population explosion and the growth of the global economy have gone hand-in-hand. And so it’s not certain that capitalism can keep growing without such a continued large expansion of the population. I don’t have the exact numbers but roughly, there were less than a billion people in 1900 and now there are more than seven billion. So this kind of explosion of the population is something that had never occurred before.
Looking ahead, it looks like demographically, while the population is still expected to grow – and I think generally, people tend to view something like 9.5 billion as the peak number – that’s a lot of new people. But the growth rate’s slowing quite significantly and if it does stop growing, then it’s going to be very interesting to see if the economy keeps growing. And if it actually does level out at 9.5 billion people, then having already gone from one billion to seven billion people over the last 115 years, I’m pretty sure we can manage another 2.5 billion over the next 40 years. What I’m not so certain about is what that means for the economic growth process and capitalism, which seems to be so heavily dependent on population growth both in terms of production and consumption.
Chris Martenson: So capitalism is – to me, it’s not so much an issue of capitalism as our money system requires growth. So before you gave the clue, which was that as long as we have credit growth over 2% – or alternatively, you said when it slipped under 2%, we went into economic recessions. So there was this correlation very tight in the series between continually expanding our money and money-like aggregate. So when you say credit growth, I think of credit as money. And my definition of the money supply that I need to look at is the change both in currency and credit. And to me, that’s one of the more valuable alignments.
I understand that those need to continually grow because of how I understand how the system of money creation works. And whether it needs to work that way or not—sort of an academic argument. The truth is that the curve fit – an exponential curve fit across our money and credit aggregates for the past 50 years has an R-squared of .99, which means that it’s a nearly perfect fit. So we have an exponential money and credit system. To me, as long as it’s growing exponentially by some percentage every year, it seems to be okay. In 2008, we saw the first contraction in that credit market series in my data series that I have and that was, of course, a very, very dicey, very awkward, bad event.
Put all this together for us, Richard. Do you think it’s possible for our money system to enter this steady state, which we might get to with 9.5 billion people if we can hold that constant? Personally, I don’t think our money system has a steady state that it operates well. I think it has two states – growing and collapsing.
Richard Duncan: Really, I think I agree with everything you’ve said. There’s no difference between money and credit. The system requires credit expansion – money and credit expansion to not just survive but to – I mean, not just to continue but to actually stay out of depression. And so I think that that’s what we’re going to have to have. But since the household sector can’t afford any more debt, that means the government sector is going to have to do the borrowing. And I believe they will, it’s just a matter – I believe they will borrow and spend. The only question is are they going to borrow and spend wastefully on too much consumption and more or are they going to borrow and spend on things that will actually create sustainable growth in the decades ahead. I would like to see them do the latter.
Now, looking out 40 or 50 years from now, honestly, we’re in the midst of such a technological revolution, I think we may be looking at an entirely different age altogether. Something that would be difficult for us to even really imagine at this stage in terms of what may have occurred, in terms of genetic science and manipulation, alteration, and all kinds of other possible scenarios involving really just a future that could be unimaginable from where we’re sitting now.
So I’m not looking out for forty or fifty years. I just would like to see us get through the next ten years and not collapse into a new Great Depression between now and then.
Chris Martenson: I agree, I couldn’t agree more. So you have a really interesting website and I know you started something called Macro Watch where you have a video coming out every couple weeks or so. Is that right?
Richard Duncan: That’s right. I’m now producing something called Macro Watch, which is a video newsletter and it’s essentially me doing PowerPoint presentations. I do a new one every couple of weeks and upload it to my website. And I sell this on a subscription basis, it costs $500 a year. But I’d like to offer your listeners a discount coupon code that would give them a 50% discount. If they visit my website, RichardDuncanEconomics.com and hit the green subscribe button and use the coupon code “NOW,” N-O-W, when prompted, use that coupon code and subscribe for 50% off. And right now, there are more than 14 hours of video content for them to begin watching immediately, including two video courses I’ve done – one called “The Global Economic Crisis Explained” and the other is called “How the Economy Really Works,” plus the access to all the other older Macro Watch videos that have been uploaded over the last year and a half.
So I hope they’ll check it out. It’s RichardDuncanEconomics.com. The discount code is NOW.
Chris Martenson: N-O-W. Well, that sounds like a fantastic offer and I certainly know some people will go and check that out. You have a very crisp and easy-to-understand view of how the economy is actually working. And boy, I think we need a lot more clarity in this day and age. Because I’ve got to be honest, Richard, what I hear from the Federal Reserve often sets my teeth on edge and my toes curling because it’s just so flawed in terms of how I understand the world to be working. But they do have the hands of power and they are going to continue to drive things for quite a while. And so anything that you can do to help people understand where we are, I think, is just a great service.
Richard Duncan: Thanks, Chris. Well, it’s been a real pleasure talking with you. Let’s do this again.
Chris Martenson: Fantastic. I certainly would love to, and thank you so much for your time today. I know I’ve got you late from halfway around the world so thank you so much for your time today and we’ll hopefully do this again soon.
Richard Duncan: Okay, thank you.
Richard Duncan is the author of three books on the global economic crisis. The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003, updated 2005), predicted the current global economic disaster with extraordinary accuracy. It was an international bestseller. His second book was The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. It was published by CLSA Books in December 2009. His latest book is The New Depression: The Breakdown Of The Paper Money Economy (John Wiley & Sons, 2012).
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 has appeared frequently on CNBC, CNN, BBC and Bloomberg Television, as well as on BBC World Service Radio. He has published articles in The Financial Times, The Far East Economic Review, FinanceAsia and CFO Asia. He is also a well-known speaker whose audiences have included The World Economic Forum’s East Asia Economic Summit in Singapore, The EuroFinance Conference in Copenhagen, The Chief Financial Officers’ Roundtable in Shanghai, and The World Knowledge Forum in Seoul.
Richard studied literature and economics at Vanderbilt University (1983) and international finance at Babson College (1986); and, between the two, spent a year travelling around the world as a backpacker.