By Joh Burton
I read “The Dollar Crisis” by economist Richard Duncan at the height of the global financial crisis in 2008. It was an eerie experience for Duncan had written the book six years before in 2002 and predicted not only the financial meltdown but how it would happen. It seemed almost as if he was blessed with second sight to peer into the future. The only major judgment that he got wrong was that the implosion of the global credit bubble would be triggered by the collapse of the dollar, but otherwise events basically proceeded as he foretold.
So it was with anticipation and some foreboding that I picked up his latest book with the ominous title, “The New Depression.” And if you think that economic conditions are bad now, he believes they could get much, much worse and result in a multi-decade global depression.
Duncan has been influenced by the Austrian school of economics, the only group of economists who consistently warned the global financial crisis was likely to happen. This resulted from their insights about the formation and collapse of credit bubbles, a subject that tends to be ignored by mainstream Keynesian economists.
To simplify their arguments, Austrian school economists believe that global debt levels were kept under control because of the Bretton Woods system of fixed exchange rates after World War II and the dollar’s link to gold. But this system broke down at the end of the 1960s as the U.S. left the gold standard and started to issue increasing amounts of currency to finance its persistent current-account deficits. This led to a massive burst of credit creation, with the amount of debt in the U.S. economy rising from $1 trillion in 1964 to more than $50 trillion by 2007.
The effects of the debt explosion were initially beneficial. It helped fuel globalization, which benefited Korea and other emerging economies, since the easy availability of credit allowed U.S. consumers to buy more overseas products. But despite the appearance of prosperity it created, the boom was an artificial one since it depended on debt levels that sooner or later would become unsustainable.
That point was reached in 2008 when the U.S. homeowners suddenly discovered they were over-extended in terms of their mortgages and the credit bubble started to deflate, triggering the global financial crisis as banks struggled to recover their loans. The financial system was rescued as Washington injected more capital into the banking system by turning on the money printing presses and absorbing some of the private-sector debt on the government’s balance sheet.
Many Austrian school economists would recommend credit creation should be curtailed with a return to the gold standard and a period of austerity as debts are paid off. But Duncan parts company with them on this issue and believes it would be a horrible mistake because it would plunge the world into a depression that would be even bigger than the one in the 1930s. “Civilization as we know it would not survive such a depression,” he says. China and other Asian economies, for example, would implode as overseas markets collapsed.
Continued government spending, he concludes, is the only thing that is keeping the global economy on life support. Duncan disagrees with the demands for deep budget cuts by the Tea Party movement in the U.S., which has been influenced by the Austrian school. He believes that the U.S. government has no choice but to continue to run big fiscal deficits, but it will only be able to do so for the next 10 years before it becomes unsustainable.
Duncan proposes that the U.S. should use this narrow window of opportunity to switch its spending from defense and infrastructure projects to “transformative 21st century technologies,” including solar power, genetic engineering, nanotechnology and biotechnology, to improve the economy’s long-term potential and develop a new path for growth. Unfortunately, given the current anti-government climate in the U.S. that is unlikely to happen.
Duncan’s book holds important lessons for Korea. One is that if the country is to mitigate the impact of a severe global depression, it should spend heavily on developing advanced technologies. Solar power and the development of electric cars, for example, would cut energy costs and improve productivity. Fortunately, Korea is already pursing this strategy. Korea’s research and development spending amounts to nearly 4 percent of gross domestic product, exceeding that of Japan, the U.S. and China, according to the OECD.
Duncan also believes that China and other Asian economies should establish a minimum wage or increase wages to change the global economic balance and encourage domestic consumption in the region. This would be beneficial to Korea. One reason why Koreans have such high household debt is that salaries have not kept pace with the rise in asset prices caused by the country’s own credit boom. Higher wages would allow Koreans to pay off this debt and eventually recover their spending power.
John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant.