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on October 24, 2015
Excellent but scary when you realize the shape we are in.
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on May 16, 2015
Thank you
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on November 17, 2007
Although Duncan's "The Dollar Crisis" can occasionally be a bit of a tricky read, given the heavy use of technical terms and complicated graphs, recent events have shown many of Duncan's predictions to be true. The sub prime mortgage crisis, real estate crash and collapse of the American dollar are undeniable consequences of the dollar crisis.
In essence, Duncan explains how the end of Bretton Woods and the end of the gold standard have allowed for an incredible amount of growth, credit expansion and economic bubbles. However, this growth, largely export driven, is not sustainable in the long term. Though Duncan is somewhat unsure about the when, he is quite certain this will (and had already started occurring). Though he proposes a number of solutions to reduce the impact that this inevitable depression/recession might have, his principal solution consists of the creation of a global minimum wage.
Once again, "The Dollar Crisis" is not a light read and requires some concentration, but goes very much hand-in-hand with the predictions of other authors such as Kiyosaki. I recommend this read for monetarists and Keynesians alike.
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on April 12, 2004
Globalization is here to stay. Walls have tumbled and so have the barriers to trade. But in the process of creating a global economy that has seen rapid growth in global trade in the last three decades, have we committed any major blunders, atleast in economic terms ?. The answer seems to be an affirmative YES according to the author. During the days till the First World War, gold was the only currency that was acceptable across international borders. While the war led to the departure from this standard, paper currency flooded European markets, leading ultimately to the great depression of the 1930's. This was our first concrete lesson to realize that money, cannot be created out of thin air, for that matter even out of plain paper.
Bretton Woods restored the relationship between currency and gold and thereby linked exchange rates. The author explains how a country with trade deficit had to part with gold which in turn led to shrinkage of credit, increase in lending rates, fall in consumption and ultimately the restoration of trade balance. Gold clearly played the role of being the conscience keeper in international markets. A noble metal indeed.
With gold standard, everything was working fine and global accounts were balanced. Suddenly Uncle Sam with his insatiable need for foreign goods, thanks to the growing consumer demand at home and increasing military expenditures in his self proclaimed capacity to police the rest of the world, goes on a spending (and borrowing ) spree. The greenback is no longer exchangeable with gold, but in fact would have to be treated to be of value in itself. The rest is history as so well explained in this book. This book devotes atleast a third of its space for graphs, charts and tables taken from published international sources to support the arguments in every chapter.
What follows the departure from the gold standard is the generation of a huge US trade deficit with its trading partners over the last three decades. This deficit is paid alteast in terms of accounting, in Dollars that are not backed by gold. This paper money creates the following :
- Increase in investments in manufacturing capacities by multinationals in low wage countries
- Increase in capacities creates fall in prices of manufactured goods
- Fall in prices leads to higher purchases by Americans
- Higher consumer spending on foreign goods leads to increase in trade deficit
- US trade deficits lead to more Dollars with trading partners
- Trading partners experience asset appreciation in their countries
- Investments by trading partners in US leads to asset/housing/stock market appreciation.
Till here it is fine. It is like the first couple of drinks at the party and everybody is enjoying. But then it does not stop there, unfortunately. The drinks keep pouring in and the music turns to noise. The party soon becomes a nuisance to society. In the above sequence, the asset appreciation leads to asset bubbles and over investments leads to deflationary pressures. This leads to fall in corporate profitability which is followed by the collapse of stock markets and banks. Banks collapse and soon the party is over. The hangover unfortunately lasts longer than the duration of the party. Tigers soon become kittens as we saw in the second half of the last decade in Asia. And the kittens are too drunk even to move.
This book presents a very powerful case to argue that America will not be able to continue its trade deficits and that the global economy is on the verge of a collapse thanks to the overvalued Dollar. Overvalued by how much ? 50 % by one estimate. When will the dollar collapse ? Anytime from yesterday.
Consequences to various trading partners from Asian Economies including Japan, Latin America to the European Union is well analyzed. China will be the worst hit with its banks already facing up to 50 % non performing loans. Europe seems to be the safest, atleast relatively.
Any rescue package ? . Certainly, says the author who advocates a demand side stimulation of the global economy through increase in wages ( in export oriented companies in developing countries) over a ten year period, which would not hurt multinationals since daily wages are too low at $ 4 in countries like China and we can afford to take it to $14 by 2014. With Multiplier Effect, the author explains that this will lead to surge in demand to offset the slump in US Consumption. There is also the need for a Global Central Bank to restore normalcy in international currency standards. Monetarism will fail since we are on the verge of a liquidity trap with near zero interest rates as experienced in Japan.
It helped me to brush up my understanding of Macroeconomics and it is advisable to do so before reading this book. What has happened till date is supported by facts. What is likely to happen is frightening. Can I have a drink please ?
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on December 4, 2003
There is an unsettling conviction to Richard Duncan's assessment of world trade today, and it is forcefully explained and supported with dozens of charts and tables. An enormous U.S. trade deficit has created a sea of liquidity and easy credit for those nations to whom we are indebted. Without a Global Central Bank to control the money supply, the debt and liquidity it provides keep growing. Nations on the Surplus side of this trading arrangement have few choices with their outsized inflow. If they keep it in their central bank reserves, their currencies will appreciate, their exports, and their economies will slow. If it is absorbed into their economies in the form of low interest rate loans to business and individuals it will spark inflation, excess capacity, and ultimately recession and deflation. Economic crises in Asia and Japan are evidence of this damaging cycle. Consequently, much of our indebtedness, our trade imbalance, returns from our trading partners like a boomerang, to buy dollar-denominated securities. Returning capital adds to asset inflation and creates more credit, more capacity, and fewer opportunities to make a profit.
Add this: Our trade deficit is growing and at some point one or more market segments of the economy - direct investments, corporate securities, even government securities - will no longer accomodate this inflow of repatriated foreign capital. At the center of this mess is a structural flaw in our global economy. It began when the U.S. Dollar decisively replaced gold in the 1970's as the basis for value in world trade and became the de facto global reserve currency. In the absence of monetary controls our trading partners accept our promises (our bonds) in place of cash or gold in payment for trade. Up to what point is uncertain. According to Duncan our cumulative indebtedness to the rest of the world is approximately $3 trillion or 30% of our GDP and it increased by five hundred billion last year. A drop in the value of the U.S. greenback seems likely (for Duncan, "inevitable"). If it helps our exporters begin to bridge the import-export gap then let it happen. Longer term, Duncan calls for an escalating Global Minimum Wage in the export industries of our trading partners to stimulate the development of a consumer class to supplement the world engine of American consumption. Currently the International Monetary Fund (IMF) assumes the role of a supervisory central bank for national economies in crisis. Duncan would like to see its role evolve into a Global Central Bank. In an advisory role a GCB just might be politically acceptable and useful in moderating boom-bust cycles caused by trade imbalances. My only caveat with Duncan's thesis is that his case is made and repeated so strongly that it seems to disallow for the possibility of unforseen events leading us to a more benign state.
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on September 13, 2003
Richard Duncan's "The Dollar Crisis" is written in a fairly straightforward manner. It is a distillation of ideas about the monetary system, and facts and figures and examples. He tries to highlight key facts and ideas, and repeat them sufficiently so you won't miss them.
In this sense its rather good for someone who is not a specialist in this area, or has not been exposed lately to some of the concepts of international monetary exchange. I have an MBA, and a solid background in economics, and found the level to be just a little tedious in places but overall very good for review, and adequate for refreshing my memory.
It may not appeal to readers with no experience in economics or financial matters, since they will need an introduction to what money really is all about, and how an economy functions. It will also not appeal to dogmatic economists, but then, nothing but their own schools ever do anyway.
I am rather enjoying the book, and recommend it to anyone who wishes to delve further into the impact of the money system on macroeconomics and the world's finances, beyond the decision for 'the next trade.'
This book is helping me to think about the dollar as a 'medium of exchange' in a more theoretical manner. It is helping me to focus some of my own thoughts on the subject, and provided a good of the international accounting system.
We really are in uncharted waters. Never before in history has the world had a 'reserve currency' that is relatively unrestrained, with a 'master' who is willing and able to debase it to suit their policy needs, and manipulate markets in concert with their peers to prolong the situation and defeat the regulating systems of the markets, such as interest rates and exchange values.
We are in a feedback loop of mutually assured financial destruction with Asia.
We are supporting their economies by consuming their exports in a huge way, and they in turn are accepting our debt instruments (dollars) and using them to expand their own economies, as well as our own by buying our Treasuries, Corp bonds, GSE debt, and equities.
It seems like an endless round of bubbles have been created as the Fed seeks to avoid crises and keep this Ponzi scheme going, because that's exactly what the dollar is these days. Make no mistake about that.
It sets out some of the timelines nicely with the appropriate facts and figures, and helped me to understand the progression of events and the key decision points.
I don't think of Mr. Duncan as an Austrian, since in the first half he avoids the dogmatism that Austrians often fall into, which is the weakness of a theory that has never been tested and refined, while being academically marginalized. Since I am an 'Austrian' you can take that as a sincere criticism if you are so inclined.
As far as his solutions, I won't comment because I do not wish to give away the ending as they say, and I wish to highlight the book for its value in helping the reader organize a complex reality into some manageable ideas. In this Mr. Duncan exceeded my expectations.
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on July 20, 2003
Summary and rating comment:
This book economics theory is flawed. It assumes that foreign central banks hang on to 100% of the accumulated U.S. current account deficits. Instead, the U.S. current account deficit gets reinvested in U.S. assets. He explains that overseas banking crisis since 1977 were triggered by large U.S. current account deficits. But, these deficits got materially large only after 1998. The author maintains that U.S. households and businesses have deteriorating balance sheets. Meanwhile, a review of Fed data shows the opposite. Flawed economic assumptions go on and on within this book.
Abstract:
The author states that the foreign banking crisis in the eighties and nineties were caused by the U.S. running large current account deficits. These U.S. deficits caused a built up in dollar currency reserves of the exporting countries central banks. These excess reserves caused lending booms, and asset valuation booms. These ultimately lead to banking crisis due to borrowers defaulting on their loans which financed overvalued collateral.
His explanation of foreign banking crisis ignores the basic international accounting equality that current account deficits equal net foreign investments flowing back into the U.S. He states that foreign central banks reserves increased by the same amount as the U.S. current account deficits. They did not, as U.S. current account deficits get reinvested in U.S. assets by the foreign exporting countries. Thus, foreign central banks do not hold on to their countries current account surpluses.
Additionally, the author mentions 24 countries which suffered banking crisis between 1977 and 1997 all due to the infamous U.S. current account deficits. But, the U.S. current account deficits never exceeded $150 billion until 1998. This deficit level is peanuts within a global trading system measured in $trillions. Thus, the U.S. current account deficit can't possibly explain foreign banking crisis going back to 1977.
Many of the countries he mentioned that experienced banking crisis in the nineties (Indonesia, Korea, Malaysia, Philippines, Thailand) were actually running large current account deficits themselves. Thus, current account surpluses were not a factor in their respective banking crisis.
The author also states that the current account deficit caused an asset inflation boom in the U.S. particularly in stocks and real estate.
Here, the author runs into a contradiction that he chooses to ignore. How can the same U.S. current account deficits cause an asset inflation in both the exporting countries and the U.S. (importer). As mentioned, they certainly are not responsible for the asset inflation within the exporting countries. They could have caused asset inflation in the U.S. since these current account deficits have gotten reinvested as direct foreign investments in the U.S. But, the U.S. incurred a stock market boom from 1995 to 1999 when the current account deficit was not that high. And, it suffered a bear market since early 2000, when the current account deficit got significantly larger. These outcomes are the opposite of what the author theory suggests.
The author also mentions highly inflated real estate prices. Meanwhile, U.S. commercial real estate valuation have been lackluster for the past decade. Residential real estate is really a local market that varies greatly from one county to another. At all times the U.S. will have residential markets that appear overvalued and others who appear cheap (nothing to do with current account deficits here).
The author makes a popular case that the U.S. current account deficit level is not sustainable, because the U.S. can't borrow that much. Well, is that really the case? We are really talking of prepaid self financing here. If China experiences a $100 billion current account surplus with the U.S., we actually pay the Chinese that money upfront. They don't have to raise a dime themselves to reinvest this $100 billion back into the U.S. These foreign direct investments are broadly diversified between bonds, stocks, and direct investments. If we look at the U.S. net foreign investment position divided by the U.S. net worth (assets minus liabilities of individuals, businesses, and government), this ratio is only 6.3%. Several countries have foreign investment position ratio 50% or greater than the U.S. Australia has a ratio equal to 14%, Canada is 10%. I developed a model showing that the U.S. could sustain its level of current account deficit level for another 20 years to reach the same net foreign investment position as Australia today. And, Australia is no basket case. It's economy is doing a lot better than Europe and Japan. So, the U.S. current account deficit appears sustainable for at least a couple of decades.
The author maintains that the U.S. consumers and businesses are already dangerously over leveraged, and thus, he expects rising defaults. However, actual Fed data contradicts him. Household balance sheets remain strong. At 2002 yearend, household debt represented only 24% of household equity. Meanwhile, businesses have steadily improved their balance sheet over the past two decades, as their respective Debt/Equity ratio declined from 150% in 1980 to 82% in 2002. The author supports his theory with media headlines on corporate failures (Enron, WorldCom). But, these are isolated attention grabbing incident. Looking at the balance sheet of the whole economy, as we did, you get a different picture. Unfortunately, dull good news never sells.
The author's theory that the U.S. current account deficit is the cause for the World's deflation is ludicrous. The cause is China's exporting boom Worldwide. Also, China is buying dollars to keep the Chinese Yuan artificially low relative to the dollar and maintain its export surplus with the U.S. Thus, deflation is a Chinese phenomenon associated with its being the lowest cost producer and its manipulating the value of its currency.
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on November 8, 2003
Author Richard Duncan may not have been the first to highlight the dollar problem, nor is he the only one presently voicing concern.
The 'problem' is that global economic growth is primarily driven by the US trade deficit, principally as a result of the strong dollar. The rest of the exporting world reinvests the US$ receipts back into the US to avoid selling dollars and appreciating their own currency (this would make their exports less competitive) and ...well, Duncan's contention is that it can't continue.
According to the author, how will the wheels fall off the trolley?
1/ The ability of the US to generate sufficient dollar denominated debt instruments is tied to the large budget deficit.
2/ The budget deficit will eventually contract and balance of payments will be restored.
3/ The effect of (2) will be to force repatriation of the trade surplus ie. widespread selling of the dollar.
There is already a well argued case for depreciation of the dollar, and the US Fed appears to have acquiesced to this weakness since the beginning of '03, but Duncan would (correctly) argue the order of depreciation required to solve the problem is much greater. Should the consumer credit binge supporting the US economy falter, perhaps as a result of a housing collapse, a chain reaction of reduced investment and downgraded commercial creditworthiness could be the trigger for a major decline. A decline in the dollar would likely become self feeding through speculative action and a 'rush for the exits'.
The book's weakness is in its closing chapters. Duncan proposes a global minimum wage as the solution to persistent trade imbalances. This is a fine academic proposal, but why argue for something that so patently will never occur?
'Crisis argues that a status quo in which the United States trades off its own financial assets in return for imported goods cannot be maintained. The conclusion: a significant fall in the dollar, is made very convincingly.
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on July 10, 2003
For the uninformed, semi-informed or even the informed who are willing to connect the dots about today's seemingly strange economic times, this book will guarantee a cold sweat. Duncan's book is a comprehensive, one stop portrayal of the prevailing bubble economics that have dominated the planet over the last decade. That process is currently running full tilt and seems terminal. He presents (sometimes redundantly, but bears repeating) the mechanics and impacts of the massive Dollar recycling operations (engendered by America's 5% of GDP trade imbalance: $500 billion plus annually). This in turn creates malallocations of capital, overcapacity, and rolling asset bubbles and busts, that regularly require costly bailouts and cleanup operations. Of course the bailouts are affected by applying even more "liquidity" in the form of more dollars and debt that the world (and especially the US) sorely does NOT need. This monetarism encourages even more moral hazard and bizarre economic behavior (borrowing against inflated assets such a homes to buy even more foreign made goods).
The strength of Duncan's book lies in his use of an excellent set of tables and graphics, that allow the reader to piece together the variables and evolution of the dollar and credit bubble. He also offers a clear and concise snapshot of the history of several late 20th century bubbles such as Thailand, Japan and the United States. Additionally an understandable description and history of the reserve system of international trade and capital flow is presented. As the book was writtten in June, 2002, the inquistive reader may be tempted to try and update the book's data. The updates can be tracked by going straight to the sources (Federal Reserve flow of funds data, etc.)that Duncan provides. I can only advise the reader to take anti-nausea medication and skip lunch during this process, as the picture is not pretty.
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on October 19, 2003
This is a quasi-economic text book from a macro POV. The focus is on truly understanding why so many country banking systems have come unglued in recent decades and applying that insight to the current and largest example, USA. He uses well documented statistics of international fund flows to empirically demonstrate what happened, the economic consequences and the likely near term (2-5 yr.) scenario. In the process he destroys the monetarist theories of Milton Friedman and the fruitless efforts of the Fed to reflate us into a new bubble. Do not read this book at your own financial peril!
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