The Money Revolution

“Give me credit, or give me death!”

That’s what I imagine Patrick Henry exclaiming today if he was reincarnated as an economist. Why?

Because credit and consumption, not old-fashioned thrift and investment, now drive economic growth. At least that’s the theory put forth by Richard Duncan in his new book The Money Revolution: How To Finance The Next American Century.

Duncan’s ideas are not mainstream, but he deserves a serious listen because his established track record as an economic forecaster, including predicting much of what happened during the GFC well in advance with his bestselling book The Dollar Crisis.

_{Creditism Has Replaced Capitalism}

Duncan calls our current system “creditism”. How does it work?

To understand, start with the fact that banks create money by making loans. Say your bank agrees to lend you $100,000. That money is not sitting in a vault somewhere in the back. 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. The free availability of credit immediately increases spending and has the 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 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 took 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

He believes creditism allows 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%.

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.

When I spoke to him on this podcast for Top Traders Unplugged he was 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 funding 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

Duncan understands that his suggestion is risky. It could cause inflation, put downward pressure on the dollar and further drive up asset valuations. But he thinks the future is scarier if we do not accelerate our technology investment.

In 2000, the US invested eight times as much as China in R&D; last year China invested more. That’s a truly extraordinary turnaround. 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 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 reminds 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 – an ambitious ideas, but it will never happen.

But…it’s actually happening, at least on a smaller scale. The Chips and Science Act was passed this year with bipartisan support. 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. Duncan believes the new world of money allows us to do much, much more.

Let’s hope he’s right – viva la money revolution!