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A New Global Depression?


You were one of the very few analysts to predict the full enormity of the financial crisis, writing as early as 2003 of a coming credit crunch that would have ramifications throughout the asset-backed securities sector, necessitating giant bail-outs for Fannie Mae, Freddie Mac and financial-insurance companies, and a possible meltdown in the multi-trillion-dollar derivatives market. This prescience was in stark contrast to the complacency of most mainstream economists. Could you describe how you came to write The Dollar Crisis—what was the course of your intellectual development and what did you learn from your experience as a Far East securities analyst?

I grew up in Kentucky and went to Vanderbilt University. My plan was to go to law school, but I didn’t get in. Plan B was to go to France for a year, picking grapes. I got a job as a chauffeur in Paris, driving rich Americans, and made enough money to backpack around the world for a year, in 1983 and 84. So I was lucky enough to see the world when I was very young. I spent a couple of months in Thailand, Malaysia and Singapore—and even a couple of months there was long enough to realize: go east, young man.

Go east, because?

Economic opportunity. It was obviously booming—there were big skyscrapers going up, and people couldn’t read maps of their own street. So I went back to business school in Boston, at a time when there was of course very little economic growth in the United States. When I finished business school, going to Asia seemed the obvious thing to do. I found a job in Hong Kong, as a securities analyst with a local, Hong Kong–Chinese stock-broking company. This was 1986. In the first twelve months I was there, the Hong Kong stock market doubled—then I woke up one morning and learned that Wall Street had fallen 23 per cent overnight, and Hong Kong immediately fell back to where it had started. By 1990 I had joined James Capel, the oldest and largest UK stock-broking company at that time, and they sent me to Thailand to manage their research department there. We had ten analysts watching all the companies on the Bangkok stock market. At first, there really was something of a Thai miracle—the growth was solid and fundamental. But very quickly, by 1994, it was obviously a bubble and I started being bearish on the market. I wasn’t saying it was going to collapse, but the growth was going to slow down. But it just kept accelerating, and the bubble turned into a balloon. When it did finally pop, in 1997, Thailand’s GDP contracted by 10 per cent and the stock market fell 95 per cent in dollar terms, top to bottom.

So I witnessed at close quarters a very big boom-and-bust cycle, over a very short period of time. And while I was wrong for several years, I had plenty of time to think about why I was wrong. I started reading a lot of macro-economics: Keynes, Schumpeter, Milton Friedman’s monetary history of the US, the classic works. There was also a sort of lightning-flash moment, around 1994. Five years earlier I had taken a group of fund managers on a trip around the Pearl River Delta, from Hong Kong up to Canton, and back down the other side to Macao. What we saw, all along this vast delta, were miles and miles of factories, as far as the eye could see, full of nineteen-year-old girls earning $3 a day. It was in 1994 that the meaning of this really became clear to me: globalization was not going to work. The US would have a bigger and bigger trade deficit, and the American economy would continue to be hollowed out. It was unsustainable—the demographics made it impossible for this system to work. The Dollar Crisis, which came out in 2003, examined the way those global imbalances were blowing bubbles in the trade-surplus economies, and how the money boomeranged back into the US. I came to see that the unlimited credit expansion enabled by the post-gold, post-Bretton Woods international monetary system was where it all began.

Yet you’re not advocating a return to gold?

No. That is, I think that if the US had remained on the gold standard, it wouldn’t now be teetering on the edge of collapse. The global economy would be much smaller than it is; China would look nothing like it does. There would have been much less growth, but it would have been more stable. But now that we’re here, there’s no going back. If the US was to go back, the sort of deflation that would be required to take us there would be absolutely unbearable—like 1926 in Britain. But it’s important to understand what the effects have been of abandoning the automatic adjustment mechanisms inherent in the gold-linked Bretton Woods system and the classical, pre-1914 gold standard—they automatically served to correct large-scale trade imbalances and government deficits. Officially, the international monetary system that emerged after 1973 and the breakdown of Bretton Woods still doesn’t have a name. In the book I called it the ‘dollar standard’, because the US dollar became the medium for the world’s reserve assets, in place of gold. The Dollar Crisis focused on how this system had enabled worldwide credit bubbles to be created. Total international reserves, the best measure of global money supply, soared by almost 2,000 per cent between 1969 and 2000, with the central banks creating paper money on an unprecedented scale. 

The quantity of US dollars in circulation soared. One of the main features of the dollar standard is that it allows the US to incur a huge current-account deficit, as it pays for its imports in dollars—of which the Federal Reserve can print as many as it needs, without having to back them with gold—and then gets these dollars back from its trading partners when they invest them in dollar-denominated assets—Treasury bonds, corporate bonds, equity, mortgage instruments—as they must do, if they are to earn any interest on them. The French economist Jacques Rueff once compared this process to a game of marbles in which, after each round, the winners give their marbles to the losers. The larger the US current-account deficit has become, the larger the amount of dollars that wash back into the US through its equally vast financial-account surplus. The other option for America’s trading partners—the one US pundits are always calling for—would be to exchange the d

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