The Money Revolution
Credit has overthrown capital, what does that mean for our future?
Everyone kind of knows how the economy grows, right?
We earn money, save a bit and that savings finances investment. Investment creates new equipment, new technology and new knowledge. All this makes us more productive, which increases our income and generates even more money to fund future investment. Etc, etc.
That’s how capitalism worked. But capitalism is dead.
At least that’s the theory put forth by Richard Duncan, author of The Money Revolution: How To Finance The Next American Century. Indeed, Duncan thinks capitalism died many years ago when the U.S. decided to end dollar convertibility to gold in 1971.
Don’t panic. This post isn’t a grumpy old man rantabout the need to purge our sinful economic ways and avoid a wrathful God by bringing back the gold standard. Instead, it’s an explanation of how Duncan believes economic growth now operates – the benefits of this new system and its risks. And, most importantly, it’s an overview of the opportunity he believes this revolution in money creates to secure America’s future.
Creditism Replaces Capitalism
Duncan calls our new system “creditism” because he believes that credit and consumption, not savings and investment, now drive economic growth. How does this work?
To understand, start with the fact that banks create money by making loans. Say your bank agrees to lend you $100,000 (well done, btw). That money is not sitting in a vault somewhere in the back. It doesn’t exist. The bank simply conjures $100,000 into being and credits it to your account while making a polite note of your obligation to pay it back over time with some interest.
You are then free to do with it what you want. If you’re an American you’ll probably spend a good chunk, since consumption makes up 70% of US GDP. The unspent balance can be used to buy financial assets like stocks, bonds or property. So the free availability of credit immediately increases spending and has the important follow-on effect of driving up the value of financial assets. This triggers a second wave of spending because when our measured wealth goes up, we spend even more.
Untethering the dollar from gold allowed the US to access credit like this en masse. Since 1980 we’ve been borrowing an average of 2.5% of GDP each year from the rest of the world. In today’s dollars that’s about $650 billion - roughly the size of the entire Swedish economy.
Using credit to drive growth is clearly faster and less painful than the old-fashioned capitalist process of first earning money and then saving. And rolled out globally it’s been remarkably effective at generating growth. Duncan points that since creditism really began to take hold in the 1980’s hundreds of millions of people globally have been raised out of poverty. Living standards and life expectancy have surged in Asia and Eastern Europe.
Creditism Is Fragile
But growth based on credit is fragile. Like a shark that must stay in motion to avoid sinking, creditism requires continual expansion of credit to avoid severe shocks. Duncan points out that in the US each time annual credit growth (adjusted for inflation) falls below 2% we have a recession. When it falls in absolute terms, we risk a depression. The graph below is my version this indicator, with the 2% danger level marked by the orange line and recessions shaded in grey.
You probably noticed that credit has been falling in absolute terms recently. The Fed’s efforts to slow the economy are starting to bite. Duncan expects the Fed to keep tightening until something “breaks” – which he thinks will involve double-digit falls in house and stock prices from current levels. You’ve been warned.
And yet…he is optimistic about the future. Why?
Embracing The Money Revolution
Rather than pine for an economic system that he thinks has died, he says we ought to embrace the opportunities created by creditism. And that opportunity is for the US government to access credit and channel the money into a massive program of investment in “industries of the future”, ideally structured to give it an equity stake in the businesses and products that eventually emerge.
His recommendation: invest as much as we can, as soon as we can. As a straw man he suggests a 10-year, $10 trillion program and his book contains a variety of estimates of how this might impact US indebtedness. In the worst case scenario – where all the investment is completely wasted - he calculates that US debt/GDP would end up at 150%.
Maybe, but he points out that Japan crossed this threshold 20 years ago, without triggering inflation or higher interest rates. I’m not convinced this is a great comparison, particularly since the forces that have kept inflation at bay – demographics and globalization – are now moving in the other direction. And Japan’s currency now sits at a 25-year low vs. the dollar. To be fair, Duncan acknowledges his program could generate inflation and weaken the dollar. But he feels if this happens investment can be scaled back until inflation falls.
A more likely outcome in his opinion is that the investment program would unleash a torrent of new innovation and medical breakthroughs which would generate economic growth above 5%. That kind of growth would actually lower debt/GDP.
He is most passionate when discussing the improvements in quality of life this technological investment could bring. For example, cancer kills 600,000 Americans each year and yet the National Cancer Institute’s annual budget is only $6 billion. In 2021, the Fed was creating credit twenty times this amount in new credit each month. The capacity to cure cancer and ”all the diseases” is there, he says, we just need to channel credit to where it can do the most good.
The Risks Of Not Investing In The Future
Maybe the future is scarier if we don’t do it?
In 2000, the US invested eight times as much as China in R&D; last year China invested more, a truly extraordinary turnaround in two decades. Duncan fears that if China develops AI technology before the US it would be akin to them acquiring a nuclear weapon before anyone else.
Personally, I hope we can move beyond this confrontational framing of our relationship and re-engage with China. Both countries need each other to thrive and I've written about safe ways to do this. That said, Russia’s invasion of Ukraine has reminded us that national security involves more than just weapons. Some degree of energy, food and technology component independence is equally important.
I know what you’re thinking…never gonna happen.
But…it’s already happening, at least on a smaller scale. The Chips and Science Act passed this year with bipartisan support (that is not a typo). The Act allocates $280bln for investment in key technology areas such as semi-conductor manufacturing, AI and quantum computing. It is the largest public investment in R&D in US history. And Duncan believes the new world of money allows us to do much, much more.
Viva la money revolution.
Intrigued? Click this link to hear Richard Duncan discuss his ideas with me on The Ideas Lab podcast series.
I am perfectly capable of such rants. Source: my kids.
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