you're watching our t.v. here's a recap of our headlines julian assange is granted asylum by ecuador the country's foreign minister says that the whistleblowers fears of political prosecution are legitimate while slamming britain's threat to storm magneto's embassy in london to arrest the wheaties editor. and near the ecuadorian embassy crowd cheering the decision that despite london police earlier detaining several supporters of julian assange. and in bahrain another so-called enemy of the state and one of us on this recent interview we is not bill ridge ob has been jailed for

three years for taking part in and to government gathering. now to our studios in washington d.c. and loren list for tonight's capital account. good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for wednesday august fifteenth two thousand and twelve looking at solutions to economic problems people at least here in the west ask how does one fix capitalism but do we actually have capitalism in this economy anymore or do we have credit to them as our guest richard duncan puts it he's flown half way around the world from thailand to explain to us what this means and why he fears civilization could survive a true crisis of credit is a plus we'll talk about what role the abandonment of the gold standard has played in fostering this type of credit ism plus what the future could bring for gold as

a monetary metal this as billionaires george soros and john paulson have again loaded up on it they ramped up their gold holdings or at least holdings of the largest gold backed exchange traded fund this is according to an s.t.d. filing yesterday that businessweek reported on and as the u.s. continues to run trillion dollar plus a budget deficit the question remains unanswered as to how long this can continue because look one major foreign creditors slowly unloads u.s. debt look how another is stepping in and increasing its holdings look at what's happening right behind me with china and japan and japan staggering debt as we know has withstood collapse for two decades so we'll discuss let's get to dave capital account.

let's talk about capitalism because some many who have been on this show say we're not living in a capitalist era this is kuoni capitalism and others like our guest today say we're living under something entirely different this is credit to them so when we're trying to solve economic problems we have to address not capitalism but credit to them but how do we get here well massive expansion of debt obviously here is a look at it though total credit market debt owed so you can see here from the fifty's it was just kind of steadily on the incline but then what happened because it really exploded it took on right around here what was going on then one nine hundred seventy one to seventy three well this my friends as you well know is when it really kicks off this is when president then present i should say richard nixon closed the gold window taking the u.s. dollar the global reserve currency off any kind of gold backing once and for all

opening the door to the money debt explosion so look ok there's been a little of the leveraging but we've got a long way to go so what are the challenges if this all collapses well our guest worries it would be the kind of depression that our civilization could simply not withstand and he is richard duncan he is chief economist for blackhorse asset management and author of the new depression the breakdown of the paper money economy he is author of many books i should mention this is just his latest and he joins us in studio which is really quite an honor because he typically resides as i said at the top of the show in thailand so thank you for being on the show lauren thank you for having me yes and congrats on the new book i have to say i'm so excited to have you on because i learned of your work first when our producer in his previous lifetime interview you for his radio show so great to

have you in studio before we get to the very deep issues that may portend a new. depression i want to ask you something more topically because while these big issues definitely tie in to everything we're talking about especially in an election year looking at what kind of fiscal solutions we need as we're heading towards a fiscal cliff a little more topically have you been surprised that we haven't seen the kind of a massive shock in our q e three that you predicted would come before the presidential election and i should say we do still have time well i have been a little surprised but in fact the reason i think that we haven't had to eat three this year is because we got bill to yarrow and from europe from that you see the on how do we not have it all to yarrow back in december and february and then we would have had q e three i believe because that would have been necessary to push the stock market back up but a trillion new euros did that very nicely that's interesting so so go a little bit more into this because you're pointing out an issue here which is that

. we or l t r o isn't necessarily about stimulating the banking sector or to lend in those respective economies the us and the e.u. but is in fact about propping up the stock market well and the whole global economy if you prop up the stock market creates the wealth effect and boost consumption and that boost the economy so yes i think these these new l.t.r. o. and q e one two and sooner or later three probably four are necessary to support the global economy i think you can say the global economy is like a big rubber raft but instead of being inflated with air it's been inflated with credit and i'm going algae and on top of the crude on top of this raft you have all the stocks and commodities and gold and seven billion people the problem is the raft is fundamentally defective it has holes all over on the side and the credit keeps leaking out as people default on the dead and the natural tendency of the rafters to sink and the only possible policy response is to pump in more credit to

replace the credit that's leaking out the sides. otherwise the raf's going down and people are going to die and are you saying it doesn't matter who is pumping in that raft whether it's the fed or the e.c.b. or whoever else what other whatever other central banks the chinese central bank are well i'm not certain if it matters or not there do seem to be some differences for example with q.e. it was a very very big impact on global food prices and commodity prices because you can't control where that money goes right and because most of these commodities are quoted in dollars and with the l.t.r. oh it didn't seem to have the same impact on on commodity prices as q.e. so there are some differences but still the creation of new the quiddity was necessary to reflate our global raft to keep it from sinking and you're talking about two really contradictory positions which is i think what makes your view so unique so let's really delve into this because while you definitely make no

apologies for the problems of this money system in the paper currency system you also say ok this is what we have we have not had capitalism for a long time arguably since i think world war two so can you explain that why you say that all right well let's think about it under capitalism say in the nineteenth century the government played very little role. well now in the united states the federal government spends twenty four percent of g.d.p. so one dollar out of four spent by the government under capitalism gold was money and the government had nothing to do with it now the fed creates money from thin air and manipulates its a value but even more to my point i would say is that the growth dynamic under capitalism was completely different than our growth dynamic under capitalism capitalism created economic growth this way businessmen would invest some of them and make a profit they would save the profits or in other words accumulate capital hence

capitalism and repeat the process investment saving. investment savers that was pretty difficult and slow but that's how capitalism created economic growth but in our system which i call credit ism for lack of a better word i think that pretty and where the growth dynamic is driven by something entirely different it's driven by credit creation and consumption and more credit creation and more consumption so as you pointed out that total dead in the u.s. went from one trillion to fifty trillion in forty three years and that credit creation drove consumption and that created very very rapid economic growth the problem is now it seems that credit ism can't create any more growth because the private sector can't bear any more debt. and if the credit now stops expanding there's a very real danger that this new economic system that we have in our economy built on credit will spiral into a new great depression and before we get to that new great depression which is

obviously a dire scenario that we would hope to avoid is there any particular event that you can point to and say aha this is when capital has them stood no chance beyond this point and this was welcome credit to them with no turning back was it the end of bretton woods was it even further back the creation of the federal reserve or even before that and around the civil war era when the national banking system was established towards that end of civil war. all good points but i would say the beginning of the end was world war one because in world war one nine hundred fourteen all the european countries went off the gold standard because they didn't have enough gold to fight the war and they started issuing a lot of paper money and government to fight the war and all of the debt and paper money led to a worldwide credit bubble that we call the roaring twenty's but in one nine hundred thirty the credit couldn't be repaid in the depression started but also all those governments spent so much money during the war that it was government directed and

government driven and the government controlled the economy completely and the same thing happened again in world war two before world war one the government spent three percent of g.d.p. by the one nine hundred fifty s. after world war two the us government never spent less than twenty percent of g.d.p. for the last seventy years and now it's spending twenty five so these wars killed capitalism the wars because governments had to take over the economy to manage the economy through the wars so they killed a lot more than just people they killed capitalism as we know it that's interesting . i just as you did mention gold and the role that the gold standard did play in limiting the expansion of credit do you see any role. for gold as a monetary metal in the future or some kind of return to a commodity based currency in our lifetimes i don't think there's any way to go back and if we go back onto the gold standard it certainly won't be because the governments decide to do or that's for sure but what if there is some kind of

catastrophic catastrophic event some kind of depression is that the scenario where perhaps that the market went decide on a gold standard or had competing currency if people just absolutely refused to accept any more paper money because it loses its value so quickly then it will be a bottom up decision where the people won't accept the paper money and will be back on a gold standard for the same reason that we had always been on the gold standard in the past the people don't trust the government usually with very good reason so one scenario where that would play out was if there was massive inflation and i know you look at this inflation deflation debate as fire and ice right where are we with fire and ice right now well this credit creation has created enormous global excess capacity of everything every industry has massive excess capacity the capacity was being absorbed by increasing household in the u.s. as the americans took equity out of their homes and spent it right now that's no

longer happening we would have already collapsed into severe deflation the kind of . deflation and death spiral that economists irving fisher wrote so well about. and it's only the trillion dollar budget deficits that are now absorbing this excess capacity without the government's intervention we are global bubble would implode into a deflation spiral and prices would collapse across the board looking five to ten years in the future it's really difficult to say which way it's going to go because we don't know it's going to be determined by government policy but we don't know who the governments are going to be in five to ten years if they don't print spend enough government money and print enough paper money that we're going to have extreme deflation on the other hand if they print too much paper money we're going to have inflation so you're going to have to monitor a government policy as time goes by and that raf we know is very precarious as it stands we go to break in a minute and when we get back i want to get to all of your solutions and kind of

kick the tires on them too but before we do why couldn't there be some kind of real addressing of government deficits why couldn't the u.s. take the medicine that other countries have and have had currency crises and have had to falls and looking at the facts they do support or arguably could that that kind of cleared the way for a pretty quick return to growth argentina russia some eastern european countries are examples is what makes the us different i'm guessing that it's the largest economy or so closely tied to the second largest economies performance which is china or it's the global reserve currency are these issues that make it different from all the examples you named the other countries they were relatively small and they were able to devalue their currency in most cases very radically and then export their way out into a booming global economy being driven by this expansion of u.s. government now the u.s. can devalue its currency by fifty or seventy five percent and there's no one for us

to export to and so there's no easy way for the u.s. to get out of this mess the way that it was for smaller countries there's no it was the way out so when we come back we're going to talk about the difficult and painful way out. and the choices that you light at lie ahead we'll have more with our guest and also still ahead as i said more insight from richard dugan about how to avoid a new depression and the recession is taking a toll on some of the happiest people on earth or at least their presumed to be the happiest by the smile they paint on we'll explain why clowns aren't just cutting it at birthday parties anymore but first your closing market numbers. well. it's technology innovation all the moves developments

around russia we've got the huge earth covered. welcome back our guest today says we are not living in capitalism this is credit to them and we got too much credit in this scenario how do we get out and i want to talk to richard duncan about solutions to avoid a new depression which incidentally probably not coincidentally is the title of his

book the new great depression the breakdown of the paper money economy so mr duncan before the break we were talking about all of the problems but what is the solution we have credited them too much credit what is a solution to move toward sounder money and sustainable growth well i think there are three possible paths for us as a society have three options on how we can go forward the first option is similar to what the tea party is recommending to immediately cut government spending well every economy is made up of just four parts personal consumption expenditure business investment trade and government spending in the u.s. this is about seventy percent of g.d.p. sixteen percent is business investment in a trade to ducks four percent and governments about twenty percent of g.d.p. so if you cut the government spending we have a sixteen roughly sixteen trillion dollar economy if we balance the budget deficit is one point three trillion roughly balance the budget deficit and overnight our

economy shrinks to fourteen point seven but if the government spends a trillion dollars less money than millions of people are going to lose their jobs so consumption will also drop and business profits will also drop and will immediately spiral into a new great depression that's option number one that died today option to kick the tires a little how do we know that that cutting government spending went on a leash more private sector spending more private sector investment would not waste more of the free market i don't know how existing your credit to the model but should exist in capitalism i will in the old days back when gold was money and it was always good if the government spent less money because if the if the government spent a lot of money and borrowed a lot of money it would push up interest rates because there's only a limited amount of money for government borrowed it would push up and. straits and crowd out the private sector so it was always good back then if the government spent less because in industry interest rates would fall and the private sector could borrow more but that's not the world we live in and our world there is no limit as to how much money the governments can create so now even though we have

trillion dollar budget deficits interest rates are at rock bottom levels the ten year bond yields one point six percent so now if the government spends less there's absolutely no offsetting benefit interest rates won't go any lower and so you're not throwing up anything you're just spending a trillion less dollars resulting in mass layoffs and a collapse in profitability where does the private sector jump in i mean the private sector is supported by the government spending take away the government spending and everybody's a lot less profitable and a lot fewer jobs exist and we immediately spiral into a new depression that's option number one ok and what do you say is the antidote to that is the antidote to avoid a new depression that you predict in that scenario well the there are two other options the second option is to follow the japan model japan's bubble popped twenty two years ago and they've had very large budget deficits every year and they've taken their government debt from sixty percent of g.d.p. up to two hundred forty percent of g.d.p.

and they've supported their economy that way and they've prevented it from collapsing into the great depression that's what we're doing at the moment we're on the japan model pass the budget deficits and they can keep doing this very easily for the next five years trillion dollar budget deficits financed with some paper money creation if necessary and maybe even ten years i think this could go on and on all of japan which has had this situation for two decades right ok but in the third scenario didn't ten years they'll be used as bankrupt as greece and then will collapse into a new depression so that's the just prolonging the inevitable bad scenario but it's much better to prolong death than for death to occur today i mean i think you could argue the opposite but i'm more interested in hearing what your third scenario with the third scenario is for us to learn from japan's experience. if the japanese that understood their crisis was going to go on for a quarter of a century and that they were going to spend trillions and trillions of dollars they wouldn't voiced at all that money paving the japanese countryside with cement and building bridges to nowhere they would have come up with a very clever and plan on how to invest trillions of dollars in cutting edge

technologies and had they done that they would be the global economic power to and you think that's what the u.s. should do i think that's what the u.s. should do because they are going to spend the money it's only a matter of are they going to waste it on too much consumption and war as they've been doing over the last ten years or are they going to invest if they invest in aggressively and transformative twenty first century technologies like solar nanotechnology genetic engineering biotechnology they can establish an absolutely unassailable lead in these twenty first century technology and lock in another american century let me ask you this why for people that think that the private sector is best to allocate resources the market is best to allocate resources and that when you have the government doing it a that leads to corruption and you see crony capitalism and you see ineptitude to give you one example so we've seen the obama administration try to subsidize some alternative energy space isn't just one example we've heard plenty about solar with

cylinder and things like that but the electric car battery industry they're trying to subsidize makers and they tied it though to aggressive production timetables versus market demand so these companies get backing and then lo and behold there isn't a market demand they're suffering losses some have filed for bankruptcy and one that i want to follow up on that i know was suffering with losses i went and found today or more recent article they found a buyer to rescue them it's a chinese auto parts manufacturer so when that is the example richard duncan how can we expect the government to really be the pioneers to take us into the new america with innovation investment into these kinds of things let me give you another example the manhattan project the u.s. governor. took all the geniuses they could capture put them in new mexico together and threw limitless amounts of money at them and within a very short period of time they created the wonder weapon that won the war in the pacific let me give you another example because the united states government invest

more in the u.s. military than the rest of the world combined the united states has a global military dominance it's now time to apply this very successful government investment strategy into american industry and into american power generation and if we do then we'll have global dominance in those fields as well so take the kind of investment that led to map it weapons of mass destruction and that led to war dominance into more of an energy dominated solar eternity energy ok i guess we're going to have to i don't know about trusting the governor there but i but i hear your point another thing that i want to ask about that since the private debt is the private sector debt is one of these major problems you say that people are up to their eyeballs in debt this credit expansion can't continue what about debt forgiveness for the private sector what steve keen an australian economist calls debt jubilees or queuing for the public or instead of pumping this money through the banks you pump it through the public and you say but hey if you get this money you have to pay down your debt and for those that don't have debt it's

a cash injection that then they can invest and and that is how we can solve the problem which is too much debt in the private sector. in terms of the do you believe if you if you write off the debt the problem with that is one person's debt is another person's asset so if you destroy the day you destroy the assets and suddenly the banking system collapses and we have a depression so you can't just write off the so it so that is not a solution in your view ok so now let's talk about if a solution isn't adopted to this crisis what happens what is this new depression scenario what are the consequences financial political geopolitical all right well i think as i said i think we're we're most likely going to stay on plan path be. the japan model the government continue supporting us we are on government life support this is going to continue whoever is in office for the next five years and maybe ten years and but ultimately the government will not be have to continue this forever the japan model is going to have

a very bad ending in japan for very much sooner or later but i fear that before we go as long as ten years this is the weakest link in the chain is likely to be this it was only twenty years ago that ross perot warned the americans that there would be a giant sucking sound of jobs leaving the country if they passed nafta and gatt it wouldn't take much for another billionaire politician to come along and point out to the americans the globalization is really really not working out very well for them and if we have a protectionist backlash so if under-employment stays at these levels for the next five years occupy wall street is going to occupy main street and it wouldn't take much i think even tipped the tea party into being anti free trade if the u.s. puts up trade barriers then that's going to be bad for the u.s. it's going to be terrible for the world and it's going to be absolutely catastrophic for countries like china and the other countries dependent on export led growth so if global trade collapses i mean if this really does break down if credit is on after a four and

a half decade fifty trillion dollars boom now bust we'll have a multi decade depression and the just to to imagine what that would be like i think that best way is to just think about the one nine hundred thirty s. and the one thousand nine hundred seven the 1930's what g.d.p. contract in the us what forty percent forty six percent forty six percent is that we'll be looking at in the us today but in addition we'd see the same kind of collapse in china where the u.s. is the largest customer for their products and combination with trade wars which history tells us oftentimes lead to actual wars is that what we're looking at china's economy under that scenario would completely implode and so many million people would lose their jobs. the factor is that it's quite possible there would be starvation and china and you can only imagine what the geo political consequences of that would be gather you the economies one and two facing that kind of a massive depression so you think that just to follow up we would be looking at

that kind of collapse in g.d.p. forty six per cent again in the us we could see well that's what's driving the policymakers now in their policy response you know milton friedman ben bernanke to that the fed could have prevented the great depression if they had simply prevented the money supply from contracting in one hundred thirty one but effectively by q.e. but now the thing is that the new credit is the new money and money is irrelevant because there's no difference between money and credit so now it's necessary to prevent the credit supply from contracting and that's what the policy response is all about preventing credit from contracting and that's what they're going to continue to do well i appreciate you being here to lay this all out it is interesting to consider everything you're saying which is that this is a different system and some of the classical things that we've thought about as solutions may not have the outcomes that they would in a capitalist economy duncan thank you so much for the time we'll have you back

again when you're in when you're when you're on to the next book which is hopefully not the depression that is here but for now that's all with richard of the new depression and that's all we have time for thank you so much for watching don't forget to come back tomorrow for a fresh show in the meantime follow me on twitter and we'll get to loose change we've just had such great guests i've been wiping it out have a great night.