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.
Is it still worth reading this book written in 2011 about the events after 2008?
Yes I think it is although I have a couple of caveats:
1) Inevitably the book is America-centric with little consideration for the rest of the world accept for how it may impact on or exaggerate changes in America. 2) It's odd reading predictions for the future from 2012 onwards when you know that the worst was postponed.
The book presents an excellent argument for the idea that America (and the world) has enjoyed decades of growth on the back of an exception increase in overall debt levels (consumers, businesses, financial institutions and governments). More frightening is perhaps that these incremental increases in debt have a lesser and lesser impact on growth.
It also rightly points out that globalisation has given us in the west short term gains but it has hollowed out our economies as manufacturing can't compete when labour costs are 90% or more cheaper elsewhere.
We have to run harder and harder just to virtually stand still.
It also makes it clear that policy options are limited unless we want a crushing depression. If we carry on as we are increasing debt levels, we build a bigger crisis in the future, if austerity is seriously undertaken then things crash quickly (all this talk about austerity in the UK is more talk than action)...
What's needed is better government spending, not less. By that the author means investment in resources that will deliver improvements in the future and he suggests solar power as an obvious choice.
I agree but I believe the future prospects are worse than the author suggests. I believe we are heading to a situation where excess debt is just one level of problem but we need to add to that poor demographics, natural resource limitations and increasingly expensive commodities and the adverse effects of climate change.
Things will be much harder but the book argues that many of the extreme ideas will make things much worse.
Baby boomers and Generation X have lived through a bountiful period of easy growth and have largely wasted the opportunity on increasingly short term consumerism. There has to be a mind-shift and I don't see any real movement to where we need to be.
My overriding thought is that I wish we could go back and change the past to reverse some of these decisions that appeared to make sense at the time. Sadly we can't.
About my book reviews - I aim to be a tough reviewer because the main cost of a book is not the money to buy it but the time needed to read it and absorb the key messages. 4 stars means this is a good to very good book.
If anyone needs a bare bones account how the world economy is in such a mess, then this is the book for you. Written in a style that does not require a PHD, it tells the story of how FIAT money and credit have destroyed our financial system. There was many WTF moments during reading
If like myself anyone who had a nagging feeling in the back of their minds that something is quite not right with the world, this book will set them on the path of enlightenment. I have done extensive reading since the 2008 crisis and the book confirms much of what I have learnt.
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).
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).