How To End The New Depression

By Richard Duncan

23rd August 2012 - 4258days ago
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There are now three ways forward. First, the government could stop supporting the economy with trillion dollar budget deficits financed with paper money creation. In that case the economy would immediately spiral into a severe depression. Austerity means collapse – the collapse of the social contract within the United States, the collapse of US military hegemony abroad and the end of globalization. The ultimate consequences of that scenario are unpredictable, but certain to be dire.

The second option is for the government to follow the Japanese model, in which it spends just enough to ensure some economic growth year after year, but fails to take the actions required to actually resolve the crisis through economic restructuring. This is the current approach. It cannot succeed and will eventually end disastrously when the government is unable to finance any more debt – in roughly five to ten years from now.

Total Credit in the US expanded 50 times between 1964 and 2007, from $1 trillion to $50 trillion. So long as it expanded, prosperity increased - in the United States and around the world. Asset prices rose. Jobs were created. Profits soared. Then, in 2008, the credit could not be repaid, and the economic system that was founded on and sustained by credit was hurled into crisis. It was then that the New Depression began.

The third course would be for the government to spend aggressively enough to permanently resolve the crisis. Our economic system requires credit expansion in order to generate economic growth. The household sector cannot bear any additional debt, but the government sector can. If government spending is to be sustainable, however, the government must change the way it spends. Rather than spending trillions of dollars each year in a manner that only boosts consumption, the government must begin to spend to invest in large-scale projects that can generate a return. The government can now borrow at 2% interest. If it borrows at 2%, invests and earns 3%, our global crisis will lessen. If it borrows at 2% and aggressively invests in transformative 21st Century technologies, such as renewable energy, genetic engineering, biotechnology and nanotechnology, this crisis will be overcome and prosperity for the next generation will be assured.

The economic system that has grown out of the adoption of fiat money is new. It is different from what came before. It is not Capitalism. We have not yet learned how it works. Its weaknesses have become glaringly apparent. Yet we are ignoring the possibilities it presents. What a tragic mistake it would be to impose austerity and see our world implode, when so much credit is available at ultra low costs. All that is required is for us, as a society, to invest that credit imaginatively. If we do, we can achieve global economic prosperity beyond the dreams of all earlier generations.