Saturday March 2, 2013
Money and credit
By THEAN LEE CHENG
The Great Crash Ahead: Strategies for a world turned upside down
Author: Harry S. Dent, Jr
Publisher: Free Press
The New Depression: The breakdown of the paper money economy
Author: Richard Duncan
Publisher: Wiley & Sons
MONEY and credit are not the same. That RM100, through credit, can become RM1,000 or RM10,000. It depends on how many times it is being multiplied by the banking system through credit and lending.
Maybe that’s why the issue of huge payouts and mind-boggling bonuses have become a blot in the West’s banking system. The banks made huge profits through the irresponsible granting of credit and interests.
While credit is the priciple that oils the business and financial world, the extension of credit without some form of back-up reserves is the bane of today’s financial system and the theory of credit is being expounded upon at length by Richard Duncan in The New Depression and Henry S. Dent, Jr in The Great Crash Ahead.
To a large extent, the subject of any book, as much as its timing and the author will influence how popular it will be. And, of course, the handling of the subject.
Projecting a coming economic Armageddon and the role of played by credit in both these prophetic books is not something that makes good bedtime reading for most. Or maybe it does as mishandling of it can send anyone to sleep.
The macro economics involved can itself be a deterrent, not to mention the doom-and-gloom part that is weaved into the subject. Notwithstanding that, the publication of these two books The Great Crash Ahead and The New Depression, is interesting and thought-provoking, now that we are in the fifth year of the global financial crisis. Both books are not new, Crash Ahead was released as a paperback in 2011 and became a paperback last year, while The New Depression was published last year.
Nevertheless, they remain current because the Western world is not out of the woods.
Both books are in a way a continuation of Carmen M. Reinhart and Kenneth S. Rogoff’s This Time Is Different: Eight Centuries of Financial Folly.
In all likelihood, as the crisis prolongs – and that seems likely – there will be more on this subject. They serve as an important avenue as they provide the lay person with the necessary tools to get a handle of what is going on in today’s globalised economy.
But writing about the current situation without going back to history is meaningless and both Dent and Duncan have taken a long and historical look at how the world came to be in the situation it is in today. They bring currency to historical events like the breaking down of the Gold Standard and the Bretton Woods system of monetary management.
To give meaning and dimension to concepts and in order to take a different trajectory, Dent, in The Great Crash Ahead, likens the world economy to a drug addict who goes “cold turkey” and begins to suffer withdrawal symptons. Along comes a drug peddlar who throws in more addictive drugs at this person and in huge amounts.
The drug addict is the economy, while the drug peddlars are the central bankers. The drugs are the huge amount of money, or fiat money (or qualitative easing), that is being pumped into the economy by the various central bankers around the world.
Writes Dent: “In a strange, perverse world, our markets are cheering as the patient is given more of what caused the illness in the first place.”
The addiction is the mind-boggling credit explosion that is chasing up asset prices, particularly real estate, to phenomenal levels.
Duncan, in The New Depression on the other hand, begins his story on the economy by drawing attention to man’s penchant to own things, be it houses, cars or a private jet. To give a day-to-day dimension on consumption, he criticises the exorbitant amount of credit that is in the system today.
It is this proliferation of credit, which at one time was tied to gold, that opened the floodgates to consumerism and over consumption.
Duncan brings currency to the subject using speculative purchases of houses where buyers take on mortgages they could not afford to repay to put ownership on houses they cannot afford to own or live in.
“Credit and debt are two sides of the same coin. One person’s debt is another person’s asset,” Duncan writes.
Essentially, both authors pit the philosophies of two groups of economists, those who uphold spending and consumption to pull an economy out of a depressed state and those who believe in austerity and savings.
Duncan goes one step further by debunking Keynesian theory of money and instead advocate a new theory of credit. He is of the world that the economy has moved so far ahead that the theory of money is now obsolete and has to be replaced by theory of credit because it is credit that is making the world go around today.
Both authors draw examples from The Great Depression of 1929 and dangle the prospect of another huge economic disaster that is being brewed by the world’s government in their attempts to prop up their respective economies. They are both of the view that printing money is not the solution as this only address the symptons but not the cause.
While the today’s depression has not yet become the New Great Depression, or the Great Crash ahead, they outline various scenarios how the current crisis may pan out if the various governments continue on their respective trajectory, particularly the United States and certain countries in the eurozone.
Some of Duncan’s predictions have already materialised, for example the US third round of quantitative easing (QE3). Although he did not call it as such, the principle is there and he delves on this at length even before it came. He also gives a rundown of the different scenarios that may take place as a result of the various courses of action being undertaken by the US.
Dent also has his predictions for 2013 and 2015, but unlike Duncan, he delves further into how the layman can protect himself as the global economy continues to unravel like a ball of wool that rolls around helter-skelter.
He suggests the different investing instruments that may help investors in case of a crash ahead.
All in all, an interesting read for those who want to get a grip of what’s happening in the world economy today.