ay back in 2005, when men were (usually) men and women were “persons,” five dollars could buy a cup of coffee, the government's deficit was only about $300 billion, and everybody was tossing money around like it was the Roaring Twenties all over again, only without the speakeasies and with house flippers instead of flappers, Richard Duncan was out there waving his arms, warning us that the dollar standard had failed. He predicted that America's huge trade deficit had created a bubble economy that must inevitably experience a devastating collapse:
"The world economy is in a state of extreme disequilibrium and is at risk of plunging into the most severe downturn since the Great Depression."
Once the bubble collapses, Duncan predicted, it would force the Fed to choose between enduring a prolonged period of deflation and printing helicopter money to reflate the bubble. Duncan predicted the latter. Now that all of his predictions have come true, it is time for everyone else to understand what happened and why.
Our current problems, argues Duncan, started when the Bretton Woods system of tying all currencies to the price of gold collapsed. What replaced it was a reliance on credit and U.S. dollars that lacked the self-regulating capacity of gold, creating enormous trade deficits in some countries and enormous trade surpluses in others. The U.S. current account deficit flooded the world with dollar liquidity, which caused economic overheating in those countries with trade surpluses. This is similar to what happened just prior to the Great Depression. Duncan explains with remarkable clarity why and how our economic problems occurred.
Excess liquidity, says Duncan, fueled a credit bubble. The bubble, and nothing else, is what has caused the economic crash that followed, just as the bubble we call the Roaring Twenties caused the Great Depression. Blasting Krugman's devastatingly foolish advice to Japan to "PRINT LOTS OF MONEY" [caps in the original], Duncan replies: you can fight fire with fire, but you can't fight water with water: "You can't fight liquidity with liquidity." Since 2005, however, government has been desperately trying to do just that. Duncan predicts it will have no more effect in America than it did in Japan. "The United States' trade deficit policy represents a tragic, brazen flaunting of all classical economic theory and sound economic practice." [p.231]
His solutions--global minimum wages and special drawing rights, or SDRs--may be impractical. But some solution is urgently needed. It is too late to go back to the gold standard, as some have suggested. The amount of gold stored at Fort Knox and the Federal Reserve Bank is barely enough to cover one year's interest on today's government's debt, estimated at $1.5 trillion and rising. Even if the price of gold soared to $10,000 an ounce, we would run out of gold in only a few weeks. The need to prevent that from happening is what caused us to drop the gold standard in the first place.
The Dollar Crisis is an outstanding analysis by one of the few people who understood what was happening to our economy, what the implications were for the future, and how we could escape the catastrophe that today seems inevitable. Save this book while you burn your copy of Keynes's The General Theory of Employment, Interest and Money to keep warm when GD II hits.
aug 14, 2011
conomists are surpassed only by politicians in their ability to misunderstand the causes of economic crises. In this sequel to The Dollar Crisis, Richard Duncan is right about two things: that we are in the most serious global crisis since the Great Depression, and that fundamental restructuring of our economy is needed. His history of how our economic crisis came about is riveting. But I found some of his suggestions about how to cure it unconvincing.
In order to know how to restructure our economy, we need to face the truth about what went wrong. How can Duncan be so sure, for instance, that the "stimulus" and QE prevented a depression? The evidence suggests that, on the contrary, they prolonged and deepened the crisis, just as years of government interference before that caused the banking crisis, the mortgage crisis, and (almost lost in the depths of antiquity) the S&L crisis. We can all agree that government deficit spending played an important role in getting us into this mess. The question is: can that same government be trusted to get us out, or will it continue its past ways until it runs us off the cliff and plunges us into the raging torrents of illiquidity? Duncan thinks it can be trusted; parsimony suggests not.
According to Duncan, the policies of LBJ and Nixon were responsible for the unending series of financial crises the world has experienced since the late 1960s. The "corruption" in the title refers to the world's abandonment of the gold standard after the 1971 Breakdown of Bretton Woods (for some reason, I always start hearing banjo music when he writes that). According to Duncan, this caused free trade to evolve into debt-financed trade. The United States, says Duncan, simply cannot produce anything the world cannot buy more cheaply elsewhere. That may be true. But when Duncan says "we are all Keynesians now" he misses the point. We are witnessing not a resurgence of Keynesianism, but its death. Keynes's theories are as discredited now as Karl Marx's theories were after the fall of Communism. So far, only a handful of economists are ready to admit it. Until the rest of them do, they will continue to promote strategies that, at best, will be either impractical or ineffectual and, at worst, disastrous.
Duncan's strategy is for the government to spend tens of trillions of dollars on new social programs aimed at creating new high-tech industries. This is perhaps the most ineffectual way imaginable to build up the economy. When unemployment is high, power flows away from the inventive class and into the hands of managers and bean-counters. The first department to be cut is R&D. The official explanation is always "We are going to focus on our core business," which really means "We are going to hunker down, stop innovating, and cut staff." Even if companies used taxpayer money to invent new products, it wouldn't change the fact that it's 20 times cheaper to manufacture it abroad. The companies would burn up the money, then ship the manufacturing to Asia. Spending money we don't have to cure a problem caused by spending money we don't have makes absolutely no sense.
No amount of tax money thrown at "clean energy" or "global warming" will fix a broken system of international trade. If our problems resulted, as Duncan argues, from a trade imbalance caused by abandoning the gold standard, we should try to solve the fundamental problem, by inventing something else that serves the same purpose. Borrowing and spending a few more tens of trillions of dollars in desperation would just exacerbate the problem. And where would all these tens of trillions come from? When Duncan says, "Ample funding is available" to pay for this carp, my guess is he's looking at you.
sep 04, 2011