In a commentary for Business Insider (The Present: On the Brink of Disaster), Richard Duncan, the Singapore-based economist who correctly predicted that global trade imbalances would cause the Great Recession in his 2005 book The Dollar Crisis: Causes Consequences and Cures, is now predicting that the world is on the brink of economic disaster, though the disaster is still 5 to 10 years away. He writes:
The global economy is in crisis. Government intervention on a multi-trillion dollar scale is the only thing preventing a worldwide collapse into a new great depression.
This crisis is structural, not cyclical. At its core is the fact that global production, swollen by limitless credit denominated in fiat money, greatly exceeds the consumption that can be financed by the income of the individuals who comprise the world’s population. Governments around the world are borrowing, printing and spending on an unprecedented scale to absorb the global excess capacity (and to prevent asset prices from deflating), but these measures cannot continue indefinitely. The structure of the global economy is unstable and unsustainable. A catastrophic economic breakdown may be unavoidable...
He thinks that the world still has 5 to 10 years to solve its problems and he may be correct. The current economic momentum of growth in the emerging countries should keep their economies humming. Growth generates increased income which leads to new investment, and thus has its own momentum. The emerging market countries, not just China, are almost all growing at 5-10% per year at the moment. They are not likely to go into a recession until they are dragged into a global depression by a dollar crash. And that crash may be years away.
So far, Duncan's analysis is excellent, but later in this piece, he has a paragraph which shows that he still does not understand mercantilism. He needs to read my commentary I'm tired of American Economic Leaders Giving Advice to China. Chinese government policy is to suppress Chinese consumption. It keeps limiting credit available to the Chinese people so that it can print the yuan (without causing much inflation) that it uses to manipulate foreign exchange markets. At the same time, it keeps out the products of the advanced economies through a wide variety of tariff and non-tariff barriers. Its main goal is not just economic growth, it is a combination of economic growth and political power.
As a result of his failure to understand modern mercantilism, he doesn't realize that a U.S. tariff constructed to balance trade, such as a scaled tariff, would force a change in Chinese government policy, result in balanced world trade, and thus solve the world's key long-term problem without requiring international economic cooperation. Instead, he thinks that any tariff action by the United States would be destructive. He writes:
U.S. trade tariffs would be bad for America, terrible for the world and catastrophic for China and all the other countries dependent on export-led growth. It is important to understand that as grave as are the challenges confronting the United States, those faced by China are even worse. The US can’t produce as much as it consumes, but China – and most other export-led economies – can’t consume as much as they produce. If international trade breaks down, production in China would collapse, unemployment would soar and political unrest would explode.
The emerging countries have learned a recipe for growth from China. Almost all of them are now devoting at least 3% of their GDP to foreign exchange accumulations in order to give themselves a competitive advantage in international trade. This year, more and more of them will copy China's barriers to products from the advanced economies.
The advanced economies, not the emerging economies, will continue to be stuck in high-unemployment economic stagnation for the next several years. They will continue to elect incompetent leaders who won't have the wisdom or power to solve their problems by balancing budgets and trade. In less than 5 years, the dollar will crash, and the emerging economies will be dragged down into the global depression from which the advanced economies never emerged.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
