The New Depression: The Breakdown of the Paper Money Economy [Hardcover]

The book's exposition is a paragon of clarity, the concise text is incisive while the arguments presented are amply documented in a wide array of graphs, histograms and tables derived from impeccable sources.

The author expounds his original and profound 'Quantity Theory of Credit' which presently that is for the last forty years has replaced the 'Quantity Theory of Money'. The watershed occurred in 1968 when the United States removed the gold backing from the dollar and 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 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 in the U.S. 50 times between 1964 and 2007 that is from $1 trillion to $52 trillion. So long as it expanded, prosperity increased;asset prices rose;jobs were created;profits proliferated.

Then, in 2008, credit began to contract. 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 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 a geopolitical catastrophe.

The above should not come as a surprise for inevitably in the economic cycle, boom is followed by bust. More particularly boom gives way to depression when credit stops expanding. Von Mises put it aptly:'a credit expansion boom must unavoidably lead to a process which everyday speech calls a depression.' This was true not only in the Great Depression, but also in severe economic crises that have broken out following the collapse of Bretton Woods in 1970:the Latin American debt crisis in 1980, the Japanese crisis that began in 1990, The Mexican peso crisis of 1994, the Asian crisis of 1993, and the Russian crisis of 1998. When credit stopped expanding, the depression began. The difference under the current fiat money is that the boom and bust cycle is much longer because now credit can expand for longer than the money supply could within the commodity money based system of the past.

The government policy response to the 2008 crisis was to perpetuate the boom through the availability of massive credit liquidity in two rounds of quantitative easing (QE). One appreciates this response when one realizes that the Fed perceives as its two mistakes in the Great Depression: the increased interest rates in late 1929 to slow down the stock market bubble and that it did not print money and bail out all the banks when the credit the banks had extended could not be repaid.

Quantitative easing is a euphemism for creating out of thin air fiat money. The 'quantity' referred to is the amount of fiat money in existence. The creation of additional fiat money 'eases' the liquidity conditions and lowers the cost of borrowing in the credit markets by adding to the supply of money available to borrow. Once the Fed had lowered the federal funds rate to 0 percent, QE was its only remaining option for stimulating the economy.

The Fed grew its balance sheet from roughly $900 billion before the launch of QE1 in November 2008 to $2.9 trillion at the completion of QE2 in mid-2011. It would be productive to assess what this massive creation of $2 trillion in new fiat money accomplish.

Government deficit spending provided the aggregate demand that kept the economy from breaking down when much of the private sector became incapable of repaying debt. Every time the economy slowed or a crisis erupted, the Fed cut interest rates and eventually resorted to QE that encouraged credit expansion and the economy re-accelerated. The reality, however, was that each intervention by the Fed simply created greater distortions throughout the economy as more and more credit was misallocated into nonviable investments or simply wasted on consumption. The economy grew, but it grew in an unhealthy and unsustainable manner. Moreover, QE obeys the law of diminishing returns.

The author suggests rational investment as the only viable alternative. In this instance the government borrows and invests in projects that give return as opposed to consumption, promising sustainable development. In this way the government not only supports the economy but actually restructures it to restore its long term viability.

The author envisages such a project namely American solar of ten year duration and total cost of $1 trillion with a view to rendering the U.S economy entirely fueled by domestically generated solar energy by 2025.

The book not only provided a sound analysis of the present crisis but also and importantly provided me with a profound insight into the true nature of the contemporary economy.

I got sent two copies of this book by mistake. Great! Now I can send one to George Osborne to teach him why austerity is self-defeating and will drag us into worse trouble than we are. If I had a third copy I would send it to Angela Merkel. The first part of the book did not really tell much that has not been said already. The second part of the book however is gold. The author tries to project developments and trends to the future. This is a brave thing to do, as it will render the book quickly out of date, but I think the author felt that some things had to be said, and be said forcefully. The argument is that attempts at austerity will sink the system. He explains how maintaining credit expansion is necessary to prevent systemic and total financial collapse. How can this go on? He suggests deficit spending can go on for a while yet, but proposes a solution. A massive drive to invest, rather than subsidise consumption. What could we invest in? How about adapting production to green energy, solving the economic and the environmental crisis at the same time? If you think this is far fetched, think of the alternative: continuous crises of increasing severity for ever!

There are a lot of books on the financial crisis, but this one delivers the most parctical insights with the least amount of pages. Really easy to read and well thought through, not to mention the author even makes a great case on how to help fix the situation. Who ever wins the election, lets hope they invest in our childerns future and not promote more consumption.