HONG KONG (MarketWatch) -- Noted economist and financial author Richard Duncan says the U.S. should take advantage of low interest rates to fund a massive push into technological research, as only stimulus will be able to save the economy.

The low yields for Treasurys seen since the start of the global financial crisis mean the U.S. federal government can borrow cheaply to help stave off a depression through Keynesian deficit spending of a scale "previously unimaginable," Duncan told MarketWatch in a telephone interview.

The key, he says, is to use the money to back forward-looking technologies that will help the U.S. compete and to shift away from the nation's dependency on industries vulnerable to being outsourced to low-wage centers abroad.

Richard Duncan

Duncan said the economic slump won't end anytime soon, and with prices to remain low, the government will be able to fund a modern-day version of the Roosevelt administration's New Deal of the 1930s.

"This situation creates unprecedented opportunities for our society," Duncan said. "We've got a situation where the Fed is creating money, and it's not creating any inflation."

Over time, innovations such as a cure for cancer, treatments to forestall aging, or advances in solar energy that end U.S. dependence on foreign oil will help to restructure the economy and bring global trade flows back into equilibrium. Thriving domestic industries would also bring about higher tax revenues and balance the budget.

U.S., the new Japan

In his 2009 book "The Corruption of Capitalism," Duncan forecasted global bond markets would shrug off the mounting gloom, even as it became apparent the global economy had become dependent on the lifeline of government stimulus.

Duncan, who is also the chief economist of a Singapore-based hedge fund, believes that the U.S. won't be able to avoid running debt up to Japanese levels. The question, he says, is not whether Washington will spend money trying to bail out the economy, but whether it will spend those funds wisely, Duncan said.

Japan famously embarked on massive stimulus spending during its "Lost Decade" of the 1990s after property and financial bubbles there burst. But much of the spending drew subsequent criticism as funding useless projects of the "bridges to nowhere" variety.

The U.S. is already on track to run up trillion-dollar-plus annual deficits through the next decade, according to estimates by the Congressional Budget Office.

"If the government doesn't spend this money, we are going to collapse into a depression," Duncan says. "They are probably going to spend it. ... It would be much wiser to realize the opportunities that exist to spend the money in a concerted way to advance the goals of our civilization."

How would such plan work? Imagine a trillion-dollar investment into solar energy, funded by the federal government over four years, says Duncan. Aside from thrusting U.S. companies to the forefront on green energy, there would other benefits. The announcement of such a plan would immediately spark a crash in crude-oil prices to $20 a barrel from their current levels of around $75 a barrel, he says. It would also knock back gasoline prices to around one-sixth of their current levels.

Tapping virtually unlimited free energy would diminish dependency on crude-oil imports and eventually remove the need to guard the Middle East, helping shave about $200 billion a year from the military budget, according to Duncan.

Aside from spending scientific research, Duncan says such funding could also go towards construction of a nationwide solar grid, which would help cut unemployment.

While some circles within the U.S. have called for similar spending pushes, such proposals remain politically perilous, as critics point to the unsustainable build-up in national debt.

But this chorus calling for fiscal austerity, though well intentioned, is underestimating the severity of global imbalances, Duncan says.

Instead of a healthy shakeout, such a policy is "insanity" in a global economy where industrial capacity is two times larger than underlying demand, he says.

"We have a global situation where there is an excess supply of goods but insufficient demand to absorb all that capacity," Duncan says. "The only thing that is absorbing that capacity at the moment is the fiscal stimulus."

Major cuts to government spending would vault the U.S. jobless rate to 20% or higher and force millions into poverty. Another risk factor is political tensions, trade rising protectionist tendencies, and a heightened risk of global war.

No bond bubble

As for those worried about the sustainability of the U.S. government's ability to raise funds via low-yielding Treasurys -- especially given the recent crisis in European sovereign debt -- Duncan points to Japan's experience.

Japanese government bond (JGB) prices are still quite high if one considers that the nation's debt has ballooned to about twice economic output during Japan's two-decade economic slump. Even as Tokyo rolled out fresh stimulus spending, JGB prices remained firm, only just recently easing due partly to political factors. See This Week in Japan column on easing in Japanese government bond prices.

Rather, Duncan believes markets won't see a big collapse in the global sovereign bond market anytime soon, as some warn. He says that sovereign debt -- particularly U.S. Treasurys -- could continue their rally for longer and to higher levels than is commonly expected.

"If we were in a macroeconomic equilibrium, then yes, bond prices would be far too high and yields far too low," Duncan says. "But there is a logical explanation why yields are at these very low levels and could remain at these low levels for well into the future, just as Japanese bond yields have done."

Over the past year or so, he says, consumer prices indicate that deflation has won out over inflation as the more serious threat to the economy. Such may remain the case for some time to come, even as the Fed prepares to increase monetary stimulus to head off a double-dip recession.

Also supporting low Treasury yields is the lack of safe and attractive investment alternatives. Again, Duncan draws a parallel to Japan of the 1990s, when demand for business and consumer lending evaporated.

At that time, with few takers for new credit, Japanese banks channeled excess funds into government bonds, with corporations following suit as they sought to hang on to their cash.

Another takeaway from Tokyo's experience, says Duncan, is that high levels of public debt won't result in the crowding-out effect of private-sector borrowing if interest rates are languishing around zero.

In the end, the U.S. will need to take advantage of this opportunity to run massive deficits, as stimulus is now the only thing that can truly save the economy, according to Duncan.

"Luckily market forces were not allowed to play out this time, and we are not in a depression, we are more or less in the same standard of living in 2007 and 2008," he says. "It's only possible as long as the stimulus lasts."

He says there's about a five-year window for the U.S. to develop a turnaround plan before the market changes and it becomes too late to fund elevated debt.