JOURNAL: How Close Are We to New Great Depression? Posted By: Catherine Boyle

How Close Are We to New Great Depression?



Posted By: Catherine Boyle





The risk of a new depression — a sustained, severe recession — has

struck fear into the heart of markets and driven monetary policy in

developed economies since the current financial crisis began.



"We're in a very unfortunate position to be here," Richard Duncan,

author of The New Depression, warned on CNBC's "Squawk Box Europe"

Monday.



"When we broke the link between money and gold, this removed all

constraints on credit creation. This explosion of credit created the

world we live in, but it now seems that credit cannot expand any

further because the private sector is incapable of repaying the debt

it has already, and if credit begins to contract, there's a very real

danger that we will collapse into a new Great Depression," he argued.



"If this credit bubble pops, the depression could be so severe that I

don't think our civilization could survive it."



The explosion in cheap credit has been widely blamed for the global

financial crisis, but the debate about how to fix the problem

continues.



In the past few years, central banks including the U.S. Federal

Reserve , the European Central Bank and the Bank of England have

pumped liquidity into their financial systems through a number of

ways, including quantitative easing and the ECB's long-term

refinancing operation (LTRO).



"We could keep deferring the depression, but that could just encourage

the bad guys. If you do this, you possibly do more harm than good,"

Roger Nightingale, economist and strategist at RND Associates, told

CNBC Monday.



"You can defer, but not prevent."



Nightingale argued that previous credit booms, for example in Japan in

the 1980s, have led to sustained recessions.



"When you throw money into the system at a rate much in excess of the

requirements of the real economy, you're trying to get people to

borrow and spend, but the good guys out there won't because they're

too cautious. It's the bad guys who come in, the malefactors," he

said.



"When the central banks realize what is going on and raise interest

rates, it flings the world economy into depression."



The ideas of Milton Friedman, the Nobel Prize-winning economist who

argued that monetary policy should constantly expand, informed some of

the Fed's response to the crisis.



"Policymakers really believe that if we allow credit to contract, we

will reach a new Depression," Duncan said.



"The increase in government debt is making total debt grow, otherwise

we would already have collapsed in to a debt-deflation death spiral.

This creates great perils, but also tremendous opportunities."



Duncan argues that governments in the developed world should borrow

"massive" amounts of money at the current low interest rates to invest

in new technologies like renewable energy and genetic engineering.



"Even if this is wasted, at least we could enjoy this civilization for

another ten years before it collapses," he said.



His views counter those of economists who believe that governments

should focus on cutting their debt, particularly where repayments on

that debt are threatening to reach unsustainable levels, like in

Greece.