The Dollar Crisis | Richard Duncan

Summary of: The Dollar Crisis: Causes, Consequences, Cures
By: Richard Duncan

Introduction

Delve into the fascinating world of ‘The Dollar Crisis: Causes, Consequences, Cures’ by Richard Duncan, as we explore the collapse of the Bretton Woods system, the end of gold-backed U.S. dollars, and their ensuing economic consequences. Discover how the absence of a limited reserve asset, such as gold, led to unchecked credit creation and massive worldwide inflation of asset bubbles. By examining case studies from Japan and Thailand to the United States, learn how these bubbles eventually burst, causing economic collapse and dire consequences for global trade. This book summary will provide you with valuable insights into the causes of the dollar crisis and the potential solutions that may help prevent future catastrophes.

The Rise and Fall of Bretton Woods

The Bretton Woods system established a gold-backed U.S. dollar as the international currency and prevented credit creation, but President Nixon ended gold’s convertibility, leading to economic problems such as asset bubbles. The modified gold standard worked well until the 1960s when deficit spending and foreign investments shrunk American reserves. Other countries held increasing dollar reserves, leading to asset inflation and the popping of bubbles. The system’s downfall resulted in an unparalleled increase in credit worldwide, ultimately leading to economic bubbles pop.

The Dangers of Economic Bubbles

Economist Jacques Rueff accurately forecasted the collapse of Bretton Woods due to US deficits. Rueff recognized that US dollars were backing the credit system in France while simultaneously expanding the credit system in the US. Similarly, the inflow of capital into the US caused the creation of credit and economic bubbles which led to the Great Depression in the 1920s and modern-day “New Paradigm” bubbles. The Dow Jones Industrial Average grew by over 1000% from 1983 to 2000 before the stock market crashed. Rueff’s prediction emphasizes the importance of monitoring economic bubbles as they inevitably lead to catastrophic consequences when they explode.

The Hidden Risks of the American Bull Market

The American economy has been fueled by credit for the past 20 years, with trade surplus countries investing in U.S. assets to maintain competitiveness. The U.S. debt-to-GDP ratio has grown to 290%, making it a risky investment. Asset-backed securities have been a major source of new debt, particularly subprime home-equity loans. The U.S. will likely face a financial crisis, with a bailout being extremely costly.

The Looming Deflation Threat

Excessive credit creation and global overinvestment in capacity have led to excess production, falling prices, and declining profitability. The availability of low-cost labor has contributed to the current slump in the U.S. economy. Policymakers insist on liberalizing trade, while politically powerful sectors are protected. Currently, American consumers enjoy low prices, low interest rates, low borrowing costs, rising home prices, and rising stock prices. However, if Americans stop spending, demand will fall, and deflation may replace the current inflation. In the long term, the U.S. faces the prospect of a slump like the one Japan experienced. Neither Keynesian nor monetarist economic policies can solve the problems that lie in store. This bubble in the first place was caused by excessive credit expansion, and the world is awash in liquidity. Even with 0% interest rates, businesses can’t earn enough return on investment.

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