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November 21, 2008

Who is Richard Duncan?

Friedrich von Blowhard writes:

Dear Blowhards,

I want to know if Richard Duncan has any good ideas right now.

Who is Richard Duncan you may ask? I myself had no idea of his separate existence until last night, when I read a blog post that mentioned him.

He turns out to be a financial analyst who in 1993 was one of the first people to warn of the impending collapse of the Thai economy and the Thai stock market (four years before it happened). Subsequently he worked for both the International Monetary Fund and the World Bank in Washington DC as a Financial Sector Specialist.

But more to the point, he turned out to have one heckuva crystal ball, accurately laying out (in considerable detail) our current economic problems in his book,“The Dollar Crisis: Causes, Consequences, Cures.” You can order it here.

What's remarkable about this is that the book was published back in 2003. That is, five years ago. And as the Financial Times points out here, Mr. Duncan’s predictive powers haven’t failed him; he also accurately predicted the course of current-day Fed policy (i.e., that the Fed would be forced to make massive loans to everyone and his brother) over a year ago.

A little googling got me to this interview with him (presumably run around the time his book was published) that laid out his thesis. I would strongly advise reading it, as it accurately and pithily summarizes the financial problems we are seeing today in a simple, straightforward way. You can read it here.

The key takeaway point is that the cause of our current financial and economic problems (if one ignores the hubris of our government and financial leaders who thought they knew what was going on but were really just being taken for a ride) was our persistent and immense trade deficit. (Which is, of course, in turn a symptom of a serious lack of US economic competitiveness and general malaise going back decades, despite what you read in the 1990s.)

As Mr. Duncan said back around the time his book was published (in 2003):

Many benefits are derived from trade between nations. However, the trade system that evolved following the collapse of the Bretton Woods System produces very serious side effects as well as benefits. In fact, the existing trade arrangements are destabilizing the global economy by creating economic bubbles, banking crises and deflationary pressures. These problems have arisen because international trade has become so unbalanced. The United States is buying $1 million a minutes more from the rest of the world than the rest of the world is buying from the US. Or put differently, last year the deficit was the equivalent of almost 2% of global GDP. To put that into perspective, global GDP grew by less than 2% last year. So, were it not for the US deficit, it is quite likely that the global economy would have actually contracted. The United States’ deficit makes the United States the world’s engine of economic growth. However, the United States must finance this deficit by issuing credit. Credit expansion on such a large scale is creating a global credit bubble. It is also unsustainable. The United States will not be able to finance such large deficits forever. When the US deficits return to equilibrium, a severe and protracted global recession is likely to ensue unless policy makers can devise a new source of global aggregate demand to replace that which is currently being provided by the US current account deficit.

In other words, this isn’t really a problem with overly generous mortgage lending. The sub-prime mortgage crisis is just one of the ways around the world that the underlying problem, the global credit bubble necessitated by our trade and current account deficit, has emerged. Mr. Duncan also claims that another symptom of the same disease was the historically unprecedented growth of China, which -- unluckily for the Chinese -- he describes in the same terms as the 1995-2006 U.S. real estate market, i.e., as a bubble.

And, of course, bubbles pop.

If the root of the problem is trade, and it is, it’s high time we began thinking far more seriously about this subject than we have in the past. (You might consider an essay that you can read here. Also, check out just about anything the blog, Trade and Taxes, which you can see here.)

Brad Delong, in an article you can read here, accurately points out that we live in the “Republic of the Central Banker” with Mr. Bernanke functioning as "the closest thing to a central economic planner the United States has ever had." It’s true, our political system has gutlessly and foolishly delegated all economic policy to the Fed for many decades now. But what Mr. DeLong doesn't point out is that there’s a major gap in the Fed’s powers: it has no policy lever with which to control the size of our trade deficit or the value of the dollar. So when faced by trade imbalances, the Fed ended up simply accommodating the elephant we were riding on, claiming we were delighted to go wherever the trade-deficit-elephant took us. We didn’t need 3 million manufacturing jobs, we could just happily recycle all of the cheap foreign money coming back into our economy via our wonderful, hyper-advanced financial system. Of course, what we lost was domestic production, wages and profits; what we got was, um, debt.

I don't know about you, but staring into the gun barrel of deleveraging and deflation, that seems like kinda a bad deal to me right now. But then, I'm just an old fool; this is Mr. Bernanke's world, and I just live in it.



P.S. Of course, I should warn you, any attempt to discuss the role of trade in our current problems will get you branded as a knuckle-dragging troglodyte by all right-thinking economists, who all devoutly worship at the altar of ‘free trade.’ Expect to hear all about how the Smoot Hartley tariffs caused the Great Depression. Don’t expect to hear how, even if that’s true (which I don’t believe it to be), that might just mean that trade is too important to be left up to the free traders and the corporate interests they flack for.

posted by Friedrich at November 21, 2008


dear Mr uncan, donald et al.

please read my mortgage crisis primer.

(do a google search on the above terms to find it.)

Thank you.

Posted by: Ramesh on November 21, 2008 9:11 AM

It's not free trade that's the problem here, but the monetary system.

Under the classic period of the Gold Standard, we had fixed exchange rates and 'rules of the game' which avoided excessive structural imbalances. When a country ran a balance of payments deficit, it had to deflate until its cost structure was competitive; when it ran a surplus, it had to reflate.

In that situation, free trade (which DOES give superior outcomes in most cases) can generate the greater prosperity. But we can't go back to the Gold Standard because (1) there's not enough gold and (2) people wouldn't follow the rules - indeed, the failure of the Fed to follow the rules in the 1920s probably contributed to the bubble and the following crash.

Posted by: Anonymous on November 21, 2008 10:32 AM

FvB: I was reading along, and beginning to compose a comment in my head, as one does. Then I got to your P.S. and realized you'd already written it. It bewilders me to read any number of "serious" econ and market blogs where our massive trade imbalances are treated as marginal or extraneous to the Current Unpleasantness - and furthermore, that the Current Unpleasantness can be dealt with either without addressing those imbalances, or by piling on more of the same. The same goes for Congressional hearings and public political utterances. (And this is aside from the pie-eyed libertari-tards who don't appear to have any familiarity with real-world trade data.) Granted I am but a dumb Iowa housewife, but no matter how I squint and sweat my neurons, I cannot but see that the root of the mess is what Mr. Duncan and his like say it is. But what do I know? If people much smarter than I say that eternally maintaining the U.S. as Import Nirvana, with infinite debt and infinite deficits, is merely a matter of hitting on just the right monetary, no wait, fiscal stimulus plan - well, who am I to quibble? I'm sure it makes perfect sense to people who understand these things.

Posted by: Moira Breen on November 21, 2008 12:40 PM

Anonymous, I hear a lot of people saying we can't go back on the gold system because we don't have enough gold. I don't quite understand that argument. Just because the monetary exchange rates would at present mean that gold is more "expensive" per ounce, what would the quantity of gold have to do with this? Not arguing. Just asking.

Also, Frederich, according to Austrian theory, the 1929 crash was fueled by excessive credit expansion in the decade following WW1. Another classic central banking bubble.

Posted by: Charlton Griffin on November 21, 2008 12:46 PM

remember the GATT?

It's just come to bite you(the US) in the ass.

Posted by: Ramesh on November 21, 2008 2:55 PM

Yes, the big problem is that we just aren't very productive anymore relative to our consumption, so we've been giving pieces of paper to the Chinese pledging that our kids will pay it off.

Posted by: Steve Sailer on November 21, 2008 5:57 PM

More gas for the fire: Lew Rockewell interviews Peter Schiff.


Posted by: Michael Blowhard on November 22, 2008 12:14 AM

Re: predictions.

I was going to link to a Harry S. Dent (Bubble Era permabull) book which came out in 2003 predicting a roaring bull for 2003-2008. Googling for it failed to find it but turned up a similar title for 2006-2010. I could have sworn it was 2003-2008. Another search page turned up a result for 2005-2009, so maybe he was just updating to keep it current. If he'd stuck to his guns in early '03 it would have proven one hell of a prescient call and probably earned him permaguru status (one exceptionally good call is good for a couple of decades in this biz).

His demography-driven approach to economics seems fruitful but few other economists appear to have shown much interest. In a nutshell, it claims the Baby Boomers entering the most productive years of their lives creates a disorting 'bulge' as it moves through the economy. Seems plausible. Knowing what hbd-ers do, whatever effect the boomer bulge had was in no small part due to its being white, thus as that segment of the population shrivels, only to be replaced by a demographic, let us say, distinctly less productive, the effect is likely to be reversed, ie at least for the market, some tough times ahead.

Posted by: silver on November 22, 2008 12:19 AM

I fall firmly in the monetary policy camp. The data clearly show that money creation was tampered with on an epic scale. Leaving alone the money supply would have caused self-regulating deflation and compensating commodity inflation.

Re. a modern gold standard: it would be a hideous mistake, on the scale of the Treaty of Versailles. We are making increasingly clever nano-structured materials, and I think it is just a matter of time before someone figures out how to latch on to gold atoms in seawater. The concentration is low, but once you can sequester it, a simple water pump will bring you huge quantities. The result would be very sharp and totally unregulated inflation. Think worldwide bank holiday.

Posted by: Daniel Newby on November 22, 2008 12:39 AM

There was this funny little man in Australia Bob Santamaria who was preaching about this current economic calamity back in the early 90's, my thinking has been heavily influenced by his "point of view". He beats Mr Duncan by quite a few years.

The current economic crisis cannot be pinned on one thing, rather it is the consequence of the post sixties cultural milleau in which economic theory and practice subsists. But this is stuff for a another post.

Free trade is not the problem, the problem is the imbalance of trade. Trade should be free and balanced. I'm a big believer in the import certificate proposal. In operation, it would probably be a more sophisticated version of the gold standard.

But balanced trade is not the only issue confronting the world at the moment. Take home wages for working people have remained static, in real terms, since the 70's. This, combined with cultural and political opposition to thrift, has meant that many Anglo western countries in particular, are capital scarce and cannot fund themselves. What we need is a return to virtue economics, an economic system which punishes waste by either rich or poor,and rewards financial virtue. No more undeserved welfare payments, either to Wall St or Lazy bums. No more privatising profits and socialising losses.

I was watching Hugh Hendry today and he made quite a frightening statement, if American households started saving at the rate they were in the early 90's, roughly 10% of aggregate demand in the U.S will vaporise. Hold on people, it's going to be a long ride.

Posted by: slumlord. on November 22, 2008 7:48 AM

Hey, what's with all the gloom and doom? Obama has arrived. He will print us out of our present soft patch, and he's effecting CHANGE (like appointing Hillary to Condi's post). Plus, the government will be rolling in cash from the returns on the bank equities it's buying.

Couple of interesting links:



Posted by: James O. on November 22, 2008 10:23 AM

When I hear people blame economic crises on the way the US trades it makes me cringe a bit. The United States (and the European colonies that predated it) have had trade deficits for roughly 450 of the last 500 or so years. If trade deficits were really so bad long term, the US would not be the most economically powerful country in the world today.

The Fed can strongly influence the value of the dollar by printing more dollars which after a certain level leads to the devaluation of the dollar. Easy credit in the US was at least partially caused by the massive expansion on the money supply. More dollars available to loan, more supply relaive to demand equating to lower interest rates. This led to hyperinflation of housing prices, particularly in supply constrained coastal markets, and a commodities bubble. We are seeing the bubble pop for both housing and commodities (oil is now off $100 per barrel from earlier in the year).

Productivity keeps growing, continuing a streak that started in the late 1980's, and this is a great thing for the economy.

Talk about "shipping jobs overseas" is useless without a look at the overall trend in unemployment. Outsourcing began in earnest in the 1990's and has continued to today. Unemployment rates dropped from something like 8% nationally in the early 90's to mid-4% for much of this decade. If outsourcing were so bad, the jobs lost to outsourcing would not have been filled by similar (or not) jobs.

Take home wages have been somewhat stagnant for the past 25 years, but that statistic ignores the large expansion of non-wage benefits. How much is healthcare worth to quality of life (that may or may not be monetized) that is light years better than it was 25 years ago? Health care benefits (and the cost to employess that affect take home wages) are not included in this base statistic always used. Nor are the vast expansion of tax-free retirement accounts (IRA, 401k) that include take-home wages not included in the base take home wage statistic often cited (think about employer matches to employee 401k contributions). Sick days, vacation days, maternity leave, career counseling, workforce training to advance careers, all of these things could be monetized to show what has been added to the average employee's compensation. All mostly are ignored in media discussions of take home pay.

Trade imbalances are seen in government debt that countries buy (like T-Bills). We see time and again how during economic downturns the flight to quality flows towards the US. Is it a bad thing that individuals, companies and countries "invest" in the US government? Where would they take their money to if they decided to dump a very large percentage of their holdings? Trade offs are everywhere, but people and organizations vote about econimic matters with their actions. Worry about China dumping US Treasuries overlooks the destabilizing impact that would have on the US (and therefore China's) economy. Self interest often trumps all.

I am an optimist. While there will be ups and downs, and even large distruptions occasionally, the long term tragectory in the US economy is upward.

Posted by: daveLA on November 22, 2008 1:34 PM


Think about it this way:

There's 100,000-150,000 tons of gold. About a third of it is used in practical ways (think about high-end electronics). Let's say there's 80,000 used as a store of value - that includes central bank reserves, but also private investors and jewellery.

Currently, gold's say $800/oz. According to Google's calculator, there's 29,167 troy ounces to a ton, so that makes a ton of gold worth $23m. 80,000 tons are therefore worth $1.9trn.

Now, on a pure gold standard, all money is backed one-for-one with gold. 'Money' here is taken on its narrower definition - all cash in circulation and all reserves held with the central bank, high-powered money as its known. A quick Google gives us some narrow aggregate data for the US dollar and the Euro, $1.4trn and around $3trn respectively. So that's $4.4trn for the bulk of the western world.

Now we see the start of the problem - that there's $1.9trn of gold, but we'd need $4.4trn just to cover two currencies (there's no point having a gold standard with just one country on it). Let's say including Japan, China, India and the UK (say) takes us up to around $8trn in needed monetary holdings... That means we'd need to set the gold price at $3,200/oz to make it possible, and probably much higher (this assumes ALL gold is used for this purpose, which means buying back all gold jewellery and private holdings... so maybe $6,400/oz might be more likely).

Now, think about what effect quadrupling-or-more the price of gold would have on the world economy. Gold's a useful commodity, after all. And then think about the fact that the supply of gold would have to keep up with global growth in order to stop there being continuing price deflation (as there was between 1874-1896). Assuming 3% global growth - given China and India - that would mean an extra 2,400 tons a year would be needed - which is about the limit of what the mining industry produces each year. So again, that means all gold gets bought to maintain the financial system, and none of it is used in the real economy.

You have to consider whether the gold standard is worth what it effectively would involve - removal of gold from most other purposes. Bearing in mind how important gold is in a lot of technology applications, forcing the price up to $4,000+ would probably have traumatic consequences for the rest of the price structure as the market tries to readjust.

Posted by: Anonymous on November 22, 2008 1:52 PM

Thank you, Anonymous, for that detailed explanation. That seems very straightforward. But let me ask you this: since gold is not plentiful enough, could we not use silver as the standard instead? It seems to me that silver exists in the quantity necessary to fulfill your criteria. A metal standard would prevent government from borrowing beyond tax receipts, printing worthless currency, and then taxing citizens with hidden inflation.

Posted by: Charlton Griffin on November 22, 2008 5:46 PM

Oh, lordy, I just read the last of the Duncan interview: "However, gaining control over the global money supply would not be sufficient to prevent the inevitable correction of the US current account deficit from ending in a severe and protracted global recession. I believe those countries that are now dependent on export led growth must develop new sources of domestic demand and I believe this could be achieved by an international initiative to put in place a global minimum wage."

To paraphase Wolfgang Pauli, this isn't even economics.

Posted by: Daniel Newby on November 22, 2008 6:46 PM

The central thesis, and I mean the central thesis, of Duncan's work is that the dollar will collapse in value leading to tremendous problems for the U.S. as it tries to finance it's debt. Duncan bases his entire theory on that premise. We are now living the ultimate crisis and time of stress and the dollar has exploded upwards in value, completely contrary to what Duncan would have predicted. Gold has actually droppped in value as well. Now the U.S. can actually issue 30 year paper at incredibly good rate. Before you go praising Duncan's work you might want to look into why he has been so wrong about the dollar.

He's just another dead ender/gold standard/gold bug nut.

Posted by: bill on November 22, 2008 10:24 PM


As I understand it, silver was less favoured as money in the modern age because it's less stable in value than gold. If silver can start going up and down quickly - and the sudden surge of purchasing it would probably trigger a big increase in supply, if it's as plentiful as I understand it, then that in turn could trigger inflation, defeating the object.

Personally, I'd favour fixing the value of currencies against a standard basket of commodity prices and requiring Central Banks to buy and sell forwards of their own currency's price against that basket to stabilise it, which means they'd get out of the interest rate-setting business, and focus on creating only money to meet demand at a given value of the currency. But I don't see it happening.

Posted by: Anonymous on November 23, 2008 5:37 PM

See the opinion piece by Christopher Wood in the 11/24 edition of the Wall Street Journal. He says foreign creditors are going to start fleeing the dollar and running to gold, thereby setting up the need for a return to some type of disciplined global financial system backed by precious metal.

Posted by: Charlton Griffin on November 24, 2008 9:16 AM

Man, I feel so dumb. I still don't get how a trade deficit requires the US government to create credit. Why? A trade deficit is a negative balance of payments, isn't it? That may or may not be a good thing or a bad one, but it doesn't mean that the US owes anyone anything. The negative balance of payments is derived from stuff the US has paid for already. It doesn't create any debt at all.

The United States’ deficit makes the United States the world’s engine of economic growth. However, the United States must finance this deficit by issuing credit.

Like I said, I feel dumb. The government budget deficit causes a need for credit expansion via the issuance of (among other things) money and IOUs and such and such because the government spends more than it takes in. But that's not the trade deficit. Is it? The trade deficit isn't America spending more than it takes in, it's America buying more than it sells. Not the same thing. Is it? I mean, I really don't know. Is Duncan talking about the trade deficit like it's the budget deficit? I don't know.

Like I said, I'm dumb. I just don't get this international money stuff at all.

Posted by: PatrickH on November 24, 2008 1:03 PM

Dear Bill:

You say,

The central thesis, and I mean the central thesis, of Duncan's work is that the dollar will collapse in value leading to tremendous problems for the U.S. as it tries to finance it's debt. Duncan bases his entire theory on that premise. We are now living the ultimate crisis and time of stress and the dollar has exploded upwards in value, completely contrary to what Duncan would have predicted.

Clearly, the collapse of the dollar would have already happened if the US dollar wasn't the world's reserve currency. I'm guessing that Mr. Duncan is assuming that this particular get-out-of-jail-card won't work forever, and someday we'll have to act like all the other currencies out there, and live within our means. Maybe he's wrong about that, but I ain't so sure. Note this from Yves Smith of Naked Capitalism: Wolfgang Munchau said today in the Financial Times and others have pointed out earlier, the Fed seems worried solely about deflation, and not about a possible US currency crisis. This is a shocking oversight. The Fed (and many others) keep drawing analogies between the US in the Great Depression and its situation now. That is flawed and dangerous.

The US was a massive creditor before the Depression and ran a very large trade surplus, to the point where the gold accumulation by the US was destabilzing to the world financial system. Sound familiar? That is the role China plays now, not the US.

What happened to the nations that were in the US's shoes at the onset of the Great Depression, the overconsuming, indebted European customers of the US? They devalued their currencies, defaulted (or partially defaulted and forced a renegotiation) on foreign debts, and suffered milder downturns than the US did.

But the authorities are not even considering the possibility of debt default or a dollar crisis in their plans. And if you think recent dollar strength argues against it, think again. The massive dollar purchase are due to unwinding of dollar based debt.

Posted by: Friedrich von Blowhard on November 24, 2008 6:44 PM

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