THE NEW DEPRESSION: THE BREAKDOWN OF THE PAPER MONEY ECONOMY by Richard Duncan

John Wiley & Sons 2012. ISBN 978-1118157794

This impressive book coins the term "Quantity Theory of Credit" which places the growth (or decline) in credit squarely at the centre of world economic affairs.

What the author, Richard Duncan, does, is to show what happens in a genuine capitalist free market system of world trade (with asset backed currencies and traditional reserve banking) and compare it with the present ersatz system in which currencies lack asset backing and bank liquidity reserves are minimal.

He shows the consensus Monetarist economic equation: MV=PT = GDP (Amount of money x How fast it circulates = Price level x Volume of goods in circulation = Annual level of economic activity). Where an increase in money (M) can lead to an increase in the price level (P) or it can lead to an increase in the amount of goods bought and sold (T). The important point being that too much M will send up P = inflation = higher interest rates, so M can only be increased within certain limits.

Duncan's equation is, CV=PT = GDP (Amount of credit x How fast it circulates = Price level x Volume of goods in circulation = Annual level of economic activity).

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.

He gives the example of Michigan auto workers who recently earned $ 200 a day while Chinese and Indians can now do the same job for $ 5 a day, and, although he doesn't mention it, service jobs are now going the same way (e.g. a study undertaken in 2006 by a Princeton economist and former Vice-Chairman of the Federal Reserve, Alan Blinder, which concluded that approximately 42 million US jobs were potentially off-shoreable, with his focus not on manufacturing jobs but on the high-tech service occupations that were supposed to compensate for the loss of manufacturing jobs). (top)		 Basically the QTC (Quantity Theory of Credit) shows that since the 1968 abandonment of gold backed dollars, credit/money could be expanded by big multiples (actually 50x from 1964 to 2007) to generate record levels of economic activity.

Isn't this good? Well, yes and no.

Since we are looking at an integrated global economic system then maybe the results have to be evaluated globally. The Chinese force the undervaluation of the Yuan (overvaluation of the $) by purchasing $ trade surpluses with newly printed Yuan and sending the $ straight back to the U.S.A. usually in the form of bond purchases. The dollar stays strong and the Chinese can develop their productive skills and industries on the back of U.S. demand so the Chinese gain in employment/ development and wealth.

The U.S.A. contracts giant debts (mostly for unproductive consumer and government spending) while the outsourcer corporations book record profits and the borrowed money itself feeds into speculation.
However, the author shows that even the best parties eventually come to an end which seems to be where we are now., and in Chapter 10 he interestingly looks at different resolutions to excessive national indebtedness.

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).