From Capitalism To Creditism

Why QE won’t end any time soon
Richard Duncan

website:
http://www.richardduncaneconomics.com

Richard Duncan Economics
MACRO WATCH
http://www.richardduncaneconomics.com/subscr
iptions/
50% Discount Coupon Code: macro

Introduction
• In 1968 Money ceased to be backed by Gold.
• The nature of money changed; and that
changed the way the economy works.
Now:
1. Credit Growth Drives Economic Growth
2. Trade No Longer Balances
3. The Government Directs The Economy
3

Money: Currency Outside Banks
US$ billions, 1945 to 2013

1,200
1,000

In 1968, the US broke the link
between Money and Gold

US$ billions

800

Fiat Money

600
400
200

Gold-backed Money
Source: Federal Reserve, Flow of Funds, Table L.204

0
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
1945
4

US Total Credit/Debt
1952 to Q3 2013

70,000
60,000

US$ billions

50,000
40,000

Credit Growth has driven economic
growth since World War II.
But can it continue to expand from
such a high base?

30,000
20,000
10,000
Source: Fed, Flow of Funds

0
2011Q4
2009Q4
2007Q4
2005Q4
2003Q4
2001Q4
1999Q4
1997Q4
1995Q4
1993Q4
1991Q4
1989Q4
1987Q4
1985Q4
1983Q4
1981Q4
1979Q4
1977Q4
1975Q4
1973Q4
1971Q4
1969Q4
1967Q4
1965Q4
1963Q4
1961Q4
1959Q4
1957Q4
1955Q4
1953Q4
1951Q4
5

US Total Credit to GDP
1952 to 2012

450%
400%
350%

Credit Growth Drove Economic Growth

300%
250%
200%
150%
100%
50%
0%

Source: Fed, Flow of Funds

2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
6

US Current Account Balance
1960 to 2015 est., US$ billions

100
0
2014 est.

2012

2010

2008

2006

-600

2004

-500

2002

-400

2000

-300

1998

-200

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

1960

-100

The US Current Account Deficit
used to be the driver of
global economic growth.
It has gone into reverse!

-700
-800
-900

Source: Bureau of Economic Analysis
Estimates: RD

7

Capitalism Has Evolved Into Creditism
• Under Capitalism, the economic growth dynamic was
driven by Investment and Savings.
• Now it is driven by Credit Creation and Consumption.
• Capitalism has evolved into Creditism!
• Creditism has created unprecedented prosperity
around the world, but…
• It’s on the verge of collapse because the private
sector cannot bear any more debt.

8

Total Credit & GDP Growth

adjusted for inflation, 1952 to 2012

14.0%
12.0%

Source: Fed, Flow of Funds;
Bureau of Economic Analysis

10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952

-2.0%
-4.0%

Total Credit Growth Adjusted for Inflation

GDP
9

Total Credit

Year on Year Change, 1991 to Q3 2013
6,000
5,000

US$ billions

4,000
3,000

$2.3 trillion in credit growth
is needed in 2014 to reach
the 2% threshold required
to stay out of recession.

2,000
1,000
0
-1,000

Source: Fed, Flow of Funds

$1,845 bn

-2,000
2013Q3
2012Q4
2012Q1
2011Q2
2010Q3
2009Q4
2009Q1
2008Q2
2007Q3
2006Q4
2006Q1
2005Q2
2004Q3
2003Q4
2003Q1
2002Q2
2001Q3
2000Q4
2000Q1
1999Q2
1998Q3
1997Q4
1997Q1
1996Q2
1995Q3
1994Q4
1994Q1
1993Q2
1992Q3
1991Q4
1991Q1
10

Total Debt, Major Sectors
1980 to Q3 2013

16,000

Source: Fed, Flow of Funds

14,000

US$ billions

12,000
10,000
8,000
6,000
4,000
2,000
0
2012Q3
2011Q2
2010Q1
2008Q4
2007Q3
2006Q2
2005Q1
2003Q4
2002Q3
2001Q2
2000Q1
1998Q4
1997Q3
1996Q2
1995Q1
1993Q4
1992Q3
1991Q2
1990Q1
1988Q4
1987Q3
1986Q2
1985Q1
1983Q4
1982Q3
1981Q2
1980Q1
Household Sector

Corporate Sector

Federal government

Total GSEs

ABS Issurers
11

US Budget Deficits

2006 to 2015 est., US$ billions
0
-200
-400

-248

-161
-400

-459

-600

-680

-800

-600

-1,000
-1,087

-1,200
-1,400

-1,294

-1,300

2010

2011

-1,413

-1,600
2006

2007

2008

2009

Source: Congressional Budget Office. Estimates: RD

2012

2013

2014 est. 2015 est.
12

Credit Growth Projections
US$ billions
Total Credit Growth
Total Credit Year End
Forecast Credit Growth
Less 2% assumed inflation
Credit Growth after Inflation

2013 est.

2014 est.

2015 est.

1,815

2,200

2,325

58,215

60,415

62,740

3.2%
1.5%
1.7%

3.8%
2.0%
1.8%

3.8%
2.0%
1.8%

Still below the 2% Recession Threshold!
So, more QE is likely to be required.
13

14

15

16

Household Net Worth
US$ bn, 1970 to Q3 2013

80,000

$77 trillion

Up $21 trillion from the post-crisis low
and 12% above its pre-crisis peak!

70,000
60,000

That was the result of Quantitative Easing!

50,000
40,000
30,000
20,000
10,000

Source: Fed, Flow of Funds

0
2012Q1

2010Q1

2008Q1

2006Q1

2004Q1

2002Q1

2000Q1

1998Q1

1996Q1

1994Q1

1992Q1

1990Q1

1988Q1

1986Q1

1984Q1

1982Q1

1980Q1

1978Q1

1976Q1

1974Q1

1972Q1

1970Q1

17

Net Worth as a Percentage of
Disposable Personal Income
650

600

Average level from 1952: 524%
2000 High: 616%
2007 High: 662%
Q3 2013: 615%
700

550

500

450

400

Source: Fed, Flow of Funds

350

2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
2000Q1
1998Q1
1996Q1
1994Q1
1992Q1
1990Q1
1988Q1
1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
1976Q1
1974Q1
1972Q1
1970Q1
1968Q1
1966Q1
1964Q1
1962Q1
1960Q1
1958Q1
1956Q1
1954Q1
1952Q1

18

19

Don’t Bet On QE Ending in 2014
• Based on the Fed’s Taper Schedule, Liquidity will become
tight in the third quarter of 2014 and there will be a
significant Liquidity Drain beginning in the fourth quarter.
• If the Fed sticks with this schedule, interest rates are likely
to rise by mid-2014.
• Higher interest rates would cause a fall in property prices,
stock prices and net worth, which would cause the
economy to fall back into recession.
• To prevent that, the Fed is likely to create more fiat money
through QE than its taper schedule suggests.
• I expect between $500 billion and $1 trillion of QE in both
2014 and 2015.

20

Conclusion
• Credit growth is not rapid enough to drive
economic growth in the US.
• Therefore, US imports are weak and the US
Current Account Deficit is shrinking.
• Consequently, the global economy is weak.
• If QE ends, Liquidity will tighten, asset prices will
fall and the global economy will weaken further.
• The Fed can’t afford to take that risk.
• So, expect QE to continue.
21

Richard Duncan Economics
MACRO WATCH
http://www.richardduncaneconomics.com/subscr
iptions/
50% Discount Coupon Code: macro