Dollar Crisis Cover  


Question 1:  Your new book was recently released by J. Wiley & Sons.  In the book you argue that the current International monetary system is in danger of collapse.  Could you explain why you believe the present international trade system is a danger to all of us?

Answer:  It is the imbalances in the international trade system rather than the system itself that poses the danger.  The United States’ Current Account deficit is now $60 million AN HOUR!  It increased 28% in 2002 to half a trillion dollars, an amount roughly equivalent to 5% of US GDP.  This unprecedented trade imbalance has created extraordinary disequilibrium in the global economy.  The countries that build up large stockpiles of international reserves due to large current account or financial account surpluses—such as Japan in the 1980, the Asia Crisis countries in the 1990s and China today—develop bubble economies.  When those bubbles pop, as they inevitably do, they leave behind banking crises and excess capacity.  The governments of those countries must then go deeply into debt to bail out the depositors of the failed banks.  At the same time, the excess capacity in the economy results in deflation.  Economic bubbles and systemic banking crises can be expected to reoccur and deflationary pressure can be expected to persist so long as the US Current Account deficits continue to flood the world with dollar liquidity.

Question 2:  In your book you write that the current system is neither good for the countries who export goods to the U.S. nor ultimately to the U.S.  How can a system that has brought such growth to so much of the world be bad?

Answer:   Ultimately, the imbalances in the system are harmful to the United States’ trading partners and to the United States itself.  The countries with overall balance of payments surpluses are destabilized through the rise and collapse of economic bubbles.  Ironically, the US current account deficits also helped fuel the New Paradigm Bubble in the United States.  The surplus nations earn their surpluses in US Dollars.  They must either invest those dollars in US dollar denominated assets or else convert the dollars into their own currencies.  If they convert such large amounts of dollars into their own currencies, those currencies would appreciate sharply, putting an end to their trade surpluses and perhaps driving their economies into recession.  Consequently, they park their surpluses in US dollar denominated assets instead.  By investing their dollar surpluses in US dollar assets, the trading partners of the United States helped fuel the stock market bubble, facilitated the incredible misallocation of corporate capital, and, by acquiring Fannie Mae debt, contributed to the dangerous rise in US property prices. 

The imbalances in the current international monetary system are also bad because they are unsustainable.  The United States cannot continue going into debt to the rest of the world at the rate of $1 million a minute indefinitely.  The net indebtedness of the US to the rest of the world is already approximately $3 trillion or 30% of US GDP…and its now growing at roughly 5% of GPD per annum.  The economies of most of the United States’ major trading partners have grown dependent on exporting much more to the US than the US imports from them.  When the United States current account imbalance returns to equilibrium, and it eventually must, the era of export led growth will come to end and the world will find itself without an engine of economic growth. 

Question 3:  I should note here that you are an economist and have worked in the past for the International Monetary Fund including working as a consultant for the international Fund in Thailand and later at the World Bank.  Can you tell us a little about your background and how you came to the conclusion that the current international trade system is so flawed?

Answer:   Since 1986 I have worked in Asia as a securities analyst for international brokerage firms.   From 1990 to 1996, I was based in Bangkok, heading up a large team of research analysts.  We analyzed and wrote research reports on most of the listed Thai companies, as well as most of the major industries and the overall economy.  In the early 1990s, the Thai economy really was experiencing something of an economic miracle.  The fundamentals and growth prospects of the companies were very solid.  By mid-1993, however, that was no longer the case.  The companies had borrowed too much and investors too much.  It was difficult to see how they would be able to generate enough revenue to repay their debt.  I turned bearish on Thailand by the end of that year, but the bubble economy continued to expand…for four more years!  I wanted to understand what was happening and why.  I began reading the economic classics:  Keynes, Schumpeter, Friedman and Rostow.  By the time the bubble finally popped in mid-1997, I thought I had pieced it together.  I had the fortunate opportunity to work as a consultant for the IMF in Thailand for three weeks in May of 1998 and then went to work for the World Bank in Washington later that year.  While I was there, I believe I was able to put the rest of the pieces of the puzzle together.  So, in short, it was the economic bubble in Thailand that taught me about the flaws in the international monetary systems.

Question 4:  In the book, you discuss Japan’s economy and Thailand’s experience with the Asian Financial Crisis of 1997 and onward.  You also write in Chapter 6 and Chapter 8 and elsewhere that “China has a bubble economy just waiting to pop.”  Can you explain this statement and why you feel China which currently has one of the highest GDP growth rates of any country is so in danger?

Answer:  Yes, China has a bubble economy.  Economic bubbles are caused by excessive credit creation.  In China, the loan growth of the commercial banks has amounted to approximately 15% per annum for almost 15 years.  To extend loans, banks must have deposits.  Much of the deposits the Chinese banks have extended as loans were earned when Chinese businesses exported their goods to the United States.  In 2001, China’s surplus with the US was equal to 7% of China’s GDP.  China’s GDP growth that year was 8%.  Without its trade surplus with the US, China’s economy would have grown at a much slower pace—if at all—both because the exporter’s profits would have been much worse and also because the banks would not have had enough deposits to allow them to expand lending so rapidly.  There are a number of problems with this economic model.  First, a very large percentage of the credit extended by the Chinese banks cannot be repaid:  estimates of non-performing loans in the banking system range from 25% to 50% of all loans.  Next, credit expansion in China has already been so excessive that the supply of goods exceeds the purchasing power of the public by a considerable margin.  Consequently, prices are falling and China is experiencing deflation despite its rapid economic growth.  Finally, China cannot depend on maintaining such large trade surpluses with the US for very many more years.  The origins of China’s rapid growth—credit creation and trade surpluses—are both unhealthy and unsustainable.

Question 5:  Many U.S. politicians have explained to the public that the U.S. current account deficit is caused by the desire of foreign investors to buy U.S. assets to take advantage of perceived lesser financial risk in the U.S.  Do you agree with these statements and if not, why not?

Answer:   It is true that the US Financial Account Surplus must be equal to the US Current Account Deficit.  However, there is no “Chicken or the Egg” riddle here.  It is very obvious which comes first. American consumers buy foreign goods because they are cheaper than goods made in the United States.  Foreign goods are cheaper because the wage rates in developing countries are as low as $4 per day.  Developing countries have far less money to buy expensive US goods.  That is clearly the cause of the US current account deficit.  Once the Unites States’ trading partners have their surplus earnings they must invest them in US dollar denominated assets or convert them into their own currencies causing them to appreciate.  If they are to avoid causing their currencies to appreciate, they must invest their dollar earnings in the US.  They certainly don’t do it because they believe NASDAQ shares can only go up or because they have strong faith in US accounting standards.  Those who argue that the finance account surplus causes the current account deficit must be able to explain how capital inflows into the US compel Americans to buy so many foreign-made goods. 

Question 6:  Also in the book you note that “over-investment causes excess capacity and excess capacity causes deflation.”  Could you explain to our readers exactly what deflation is, why it is to be feared and why you believe the threat of global deflation is real?

Answer:   Inflation comes about when there is too much demand relative to supply.  Deflation is caused when there is too much supply relative to demand—or, more precisely, purchasing power.  When credit is abundant, companies borrow and expand industrial capacity and aggregate supply increases.  However, the purchasing power of the public does not necessarily expand in line with supply.  During periods of very rapid credit expansion as in the 1970s and ‘80s in Japan, in the Asia Crisis countries during the 1990s and in China during the last 15 years, supply grows much faster than the personal income of the public.  When supply exceeds purchasing power, prices fall.  That is why Japan and China are suffering from deflation now.  The Asia Crisis countries avoided deflation by devaluing their currencies and exporting deflation abroad.  For example, the devaluation of the South Korean Won after the Asia Crisis contributed to the downward pressure on global semiconductor and steel prices. 

The US current account deficit is flooding the global economy with dollar liquidity.  When the dollar earnings of the surplus nations are deposited into their domestic banking systems, those dollars, being exogenous to those banking system, act as high powered money and spark off an explosion of credit creation.  Excessive credit creation permits over-investment, which, in turn, causes excess capacity and deflation.  So long as the huge US current account deficits continue to flood the world with dollars, global deflationary pressures are very likely to continue to build, as reckless credit creation results in more industrial capacity than can be absorbed at the prevailing price level.

The reason that deflation is harmful is because it undermines corporate profitability and, thereby, leads to rising unemployment and falling purchasing power.   

Question 7:  In your book in Chapter seven you list two tables showing a list of banking crises.  You also note in the book that “there is a direct cause-and-effect relationship between surging international assets and systematic bank failures.”  Can you explain this and how the charts above and others in your book support your contentions?

Answer:  Corporate distress frequently evolves into financial sector distress and banking crises.  Falling product prices make it impossible for businesses to repay their bank loans.  A similar process occurs when excessive credit creation causes asset price bubbles in the stock market and the property market.  Rapid loan growth causes asset prices to rise.  Frequently banks accept the inflated assets as collateral for additional loans.  This process continued for so long in Japan that the imperial gardens in Tokyo came to be considered as valuable as California.  Eventually, it becomes impossible to pay the interest expense on such extraordinarily overvalued assets.  The owners default, the banks then refuse to make new loans, the house of cards in asset prices begins to shake, panic sets in, the bubble pops and banks fail. 

Banking crises require expensive government bailouts.  This pattern has been repeated frequently around the world since the Bretton Woods System broke down in the early 1970s.  This sequence of events is set into motion when large amounts of foreign capital enter a country’s commercial banking system and set off excessive credit creation.

When more foreign capital enters a country than leaves it, that country’s international reserves rise.  When international reserves rise rapidly over a short period of time, economic bubbles and hyper inflation in asset prices rise and, then implode, leaving deflation and systemic banking crisis behind.

Question 8:  It is almost like arguing against motherhood to oppose free trade.  Why do you feel that existing trade arrangements are destabilizing the global economy and therefore should be opposed?

Answer:  Many benefits are derived from trade between nations.  However, the trade system that evolved following the collapse of the Bretton Woods System produces very serious side effects as well as benefits.  In fact, the existing trade arrangements  are destabilizing the global economy by creating economic bubbles, banking crises and deflationary pressures.  These problems have arisen because international trade has become so unbalanced.  The United States is buying $1 million a minutes more from the rest of the world than the rest of the world is buying from the US.  Or put differently, last year the deficit was the equivalent of almost 2% of global GDP.  To put that into perspective, global GDP grew by less than 2% last year.  So, were it not for the US deficit, it is quite likely that the global economy would have actually contracted.  The United States’ deficit makes the United States the world’s engine of economic growth.  However, the United States must finance this deficit by issuing credit.  Credit expansion on such a large scale is creating a global credit bubble.  It is also unsustainable.  The United States will not be able to finance such large deficits forever.  When the US deficits return to equilibrium, a severe and protracted global recession is likely to ensue unless policy makers can devise a new source of global aggregate demand to replace that which is currently being provided by the US current account deficit.

Question 9:  In Chapter 9 you state that “The over-indebted American economy has entered a recession that is likely to be as extreme and prolonged as the economic boom that preceded it.”  These are very strong words.  Do you really feel that a strong recession is inevitable and if so why?

Answer:  Economic cycles generally exhibit a considerable degree of symmetry.  Big booms are generally followed by big busts.  The excesses of the 1980s and 1990s were unlike anything witnessed since The Roaring Twenties.  The savings rate of the public has fallen to the lowest levels every recorded.  A rapidly inflating property bubble has enabled American consumers to extract huge amounts of equity from their homes so that they can continue living beyond their means.  When interest rates bottom, home prices will stop rising, equity extraction will cease, consumption will fall and the second phase of the New Paradigm Recession will begin. 

Question 10:  In the following chapter of the book you review the likely effect of a recession on Japan, China and the Asian Exporting economies.  Your prognosis is that they may fare even more poorly in the coming recession than the United States.  Could you explain why you think this is so and whether there aren’t things that could be done in Asia to lessen the effects of such a recession?  Couldn’t a growing China help to soften the blow?

Answer:  During 1999 and 2000, the final two years of the New Paradigm Bubble, imports into the United States jumped by $307 billion, an increase of 33% over the level of 1998.  Then in 2001, US imports fell by $79 billion, or by 6.3%.  The impact of that decline in US demand on the rest of the world was extraordinary.  That year, the economic growth rates of all the United States’ major trading partners decelerated abruptly.  Stock markets spiraled downward, commodity prices fell, and government finances came under strain all around the world.  The same consequences can be expected during the second phase of the recession, when the US consumer is finally forced to stop spending more than he earns.  At that time, imports into the US will decline and all those countries that rely on exporting to the United States will suffer.  China will be one of the hardest hit since it a leading supplier of cheap consumer goods to the US.  When China’s exports to the US decline it will not have the cash to act as an engine of growth for the rest of Asia.  Asia should not harbor false hopes of China replacing the Unites States as importer of last resort.  Instead, Asian policy makers should recognize that the era of export led growth will end once the US current account deficits can no longer be financed and they should act now to develop sufficient domestic demand.

Question 11:  In the last portion of the book you argue that a new source of global aggregate demand must be found to replace the U.S.  You argue for a plan to establish a global minimum wage.  This seems extremely hard to achieve in a short time, perhaps ever.  Are there other remedies that could be used to give the World time to come up with a new international trade system?

Answer:  You are right to point out that introducing a global minimum wage will be difficult to achieve.  I do recognize that, of course.  However, harder things have been accomplished.  National minimum wage rates have been in effect for 100 years in some advanced economies.  If minimum wages can be enforced on a national scale, I believe they could also be enforced on a global scale.  Basically, where there’s a will, there’s a way. 

There may be easier solutions to this problem of creating sufficient aggregate demand to replace the $500 billion a year that is currently being supplied by the US current account deficits.  However, I cannot see what those solutions might be.  Most countries—in Asia and elsewhere around the world—already have too much national debt to allow for a long term Keynesian-fiscal deficit solution.  Worse still, a Monetary Policy response would do more harm than good since it was too much monetary expansion in the form of US dollar liquidity that caused all the problems outlined in the preceding paragraphs in the first place.  It might be possible to fight fire with fire, but no one has ever suggested that it’s possible to fight liquidity with liquidity.  That said, I hope other proposals will be made.  Any discussion on this very important subject would be a step in the right direction.

Question 12:  Lastly you argue that a new international monetary accord is needed to govern international trade and you discuss the Keynes Plan, use of Special Drawing Rights (SDRs) and creation of a Global Central Bank.  These seem all very major steps, especially in a world where major international body, the U.N., seems sidelined.  Could you discuss how you see the above mitigating the effects of a major recession and tell us how achievable you feel any or all of these steps might be and why?

Answer:  The United States’ current account deficits have acted as an important subsidy to the rest of the world, but they have also flooded the world with dollars, which have replaced gold as the new international reserve asset.  Those deficits have, in effect, become the font of a new global money supply.  In addition to being destabilizing, this system is neither sustainable nor easily controlled.  It is not sustainable because the US cannot continue going deeper into debt to the rest of the world indefinitely.  It is not easily controlled because the disbursement of the new Global Money Supply takes place as a result of trade imbalances and capital flows that are far too complex to easily direct.  This is really no way to run a global economy.  A new international monetary accord is needed.  The new system must prevent persistent trade imbalances, and it must put in place a mechanism that would allow the growth of the global money supply to be controlled and allocated in an orderly and rational manner.  Otherwise, the existing flaws in the international monetary system are going to continue destabilizing the global economy as they have over the last two decades.

It may be hard to adjust to this fact, but a global central bank is needed to control the global money supply.  The IMF has the organizational structure and many of the policy tools (including to authority to create Special Drawing Rights) needed to carry out the role of a quasi- Global Central Bank.  However, there are three important tasks that the Fund must now master if it is going to succeed in that role.  First, the IMF must gain control over the global money supply—that is over the creation of international reserve assets.  Second, it must learn how to allocate the future supply of global liquidity (SDRs) in quantities that are neither excessive nor too sparse.  Finally, it must learn how to allocate the global money supply in a way that both ensures global economic stability and, simultaneously, supports the global development agenda.

Gaining control over the global money supply is the first step.  That would stop the excessive credit creation responsible for the bubble economies and systemic banking crises that have occurred around the world in recent decades.  However, gaining control over the global money supply would not be sufficient to prevent the inevitable correction of the US current account deficit from ending in a severe and protracted global recession.  I believe those countries that are now dependent on export led growth must develop new sources of domestic demand and I believe this could be achieved by an international initiative  to put in place a global minimum wage. 

It is difficult to do justice to such complex issues in only a few paragraphs.  Your readers will find a much more well argued case for a global minimum wage and a global central bank in chapters 12 and 13 of The Dollar Crisis.

About the Author:  Richard Duncan has worked as a financial analyst in Asia for more than 16 years, conducting research and publishing investment reports on companies, industries, and economies from India to Korea.

In 1993, Mr. Duncan was one of the first to warn of the impending collapse of the Thai economy and the Thai stock market in a series of published reports and speeches directed at institutional investors.   At the height of the Asian crisis, he worked as a consultant for the International Monetary Fund in Thailand.  Subsequently, he joined the World Bank in Washington DC as a Financial Sector Specialist focusing on issues related to the economic crisis in Asia.

About the Interviewer: 

Christopher W. Runckel, a former senior US diplomat who served in many counties in Asia, is a graduate of the University of Oregon and Lewis and Clark Law School. He served as Deputy General Counsel of President Gerald Ford’s Presidential Clemency Board. Mr. Runckel is the principal and founder of Runckel & Associates, a Portland, Oregon based consulting company that assists businesses expand business opportunities in Asia. (

Until April of 1999, Mr. Runckel was Minister-Counselor of the US Embassy in Beijing, China. Mr. Runckel lived and worked in Thailand for over six years. He was the first permanently assigned U.S. diplomat to return to Vietnam after the Vietnam War. In 1997, he was awarded the U.S. Department of States highest award for service, the Distinguished Honor Award, for his contribution to improving U.S.-Vietnam relations. Mr. Runckel is one of only two non-Ambassadors to receive this award in the 200-year history of the U.S. diplomatic service.

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