Below you’ll find an excerpt of remarks made by economist Richard Duncan in Melbourne in late March of 2014. He was in Melbourne at my invitation giving a keynote address to the ‘World War D’ conference, a conference about money, war, and financial survival in the digital age.
Duncan was one of the keynote speakers
Others were Currency Wars author Jim Rickards, ‘Dr Doom’ Marc Faber, author Satyajit Das and many more. I remembered Duncan’s speech yesterday after I saw a tweet from Jim Rickards. Jim pointed out that the Fed isn’t quite out of bullets yet.
This is important because yesterday’s events make it more likely that whatever the Fed’s next response, it will happen before the market gets out of hand like it did yesterday. You can’t survive a near miss like that and not put ‘Plan D’ into action. So what is plan D?
Well, it could be QE4. Duncan described this as de-facto debt cancellation at WWD. In effect, the transfer of systemic liabilities continues in the same vein since 2008. Back then, the liabilities of the big banks and insurance companies were transferred to the government balance sheet. When that got to be too big a job for some governments, central banks were brought into the game.
A central bank can load up on government bonds and hold them to maturity if it likes. This gets liquidity into the system (they print the money to buy the bonds) and debt out of the system. The central bank can sell them at a profit if things improve or work out some sort of restructuring and rescheduling with the government.
The important thing is that the debt – debt that impairs growth, which is what you really need to get out of a depression – is off the government balance sheet. It’s quarantined in a part of the system where it does the least damage. And what does that do?
It frees up fiscal policy!
Or, in plainer terms, the government is now free to rack up even newer debts to an even larger percentage of GDP. It’s what Krugman advocated in The New York Times over the weekend. And it’s what Duncan described last year as ‘creditism’.
When you hold it up, twist it around, and get the right light on it, ‘creditism’ looks a lot like inflationism to me. It’s based on the idea that government-directed capital investment can produce breakthrough technologies, economic growth, peace, prosperity, and social justice.
Anyone with a real-world knowledge of human action knows the above is a pipe-dream. Or, in more technical terms, absolute BS. But that doesn’t mean it won’t be tried anyway.
And who knows? Dr Tubbs is probably right that we are living in one of the most exciting periods of technology development in all of human history. One breakthrough in energy, one breakthrough in medicine, one single innovation could change everything. A brass ring. A golden ticket. A get out-of-debt-jail free card!
Here’s Richard:
Introducing creditism
You can think of the global economy now as like a big rubber raft. Instead of being inflated with air, this raft has been inflated with credit. On top of the raft, you’ve got all the asset classes, stocks, bonds, property, commodities and gold. You’ve got seven billion people of the world’s population.
The problem, though, is that the raft is now fundamentally defective. It’s full of holes. The credit keeps leaking out and the natural tendency of the raft is to go down. When it goes down, all the asset classes go down together. The people start to get their feet wet.
The policy-makers are absolutely terrified, and rightly so, that if this raft sinks, it’s going to be a replay of the 1930s and 1940s. There is only one possible policy response, and that’s to pump in more credit, and that’s what QE1, 2, 3 have been about. When they pump in more credit, the raft inflates, all the asset prices go up again together – stocks, bonds, commodities, gold – and the people are once again dry and happy.
The reason the raft is fundamentally defective is because there has been so much credit created globally, seven billion people on earth now just don’t have enough income to serve us the interest on all this debt. They keep defaulting – sub-prime loans in Ireland and Spain and Japan and China and the raft tends to sink. This is what we’re going through.
The only one policy response is to re-inflate the raft
How long can this go on? Is this depression really inevitable? We have to think very carefully about this, because, again, if it collapses, it could be catastrophic.
The private sector in the US and globally may not be able to bear any more debt. They had so much debt already, but the government sector can. In Japan, government debt-to-GDP, the ratio of government debt-to-GDP is 250%. Their bubble popped 24 years ago. They’ve increased their budget deficits every year, had big budget deficits and their debt has gone from 60% of GDP to 250% of GDP.
The US government debt is only 100% of GDP. The US economy is $17trn in size, so even if the government took this up to 200% of GDP, that means the government can borrow and spend another $17trn before it hit 200%, assuming zero percent GDP growth. Of course, if the government spends $17trn, the economy is going to boom; it’s going to double in size.
There is no limit here as to how much the government can borrow basically
They can finance it with fiat money creation to a certain extent, because globalisation is so deflationary. Japan has got away with this for 24 years. Do they have hyperinflation? Do they have double-digit interest rates?
The Japanese government borrows money for ten years at 60 basis points a year. They have extremely low interests. That shows the government debt in Japan has gone from 60% of GDP to 250%. That’s how Japan has avoided depression for the last quarter or century.
Our economic system must have credit growth to survive and that the government has the potential to borrow trillions of dollars more. How about we learn from Japan’s mistakes? Japan took its debt up to 250% of GDP. They wasted all of this government money that they borrowed, building bridges to nowhere and paving the Japanese countryside with cement.
What the US government should learn from this experience is that they’ve been continuing having very large budget deficits. Let’s not waste all of this money on too much consumption and unnecessary wars.
Why don’t we invest this money in transformative new industries and technologies?
What I’d like to see over the next ten years is the government investing a trillion dollars in solar energy, and a trillion dollars in genetic engineering, and a trillion dollars in nano technology, and a trillion dollars in biotech. Pick a couple more – you can choose – north of a trillion dollars in all of these.
This will induce a new technological revolution that not only will prevent a new depression, but it will be so enormously profitable when we start selling a cancer vaccine or a molecular therapy that reverses aging that these things will pay for themselves. Not only will they balance the budget, they will pay off the entire national debt. Moreover, they’ll create technological miracles and medical marvels that would improve the wellbeing of everyone on earth.
That’s the opportunity that exists within creditism, in a world where we have globalisation, where our government can borrow trillion of dollars and invest it, and finance it with fiat money creation with no hyperinflation. This is a not only a once-in-a-lifetime opportunity, it’s a once-in-history opportunity. It’s not going to last. It is a window of opportunity. It will close.
Unfortunately, no one seems to see it the way I do. Most likely, the politicians are not going to invest $5trn in the industries I have just named. Most probably, creditism is going to collapse and breakdown into a new depression. Investors need to understand that in our world, credit growth drives economic growth. Without it, we’re going to have a depression. The Fed is going to act as long as it can to prevent that from happening, because they’re terrified of replaying the 1930s and ’40s.
Category: Economics