Book Review: The Corruption of Capitalism by Richard Duncan

Richard Duncan’s The Corruption of Capitalism is primarily dedicated to detailing the various causes and the continuing ramifications of the 2008 systemic financial crisis. While making his arguments, Duncan clearly explains to the reader the many economic factors he used in his analysis and their relationships with each other. At times, the book exhibited a high degree of redundancy, but such a characteristic may be beneficial to those readers that are not experts in economics and/or financial markets. While this book can be read by many, we recommend one have some basic knowledge of economics and international trade accounting.

In general, Duncan believes that the root causes of the financial crisis (discussed below) initially resulted from changes in US monetary and economic policy that occurred during the twentieth century.

Throughout the book Duncan repeatedly reminds the reader that he considers the following four interrelated factors as the root causes of the 2008 financial crisis:

1. The private sector’s increased dependence on credit creation and higher asset valuations to fuel its consumption. When credit levels became too high to maintain, the system broke along with asset valuations, which were being used in many cases as collateral for additional leverage.
2. The decision to break from any semblance of a gold standard or a fixed currency exchange system during the 1970s provided nations with the ability to print money freely. High rates of money creation occurred in many countries, thus aiding trade imbalances and eschewing many normal cyclical corrections that would correct such imbalances.
3. The increasing US trade deficit and the increasing trade surpluses of other nations. Duncan explains that the trade surpluses of other nations were fueled, in part, by the US trade deficit and the lack of a gold standard. Consequently, these exporting countries built up large foreign reserves which resulted in increased credit creation and asset valuations.
4. The US effort to avoid budget deficits in during the 1990s. This effort reduced the amount of US Treasuries available for investment. As a result, both foreign and domestic investors began to deploy their money in other assets such as real estate and the stock market, thus creating bubbles in both.

As Duncan explains these causes of the crisis and the policy changes that gave rise to them, the reader is treated to a beneficial lesson in economic history.

When Duncan shifts the focus of the book to the present he warns that the government stimulus programs have not resolved the causes of the crisis, but instead temporarily mitigated their negative effects. At present, in the current post-bubble state, he believes that the US is confronting an environment rife with excess industrial capacity, over-inflated asset prices, unsustainable spending patterns, and consumers that have yet to deleverage. Although the US consumer is no longer able to achieve greater leverage levels, the government through transfer payments is currently directly and indirectly financing private sector consumption. Such support of private sector consumption, which accounts for approximately 70% of gross domestic product, will help keep the economy afloat.

Nevertheless, Duncan argues that the government will have to continue to offer stimulus programs and outlays to avoid a continued contraction of gross domestic product, which implies continued large budget deficits. While he believes that the amount of government debt required to finance additional stimulus programs and outlays will be very large, such an amount could be financed through the private sector without money creation and government buying. To elaborate, Duncan states that the private sector is currently experiencing a savings glut -- similar to the one Japan experienced -- and the managers of the money in the savings glut are willing to sacrifice yield for less risky investments such as government debt. However, he is adamant that in order to get out of this crisis the US will have to grow and begin to produce as much as it consumes, which will not happen unless the foundations of the current economic system are changed.

While the majority of the book focuses on the crisis from a US perspective, Duncan does acknowledge the global nature of the crisis. He explains that the US and its growing trade deficit have been responsible for a significant amount of the global growth during the last few decades. He believes that as the US imports more, the other countries with the trade surpluses have more money, which leads to increased employment, increased internal demand, increased credit creation, and increased growth.

In fact, using three detailed case studies he demonstrates how the importing nature of the US private sector greatly aided the recovery of many nations in crisis. Generally, these nations in crisis (before 2008) would rely on the strong US dollar and to boost their exports, which would boost their economies. Given the current weakness of the US consumer, the reader is left wondering what model these export-led economies would implement today if they were to experience an economic crisis. As pointed out in the book, one should not underestimate the risk that some of these emerging economies, especially those with experiencing significant credit creation, could face recessions or crises.

We believe, for the most part, that Duncan does an excellent job of making his arguments and supporting them with macroeconomic data in a manner that is easy for the reader to follow. Not only does Duncan state his argument, but he manages to explain some of the complex relationships between various economic factors. Nevertheless, this is not a text book and the book is easier to follow if one has had some basic economic and trade accounting learning in the past. This book, while it has its faults, is likely to be beneficial to most readers interested in learning more about the economy and the financial crisis.

Disclosure: No positions