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Michael Hudson: Debt and Democracy – Has the Link Been Broken?

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By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College

A longer version of this article in German was published in the Frankfurter Algemeine Zeitung on December 5, 2011 [the FAZ provided this anachronistic note].

Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to “take the multitude into their camp” and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history.

Debt has been the main dynamic driving these shifts – always with new twists and turns. It polarizes wealth to create a creditor class, whose oligarchic rule is ended as new leaders (“tyrants” to Aristotle) win popular support by cancelling the debts and redistributing property or taking its usufruct for the state.

Since the Renaissance, however, bankers have shifted their political support to democracies. This did not reflect egalitarian or liberal political convictions as such, but rather a desire for better security for their loans. As James Steuart explained in 1767, royal borrowings remained private affairs rather than truly public debts. For a sovereign’s debts to become binding upon the entire nation, elected representatives had to enact the taxes to pay their interest charges.

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.

This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

Near Eastern Rulers Proclaimed Clean Slates to Preserve Economic Balance

Charging interest on advances of goods or money was not originally intended to polarize economies. First administered early in the third millennium BC as a contractual arrangement by Sumer’s temples and palaces with merchants and entrepreneurs who typically worked in the royal bureaucracy, interest at 20% (doubling the principal in five years) was supposed to approximate a fair share of the returns from long-distance trade or leasing land and other public assets such as workshops, boats and ale houses.

As the practice was privatized by royal collectors of user fees and rents, “divine kingship” protected agrarian debtors. Hammurabi’s laws (c. 1750 BC) cancelled their debts in times of flood or drought. All the rulers of his Babylonian dynasty began their first full year on the throne by cancelling agrarian debts so as to clear out payment arrears by proclaiming a clean slate. Bondservants, land or crop rights and other pledges were returned to the debtors to “restore order” in an idealized “original” condition of balance. This practice survived in the Jubilee Year of Mosaic Law in Leviticus 25.

The logic was clear enough. Ancient societies needed to field armies to defend their land, and this required liberating indebted citizens from bondage. Hammurabi’s laws protected charioteers and other fighters from being reduced to debt bondage, and blocked creditors from taking the crops of tenants on royal and other public lands and on communal land that owed manpower and military service to the palace.

In Egypt, the pharaoh Bakenranef (c. 720-715 BC, “Bocchoris” in Greek) proclaimed a debt amnesty and abolished debt-servitude when faced with a military threat from Ethiopia. According to Diodorus of Sicily (I, 79, writing in 40-30 BC), he ruled that if a debtor contested the claim, the debt was nullified if the creditor could not back up his claim by producing a written contract. (It seems that creditors always have been prone to exaggerate the balances due.) The pharaoh reasoned that “the bodies of citizens should belong to the state, to the end that it might avail itself of the services which its citizens owed it, in times of both war and peace. For he felt that it would be absurd for a soldier … to be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all.”

The fact that the main Near Eastern creditors were the palace, temples and their collectors made it politically easy to cancel the debts. It always is easy to annul debts owed to oneself. Even Roman emperors burned the tax records to prevent a crisis. But it was much harder to cancel debts owed to private creditors as the practice of charging interest spread westward to Mediterranean chiefdoms after about 750 BC. Instead of enabling families to bridge gaps between income and outgo, debt became the major lever of land expropriation, polarizing communities between creditor oligarchies and indebted clients. In Judah, the prophet Isaiah (5:8-9) decried foreclosing creditors who “add house to house and join field to field till no space is left and you live alone in the land.”

Creditor power and stable growth rarely have gone together. Most personal debts in this classical period were the product of small amounts of money lent to individuals living on the edge of subsistence and who could not make ends meet. Forfeiture of land and assets – and personal liberty – forced debtors into bondage that became irreversible. By the 7th century BC, “tyrants” (popular leaders) emerged to overthrow the aristocracies in Corinth and other wealthy Greek cities, gaining support by cancelling the debts. In a less tyrannical manner, Solon founded the Athenian democracy in 594 BC by banning debt bondage.

But oligarchies re-emerged and called in Rome when Sparta’s kings Agis, Cleomenes and their successor Nabis sought to cancel debts late in the third century BC. They were killed and their supporters driven out. It has been a political constant of history since antiquity that creditor interests opposed both popular democracy and royal power able to limit the financial conquest of society and an almost autonomous dynamic turning the economic surplus into interest-bearing debt claims for payment.

When the Gracchi brothers and their followers tried to reform the credit laws in 133 BC, the dominant Senatorial class acted with violence, killing them and inaugurating a century of Social War, resolved by the ascension of Augustus as emperor in 29 BC.

Rome’s Creditor Oligarchy Wins the Social War, Enserfs the Population and Brings on a Dark Age

Matters were more bloody abroad. Aristotle did not mention empire building as part of his political schema, but foreign conquest always has been a major factor in imposing debts, and war debts have been the major cause of public debt in modern times. Antiquity’s harshest debt levy was by Rome, whose creditors spread out to plague Asia Minor, its most prosperous province. The rule of law all but disappeared when publican creditors arrived. Mithridates of Pontus led three popular revolts, and local populations in Ephesus and other cities rose up and killed a reported 80,000 Romans in 88 BC. The Roman army retaliated, and Sulla imposed war tribute of 20,000 talents in 84 BC. Charges for back interest multiplied this sum six-fold by 70 BC.

Among Rome’s leading historians, Livy, Plutarch and Diodorus blamed the fall of the Republic on creditor intransigence in waging the century-long Social War marked by political murder from 133 to 29 BC. Populist leaders sought to gain a following by advocating debt cancellations (e.g., the Catiline conspiracy in 63-62 BC). They were killed. By the second century AD about a quarter of the population was reduced to bondage. By the fifth century Rome’s economy collapsed, stripped of money. Subsistence life reverted to the countryside as a Dark Age descended.

Creditors Find a Legalistic Reason to Support Parliamentary Democracy

When banking recovered after the Crusades looted Byzantium and infused silver and gold to review Western European commerce, Christian opposition to charging interest was overcome by the combination of prestigious lenders (the Knights Templars and Hospitallers providing credit during the Crusades) and their major clients – kings, at first to pay the Church and increasingly to wage war. But royal debts went bad when kings died. The Bardi and Peruzzi went bankrupt in 1345 when Edward III repudiated his war debts. Banking families lost more on loans to the Habsburg and Bourbon despots on the thrones of Spain, Austria and France.

Matters changed with the Dutch democracy, seeking to win and secure its liberty from Habsburg Spain. The fact that their parliament was to contract permanent public debts on behalf of the state enabled the Low Countries to raise loans to employ mercenaries in an epoch when money and credit were the sinews of war. Access to credit “was accordingly their most powerful weapon in the struggle for their freedom,” notes Ehrenberg: “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, which had power as overlords, but were also corporations, associations of individuals held in common bond. According to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”

The financial achievement of parliamentary government was thus to establish debts that were not merely the personal obligations of princes, but were truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 revolution, developed the most active capital markets and proceeded to become leading military powers. What is ironic is that it was the need for war financing that promoted democracy, forming a symbiotic trinity between war making, credit and parliamentary democracy in an epoch when money was still the sinews of war.

At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.” The more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. By the end of the eighteenth century Austria was left “without credit, and consequently without much debt” the least credit-worthy and worst armed country in Europe (as Steuart 1767:373 noted), fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.

Finance Accommodates Itself to Democracy, but Then Pushes for Oligarchy

While the nineteenth century’s democratic reforms reduced the power of landed aristocracies to control parliaments, bankers moved flexibly to achieve a symbiotic relationship with nearly every form of government. In France, followers of Saint-Simon promoted the idea of banks acting like mutual funds, extending credit against equity shares in profit. The German state made an alliance with large banking and heavy industry. Marx wrote optimistically about how socialism would make finance productive rather than parasitic. In the United States, regulation of public utilities went hand in hand with guaranteed returns. In China, Sun-Yat-Sen wrote in 1922: “I intend to make all the national industries of China into a Great Trust owned by the Chinese people, and financed with international capital for mutual benefit.”

World War I saw the United States replace Britain as the major creditor nation, and by the end of World War II it had cornered some 80 percent of the world’s monetary gold. Its diplomats shaped the IMF and World Bank along creditor-oriented lines that financed trade dependency, mainly on the United States. Loans to finance trade and payments deficits were subject to “conditionalities” that shifted economic planning to client oligarchies and military dictatorships. The democratic response to resulting austerity plans squeezing out debt service was unable to go much beyond “IMF riots,” until Argentina rejected its foreign debt.

A similar creditor-oriented austerity is now being imposed on Europe by the European Central Bank (ECB) and EU bureaucracy. Ostensibly social democratic governments have been directed to save the banks rather than reviving economic growth and employment. Losses on bad bank loans and speculations are taken onto the public balance sheet while scaling back public spending and even selling off infrastructure. The response of taxpayers stuck with the resulting debt has been to mount popular protests starting in Iceland and Latvia in January 2009, and more widespread demonstrations in Greece and Spain this autumn to protest their governments’ refusal to hold referendums on these fateful bailouts of foreign bondholders.

Shifting Planning Away From Elected Public Representatives To Bankers

Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

Finance vs. Government; Oligarchy vs. Democracy

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. The same is true for America’s $13 trillion added since September 2008 (including $5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and $2 trillion of Federal Reserve “cash-for-trash” swaps).

This is being dictated by financial proxies euphemized as technocrats. Designated by creditor lobbyists, their role is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors for debts now on the books. What makes this calculation self-defeating is the fact that economic shrinkage – debt deflation – makes the debt burden even more unpayable.

Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy. Through their media and think tanks, they have convinced populations that the way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds rising in price – being inflated by bank credit – and to reverse the past century’s progressive taxation of wealth.

To put matters bluntly, the result has been junk economics. Its aim is to disable public checks and balances, shifting planning power into the hands of high finance on the claim that this is more efficient than public regulation. Government planning and taxation is accused of being “the road to serfdom,” as if “free markets” controlled by bankers given leeway to act recklessly is not planned by special interests in ways that are oligarchic, not democratic. Governments are told to pay bailout debts taken on not to defend countries in military warfare as in times past, but to benefit the wealthiest layer of the population by shifting its losses onto taxpayers.

The failure to take the wishes of voters into consideration leaves the resulting national debts on shaky ground politically and even legally. Debts imposed by fiat, by governments or foreign financial agencies in the face of strong popular opposition may be as tenuous as those of the Habsburgs and other despots in past epochs. Lacking popular validation, they may die with the regime that contracted them. New governments may act democratically to subordinate the banking and financial sector to serve the economy, not the other way around.

At the very least, they may seek to pay by re-introducing progressive taxation of wealth and income, shifting the fiscal burden onto rentier wealth and property. Re-regulation of banking and providing a public option for credit and banking services would renew the social democratic program that seemed well underway a century ago.

Iceland and Argentina are most recent examples, but one may look back to the moratorium on Inter-Ally arms debts and German reparations in 1931.A basic mathematical as well as political principle is at work: Debts that can’t be paid, won’t be.

Notes:

1.James Steuart, Principles of Political Oeconomy (1767), p. 353.
2. Richard Ehrenberg, Capital and Finance in the Age of the Renaissance (1928):44f., 33.
3. Charles Wilson, England’s Apprenticeship: 1603-1763 (London: 1965):89.
4. Sun Yat-Sen, The International Development of China (1922):231ff.

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81 comments

  1. Parvaneh Ferhadi

    A longer version of this article in German was published in the Frankfurter Algemeine Zeitung on December 5, 2011 [the FAZ provided this anachronistic note].
    —————————————
    Speaking of anachronistic – December 5, 2011 is still some 3 days away. Typo or am I missing something?

  2. jake chase

    A longer version of this is published somewhere else? It is difficult to imagine a longer version. Anyone reading this one should be congratulated. It reminds me of Henry Ford’s aphorism, ‘history is the bunk.’ Let’s try for a shorter version limited to these United States: beginning roughly in 1980, corporate and banking conspirators realized they could elect an empty suit politician capable of convincing people that limitless credit was a sound substitute for living wages, that speculation was indistinguishable from production, that economic failure was simply the result of moral failing. Enough people bought into this fantasy to keep things humming more or less for twenty-eight years, by which time those running the scam were rich beyond the dreams of avarice. After the shit hit the fan, these oligarchs have succeeded in controlling the terms of debate through their captive media empires, captive political stooges, and double talking corporate henchmen, all of whom can be seen daily on CNBC, where the only truth you will get is the published market prices, most of which are manipulated. Nothing can be done about all this until enough people wise up. Since Veblen explained all of it in 1904 I am not optimistic about the liklihood of meaningful change, but I expect they will print enough money to keep markets afloat and people competing desparately for the jobs which continue to lurk just out of reach for 20% the people needing them. Somehow most of these people manage to keep eating, but their plight never seems to be taken seriously by anyone except for them.

    1. tom allen

      exactly. so, fuck them. their days are numbered, they’re kinda pitiful now and sad when you think about it, but they did some good shit, really, they saved the world and deserve our respect for that. the question is how to build a functional economy for the kids, and for us in our productive years and our retirement.

      they almost had it right. a little more humility, a little more transparency, and the whole thing could work just great. :-)

    2. reslez

      Lengthy? I thought the article was riveting. You must belong to the Nintendo generation. My parents bought me books, not video games.

    3. LeonovaBalletRusse

      Michael Hudson, thank you for this suberb, succinct overview, which frames so well our current predicament.

      This is great thinking and great writing. Please ignore the comments from the ignorant, the woefully undereducated, who might even think that “history is bunk.”

      What are the chances that we might see a “Year of the Jubilee,” in your opinion? It would seem to be a very WISE course of action to take, compressing the pain and misery, of civilization at large, discouraging bloody revolution and slaughter even of the toffs. It would serve to re-set the world’s business in short order. But, of course wisdom is at an all-time low. The savagery of the rentier class is fierce, and they have long ago departed “civilization” as the rest of us know it. The ruthless damage done by Henry Kissinger at the behest of the Master Race, even as he shared in their spoils, is a keen example of the financial *realpolitik* that makes men monsters (Chapter 9: “Running the World Economy in Reverse: Who Made the 1970′s Oil Shocks” in “A CENTURY OF WAR: Anglo-American Oil Politics and the New World Order” – New and Revised – by F. Edward Engdahl.

      It would take a radically different class of men and women to bring to fruition the “Year of the Jubilee* of Levitus 25 in our time. Do they exist? Is it ONLY monsters who dwell in the domain of high finance?

      Thanks for the lesson. I’ll keep a copy on file.

      1. Glenn Condell

        ‘Michael Hudson, thank you for this suberb, succinct overview, which frames so well our current predicament.’

        Seconded. Those who are ignorant of history are condemned to repeat it. The third rail of elite control (after 1. grab all the money and resources and 2. control the political and judicial processes) is 3. underfund and discourage universal education to the point that people are ignorant of history, and therefore of of how they are being fucked by their ‘betters’. I read some link to a piece on Rob Walton yesterday and it seems he and his family, along with the Kochtopus and a lot of like-minded 1%ers, has a near-obsessive interest in destroying even the sad remnant of public education that still exists. If essential messages such as the one Michael Hudson is trying to convey cannot be stifled safely (he is now, hopefully, Too Big To Silence), then at least they can try to ensure the intended audience are either too dumb to ‘get it’ or susceptible to all the noise that is carefully arranged to accompany the signal.

        ‘What are the chances that we might see a “Year of the Jubilee,” in your opinion?’

        This is also the tack Steve Keen seems to be taking, though his approach is to bail out the debtors and savers alike, rather than simply forgive debt. There seem to be good reasons Keen’s way makes more sense from an economic perspective, as it’s more likely to stimulate demand, ie jobs, ie, enhanced tax revenues, ie recovery.

        “A CENTURY OF WAR: Anglo-American Oil Politics and the New World Order” – New and Revised – by F. Edward Engdahl.’

        I think it’s F. William Engdahl (unless he has a brother) I still have a copy somewhere of an article of his from July 2004, warning generally of a housing bubble collapse leading to depression, and specifically of Fannie/Freddie implosion. This is well before Taleb and so far as I can work out, the earliest accurate prediction in the particulars, though people like Kevin Phillips have been making more general warnings publicly since the 90s.

        1. tts

          “the tack Steve Keen seems to be taking, though his approach is to bail out the debtors and savers alike, rather than simply forgive debt. There seem to be good reasons Keen’s way makes more sense from an economic perspective, as it’s more likely to stimulate demand, ie jobs, ie, enhanced tax revenues, ie recovery.”

          Debt Jubilee is very different from mass bailouts. I like Keen but his proposed solution is terrible IMO. Giving money to everyone sounds good at first but in reality the people who’ve engineered this on going financial crisis, and have already profited handsomely from it, will get even more wealth and power than the “middle class” and poor than they already have if that happens.

          Which of course they’ll use to further usurp the power of governments everywhere. And they’ll create another even bigger bubble, because they never learned their lesson or were taken down a peg or 2, which of course they’ll try to force us all into paying for again.

          You must, MUST default (Jubilee) the bad debt first, THEN implement reforms and then at last you start throwing money at the economy/people either directly or in the form of social programs.

          Failure to do all of that in the appropriate and timely order will simply strengthen the oligarchs further since they’ll gobble up all or a disproportionate portion of any stimulus (see Obama’s stimulus package as an example, also tax cuts) which they’ll then keep or use to further their vote buying in their favor so that no reform or only the appearance of reforms are implemented (ie. Volcker Rule, Obama’s Healthcare reform) all while forcing the public to pay down the bad debt which of course ends up foisted onto the government’s balance sheets.

          1. digi_owl

            I think Keen bases his suggestion on outcomes from his computer model. There is a instance in his lecture videos where he demos putting money in via the creditors or the debtors, with the latter resulting a much more rapid recovery of the economy.

            This based on pure money flow, not taking into account the mindsets of the various entities involved in the process.

  3. Richard Kline

    So Michael, this is a quite interesting and wide-ranging thesis. It demands a broader response than I’m in a position to give it at the moment, so regrettably I’m going to engage with your problematique only tangentially, and that by way of a counter-thesis to a portion or it. (Not fair I know, but in the manner of testing potentially useful hypotheses.)

    You make this statement in building your argument: “The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history.” I agree with that as a general contention: it is remarkable how unstable credit proves in social contexts. Regulation is the only thing linking creditors from themselves as they always seem to get the Big One wrong in the end, though as you allude often after hollowing out their surrounding societies first (a dynamic, as I say, which deserves far more discussion then I’ll give it). We are certainly at a point in most Western industrial and post-industrial democracies where the credit process has gone past the threshold of stable control. You ask the question, to paraphrase, ‘Will the creditors now proceed with the hollowing out, and secondarily will they morph into a parasitic aristocracy in the process?’

    I would precede those concers, though they’re of considerable interst with the question of ‘How did the creditors get to be the only game in policy?’ Yes, political influence was gradually bought to eliminate the buffers of regulation in some places (US, UK, Ireland, Iceland), without which, yes the debt-swirl crossed the threshhold. In other places, it was the politicians themselves who jammed the debt spigots open for their partisan advantages (Greece, Italy). But there is something qualitatively different in a social sense about _this_ debt crisis relative to many historical instances I’ll suggest in a moment that is relevant to the question of ‘how?’ in my view. I’ll first say that I think the finance-capital speculators are perhaps as surprised as anyone else that the surge of ‘peak debt’ has swept them, the creditors, into such a presently unprecedented position of political dominance. My observation is that finance-capital didn’t set out to launch a coup to take over government policy _as a whole_, since finance-capital simply wanted to get and stay mega-rich. It was necessary to bend government and law to accomplish that because regulations had to be removed in the process, that was most of all. Finance-capital, as opposed to some other concentrations of great wealth, strikes me as less politically involved over the last two generations. Someone like Soros aside, we don’t see insiders at Goldman Sachs or Deutsche Bank becoming Prime Minister or President but rather taking crucial civil positions in the financial structure to manipulate for their friends and cronies: it’s the money, not the policy power that they have sought.

    So again, how did finance-capital, without really seeking it, arrive in a position where they can at least attempt to emplace themselves as a credit-allocating aristocracy? Because the _aristocracy_ aristocracy are no longer around to block finance-capital from that place in the social space I would argue. Throughout most of the social times and places you summarize, the real wealth in society was in land and powerful government office, and both commodities were sought after and generally monopolized by actual aristocracies. Yes, aristocrats of various grades, sovereign and semi-sovereign, borrowed money and lent it. They were not, as a class, speculators, however. Preservation of capital was in many ways more important, and moreover preservation of personal status and class were far more important. Yes, in the modern era—post 1600 CE for a date—aristocrats were much more active in the capital markets. And yes, the aristocracy gradually lost ground politically to finance-capital, but in no small part because the aristocracies lost ground politically to the bourgeoisie as well, in effect having to fight two gaining fires and losing in the end. But the aristocracy historcially was never comfortably allied with finance-capital exactly because both the goals and the class of the two communities diverged. In this way, the aristocracy always served as _a brake on the self-destructive excesses of finance-capital_ because the aristocracy understood very well that they could be dragged down in the financial ruins and sought to keep some kind of lid on the worst speculation. This was, in part, a core plank of the resistance of the aristocracy to uncontrolled taxation: they knew to whom those taxes would go in the main, creditors, who were often foreign and often non-aristocratic. It was bourgeois liberals who were in the end eager for the public purse to issue debt, which said liberals sought to use to undermine aristocratic privilege. Even in the Netherlands and the UK as you mention, the aristocracies fought long, delaying, losing political struggles to keep control of the state and to keep debt down. (Yes, the reality is more complex, I simplify, but I think this argument holds in the main.)

    What we have finally seen in the 20th century CE is the defeat of the aristocracy as a political force. That has had many outcomes, but the one I would raise in the context of this argument is that a fundamental societal brake on uncontrolled expansion by finance-capital was removed. True, regulatory institutions to ‘control the flow’ were put in place in most of the post-aristocratic countries . . . institutions that were either captured or operated outright by those tied to finance capital. So my counter-thesis is in fact not one of economics but of politics. The component of society with the political weight—and money—to act as a brake on finance-capital is gone, and the middle class simply lacks the political density to keep control on the situation. Yes, the large mass of middle class is like a mountain of sand, but it moves only one grain at a time whereas finance-capital operage great huge bulldozers and fire hoses of titanic scale. And this, to me, is the problem. Finance-capital has gone _politically_ out of control because there is no social faction organized which can countervail it. The institutions meant to control finance-capital have, to be blunt, been shut off or simply collapse and it is finance-capital which sits in their control rooms.

    What is missing is the counterweight to a tiny minority who didn’t set out to be petty kings but who know perhaps realize that there is no one and nothing in their way as things stand. . . . As things stand: things will change. Revolution is as likely as oligarchy; more likely I would say. And revolution has more modern precedents than does oligarchic recession. But I do think that society is not presently well-balanced to restrain finance-capital: so it’s them or us who goes down. Let’s make it them.

    1. Sock Puppet

      The (latest) ascendancy of the creditor class over the aristocracy originates with the declaration of independence in the us, and with the industrial revolution, and was helped by two world and other wars. The creditor class did not have power thrust upon them. It’s deliberate.

    2. jake chase

      What aristocracy? America never had an aristocracy, Henry James and Edith Wharton to the contrary notwithstanding. Big money was made since the beginning by debauching indians, speculation, land grabs, corrupting legislators, monopolizing key industrial sectors, financialization, manipulating financial markets. What America has always had is a financial oligarchy masquerading as “the private sector”. It has never had a counterbalance apart from the (very) occasional honest politician gaining high office and using executive power to confront it. I think Lincoln and Roosevelt, arguably Jackson, are pretty much the entire group.

      1. Justicia

        Not to mention 300 years of free labor from enslaved Africans.

        Agreed, the U.S. has no hereditary aristocracy (the Constitution forbids it) but substitute landed-and-industrial plutocracy and it amounts to the same thing. Jacksonian populism was directed at the “aristocrats” in the East who ruled in Washington.

        What has collapsed in the U.S. is not aristocratic power but the power of the post-WW II business elites whose wealth and status rose and fell with economic gains here at home. We now have a globalized corporate elite whose allegiance runs to their corporate fiefdoms.

        1. Glenn Condell

          ‘What we have finally seen in the 20th century CE is the defeat of the aristocracy as a political force.’

          Hi Richard. I reckon that destruction started with WW1, and WW2 virtually completed it. The importance of genuine birth-determined aristocracies has been negligible since the late 40s. The plutocracies that have arisen since have simply not had the time to turn themselves into heralded aristocracies, with azure lions rampant, etc, but if we allow them to, they will.

          ‘What has collapsed in the U.S. is not aristocratic power but the power of the post-WW II business elites whose wealth and status rose and fell with economic gains here at home.’

          What has collapsed is the most robust, productive and genuinely democratic political and economic system the world has seen, based as it was on collective wealth rather than stratified disparity. Power comes from control of wealth and in postwar USA uber-progressive tax rates levelled the playing field at a time when the globalised and communication-saturated world we live in was decades away. ‘Investment’ did not mean smart-aleck spivs in 3000 buck suits selling sliced and diced securitised housing bullshit to gullible wannabe spivs in 1500 buck suits representing mom and pop’s retirement income. It was local banks run by sober local bankers who knew their community and invested accordingly. Small scale, but almost always productive in the actual sense, not the ‘innovative’ one. This setup was robust because it had ‘slack’, it could weather failure in particular locales, the bulk of business going on around the hotpsot until it regained it’s feet. Compare and contrast.

          ‘Regulation is the only thing linking creditors from themselves as they always seem to get the Big One wrong in the end, though as you allude often after hollowing out their surrounding societies first’

          A thousand times yes. Regulation is necessary not just for us, but in the end for them as well. The more enlightened (and perhaps less greedy) of them acknowledge this – Buffett and Soros come to mind – but really the emblematic utterance of what I’m driving at is that comment, was it John Mack, about how while the music is playing you gotta keep dancing or you end up empty-handed. If the rules are removed, or if the players perceive that there is no penalty for breaking them – that you can still win if you cheat, in fact, that you can’t win if you don’t!! – then not only will you never get a fair result, but over time you destroy all your opponents and are left alone, the game finally being up.

          The bankers are like the Easter Islanders, and we are their trees.

          1. LeonovaBalletRusse

            Don’t you think the full-bore scam began when Merrill Lynch led the way to *retail* brokerage, with “Wallstreet Week” as barker? This surely was the hallmark of the end of whatever vestige of the *aristocracy* that remained. And this *aristocracy* of descendants of Europeans who escaped to *French* Louisiana from European troubles from the 18th century onward, did exist in New Orleans in particular.

            Retail brokerage opened the gates to the masses, gathered for fleecing by the hottest shots in the game.

      2. Richard Kline

        So jake and Justicia, you’re reading too narrowly what was written. Micheal has taken a wider ranging thesis than one limited to the US alone, and I’m thinking along similar lines in my comments. But in that regard, the US was not ascendant in the global financial system until after WW I, and prior to that aristocracies real and residual in the UK, Germany, and in concentrations of great wealth in France served the functions I describe. And in reply to Glenn, those aristocracies were moribund after 1920, not only due to the erasure of some of them in the ruin of the Great War, and the political discrediting of all fo them therein, but also in that they were dwarfed financially by finance-capital thereafter and wholly thrown in the shade during the war by the mass resources mobilized _largely without the aristocracy_ by republican governments in pursuit of the Great War. By c. 1940, the European aristocracies were finished as a force in governance.

        And yes, the US had no ‘titled’ aristocracy, but it had from well before independence, affluent, politically involved, upper class wealthy families. What changed after WW I is that these families were much less involved in governance than previously, having been muscled out by democratic haute bourgeois liberals but also having become more engaged with speculative finance themselves. So the retreat of the ‘gentry’ from political leadership did happen at the same time in my view to extend this thesis.

        1. Otter

          Richard, you have abused uncountable electrons merely to say you cannot see the financiers with your own two little eyes.

          It is not that these families are much less involved in governance, but that they are much less visible in governance. The Gnomes of Zurich are called so, not because they look like lawn ornaments, but because nobody much sees them.

          Franz Ferdinand had hardly bled out before the owners had disappeared behind curtains, pushing forward trained seals, washedup actors, and the occasional son with a taste for dancehall girls. The smart families had already withdrawn into anonymous stone buildings and country estates before Dr. Guillotine had finished sharpening the blade of his machine.

      1. Fiver

        And they have no intention of letting that change – they are perfectly capable of doing ANYTHING it takes to keep power.

    3. LeonovaBalletRusse

      Was that *brake* not Glass-Steagall? It’s removal permitted the runaway gravy train to plunge off the cliff.

      You are certainly correct that the aristocrats quit doing their *social order* job. They joined in common cause with a vulgar lot they formerly dispised and contemned, trashing their former place in the social order for quick cash.

      I dare say the only genuine aristocrats today in existence may be those the world considers *poor*, for this status has become the price of dignity in a world governed by swine. Now we see why Toni Morrison is the foremost authority on the issue of dignity. Is there a filthy rich person in the world with a shred of dignity? They all have made the Faustian bargain, with results guaranteed. May they reap their deserts: everlasting contempt from those who have not traded their dignity for the food of swine.

      Weep at your disaster, mes chers compatriotes. You have sold your dignity down the river of no return.

  4. Sock Puppet

    “Nothing can be done about this until enough people wise up”. So true. So those few of us who get it are charged with educating those who don’t, and with finding ways to live that don’t prop up the system.

  5. joebhed

    Thanks, Dr. Hudson for the historic postulation of the basis for the present debt-saturation paradigm.
    I am slightly chagrined by your hesitation at calling the spade here.
    The tool for restoring economic democracy over today’s debt industrialists IS available to us all by the simple, legal act of overturning the oligarchy’s system of money as debt.

    The Bill for doing so is resting in the Halls of Congress, having been introduced by Congressman Dennis Kucinich earlier this year as the NEED Act of 2011.
    http://www.monetary.org/wp-content/uploads/2011/10/HR-2990.pdf

    We will only ever achieve true economic democracy when we fully understand that we deserve and can have a money system that can function without the debt-power of the monied elite. It’s time to end their economic conflagration against humanity. Now.
    For the Money System Common.

    1. RSDallas

      I think that all of us savers get screwed by section 505. The citizens dividend. Unless of course one was able to swap their savings out 1 for 1 and not at a discounted rate.

      Why can’t something like this be taken up in a National referendum?

  6. F. Beard

    In more modern times, democracies have urged a strong state to tax rentier income and wealth,… Michael Hudson

    Why not prevent the theft in the first place? What good does it do the victims if the villains have to pay high taxes? None?

    1. Tao Jonesing

      Excellent point. Letting the criminal keep most of his loot proves that crime does, in fact, pay.

      Usury is the root of all evil.

      1. mansoor h. khan

        Tao Jonesing,

        More precisely, Arrogance (lack of humility) is the root of all evil.

        Usury is just one tool that oppressors use to enslave the masses. But there are others (mass killing, torture, widespread lies spread through the media, racism, etc.).

        Mansoor Khan

          1. mansoor h. khan

            LeonovaBalletRusse,

            No. All hearts are not equal due to free will. God is giving everyone a chance to develop faith in their hearts. Basically here is how I think about it:

            Humility is a realization that ==> I can’t “completely” figure out the universe by myself via reasoning ===> Start looking for him ==> You find him via faith ===> once you find him he will help you remove the (rest)of arrogance and other bad stuff from your heart. It is a continuous improvement process.

            Mansoor H. Khan

          2. Tao Jonesing

            No. All hearts are not equal due to free will. God is giving everyone a chance to develop faith in their hearts. Basically here is how I think about it:

            Humility is a realization that ==> I can’t “completely” figure out the universe by myself via reasoning ===> Start looking for him ==> You find him via faith ===> once you find him he will help you remove the (rest)of arrogance and other bad stuff from your heart. It is a continuous improvement process.

            I’d argue that believing in a God who provides all the answers is the first step towards arrogance. A sense of religion-induced righteousness certainly has caused (and continues to cause) a great deal of human suffering throughout the world.

            I don’t believe in any god. I also don’t believe that I understand the universe. Period. Anybody who believes they understand the universe, whether through reasoning or through faith, is a paragon of arrogance.

            Another approach at this, one that does not insult your belief system, is that hubris born of false certainty is the real problem you’ve identified. I still think usury is the root of all evil because it is usury (and its derivatives) that has brought us to this point. The arrogance the usurers exhibit is the result of how effective usury has been in enslaving humanity, not the cause.

        1. Tao Jonesing

          More precisely, Arrogance (lack of humility) is the root of all evil.

          I guess you have all the answers.

          Irony can creep up on you when you least expect it, Mansoor.

          1. mansoor h. khan

            Tao Jonesing,

            You are correct. Arrogance is can creep up very easily on one. Yes. I need to be careful.

            Islam says…arrogance is like this:

            Imagine on a very dark night on very dark rock a very dark ant is climbing it. Arrogance in once heart can be hidden like this ant would be and so one needs to be very careful.

            Please forgive me if I sound arrogant. I will try better next time.

            Mansoor H. Khan

  7. quark

    I see this sociol/exonomic cycle simply a result of the frailty of mankind to evolve. We as a species are intelligent enough to deaign but terrible at .practical application. While we have saved millions of lives we have deatroyed a large multiple more.

  8. Wil

    joebhed,
    Though I am unfamiliar with Kucinich’s bill (I do like the man)I think we can conclude that the debt-based international financial and monetary system has reached the end of its timeline. That should be all too obvious at this point, even though otherwise intelligent people will say, “There’s not enough money to repay the debt”. They need to be thinking, “There’s not enough debt to repay the debt.” Liquidity today is debt. Once this logical bridge is crossed, the circular nature of expanding debt (derivatives, 1.75 quadrillion ring a bell?) is finally understood.

    But this is all in accordance with the grand design of those monied interests who manage the BIS and who also sit atop mountains of private gold holdings, the flow of which has been a ten year run like no other.

    Here in America, the settlement of debt will either be self-imposed from within or mandated by the global corporation of hidden capital about to emerge even more powerful than before.

    Onmce again, timing, of course, is everything.

    1. joebhed

      end of its timeline. That should be all too obvious at this point, even though otherwise intelligent people will say, “There’s not enough money to repay the debt”. They need to be thinking, “There’s not enough debt to repay the debt.” Liquidity today is debt. Once this logical bridge is crossed, the circular nature of expanding debt (derivatives, 1.75 quadrillion ring a bell?) is finally understood.

      Steven LaChance, author of “How Debt Money Goes Broke” describes the ‘cascading cross-default’ tipping point of debt-based money as when we do not create enough new debt-based money to pay the interest on the debt-money already in existence.

      Thus the global protectionist slide to ZIRP, while the bankers solidify their collateral.

      Your description of the situation today is spot on.
      The ‘insolvency’ of the system stems from the fact that you cannot extinguish ‘too much debt’ with more debt.
      And the monetary construct says you can’t have money without debt.

      Thus, deflation(money-contraction) induced austerity becomes the political de rigueur of the day, certainly for liberals and even some quasi-progressives.

      Either we wait out that “self-imposed….. or mandated by the global corporation of hidden capital” debt settlement, or we change that debt-based monetary structure to one in which we ARE capable of issuing what is sometimes called equity-based money in its place.

      That’s what’s in the Kucinich Bill.
      Please have a read.
      http://www.monetary.org/wp-content/uploads/2011/10/HR-2990.pdf

      As you said, timing is everything.
      Thanks.

        1. tom allen

          LOL, sorry dude, for good or ill, what you say on the internet is preserved forever. or at least till the servers crash. which will probably be next Tuesday, so don’t worry, be happy. :-)

    2. joebhed

      Steven LaChance, author of “How Debt Money Goes Broke” describes the ‘cascading cross-default’ tipping point of debt-based money as when we do not create enough new debt-based money to pay the interest on the debt-money already in existence.

      Thus the global protectionist slide to ZIRP, while the bankers solidify their collateral.

      Your description of the situation today is spot on.
      The ‘insolvency’ of the system stems from the fact that you cannot extinguish ‘too much debt’ with more debt.
      And the monetary construct says you can’t have money without debt.

      Thus, deflation(money-contraction) induced austerity becomes the political de rigueur of the day, certainly for liberals and even some quasi-progressives.

      Either we wait out that “self-imposed….. or mandated by the global corporation of hidden capital” debt settlement, or we change that debt-based monetary structure to one in which we ARE capable of issuing what is sometimes called equity-based money in its place.

      That’s what’s in the Kucinich Bill.
      Please have a read.
      http://www.monetary.org/wp-content/uploads/2011/10/HR-2990.pdf

      As you said, timing is everything.
      Thanks.

    3. LeonovaBalletRusse

      “Timing is everything.” ‘Twas ever so. So are you in favor of getting the Kucinich bill passed as quickly as possible?

      Mustn’t we do something constructive before the imposition of global martial law?

  9. greg

    It’s about time somebody figured out the cause of the fall of the Roman Empire. Probably the rise and fall of a lot of other empires, too. First the concentration of power, then the hollowing out and destruction of the tax base needed to support it. So mindless when you think about it. You’d think the ‘masters of the universe’ would have more vision.

    They hunger after power, but don’t know what to do when they get it.

    Now if we can just get these parasites off our back…

    1. LeonovaBalletRusse

      greg, this cause of the fall of the Roman Empire seen in:

      http://www.youtube.com — “The Secret of Oz – Winner, Best Docu of 2010 v.1.09.11 uploaded by bstille on Feb 2, 2011. I think you’ll like it. It’s quite informative, no *blague*. LINK:
      http://www.youtube.com/watch?v=swkq2E8mswI

      Also worth viewing is a *farewell note* from Aaron Russo:
      http://www.youtube.com — “Aaron Russo’s Last Message to Humanity” uploaded by GeorgeGreekTrucker on Oct 17, 2009 (40 sec.):
      http://www.youtube.com/watch?v=8f85mSQKq6w&feature=related

      Maybe we can do it.

  10. Ed

    I probably should look at the longer version of the piece. In the short version, I see a lot of dubious historical claims made to back up a point about contemporary political economy that doesn’t really need all that historical stuffing. This is the sort of thing that people on the right like Victor Davis Hansen like to do and I don’t think much more of the style of argument when used by people on the left.

    One thing I’m very suspicious about is restating in contemporary terms the problems of economies where most of the wealth was agricultural (in fact nearly all the wealth was grown, chopped down, fished, hunted, or mined), accounting was done on a purely cash flow basis, and debt was used to back really risky ventures like long distance trades or plundering raids, well military expeditions where any advance was to be repaid with plunder. Not to mention limitations in the records, for very good reason early historians and chroniclers write a good deal about social classes but nothing about economics as we would understand it.

    There is a gentleman who has been arguing that anyone can retire if they limit their expenditures to anything that can be covered by a 3% return on investment, because you will always get at least that, citing things like 20% interest rates before the invention of modern banking. Interest back in the day was that high because debt was only used to finance projects where the businessmen stood a good chance of being killed and the entire investment lost! Except for some broad points about corruption, ambition, etc. arguments about contemporary political economy drawing on history before the arrival of Vasco de Gama in India should be off limits.

    Some of this stuff reminds me of accounts of the misery of people surviving in developing countries on less than $2 a day when the people involved are simply not living in a cash based or debt based economy (they are poor, but its not like trying to survive on less than $2 a day in Manhattan), you really are talking about a different frame of reference at this point.

    And what is the point? That the government should be taxing concentrations of wealth more? Do you really need all that to make this point? Here’s another historical analogy, the “finance sector” in the United States has put itself in a position that bears comparison with that of the church in 18th century France, and this indicates that if it continues to use its influence to block milder reforms, the the financial problems of the U.S. government will have to be resolved with the same methods used in France after the monarchy’s eventual bankruptcy.

    1. steve from virginia

      At the risk of appearing to ‘gang-tackle’ Michael Hudson — which is not the intent — I have to agree that there is no common ground between the pre-modern economies that existed before the widespread adoption of industrial methods and what we are confronted with today.

      There are other points of contention with regard to the ‘debt problem’, the largest being the simple issue of at what level does debt become ‘too much’?

      The US carries (Fed) $55 trillion public and private debt. Why is this a problem but not $45 trillion? Why wasn’t $20 trillion a problem?

      Why should $555 trillion or $10 x 10^23 be a problem? Debt service can be monetized, the numbers get bigger but the effect of the larger numbers exists in the imagination rather than on balance sheets.

      Is the problem the number or its decreasing effectiveness?

      EU debt is a problem only because it is issued in euros, not in the currency of any borrower. If there was a European fiscal authority, a United States of Eurozone, it could borrow amounts limited only by the characterization of borrowers as ‘insane’ or ‘innumerate’. There are numerous on this site who can/will come to the same conclusion including Randall Wray, Warren Mosler, James Galbraith, etc.

      Debt by itself does not translate into policy as can be seen in most places where the ‘debt slaves’ are outnumbered by repo men and ‘jingle mail’.

      In Greece and Italy, the hated ‘Troika’ trolling for assets to ‘steal’ is likely to return to Brussels empty handed: there is little in Greece other debtor nations that can be converted to ready cash at the industrial scale needed to have any effect (or cover the cost of recovery). What exists in these places is the worthless ‘detritus of modernity’: ugly suburban ‘developments’, ugly concrete block ‘luxury hotels’, airports w/ no traffic, toll roads, used cars, shopping strips, all ugliness and cheaply done for the putative gain of the auto dealers and their finance enablers. All which are really bottomless costs, btw.

      A large problem is a false narrative: that our crisis is the result of too high labor costs rather than too high energy costs. The tools used to drive labor costs lower — job exports, uncontrolled immigration, benefits cuts, automation substitute energy work in machines for human labor. In the the context of false narrative the cure IS the disease.

      The debt issues will solve themselves, frankly. Where the reforms need to be made are in the area of energy costs. There must — and will — be severe and stringent conservation steps taken including eliminating fuel use that does not provide a direct return. It is living beyond our energy means which is knocking apart our waste-based economy …

      1. Fiver

        The real problem with debt is not that it is how we’ve organized and “grown” our economic system for thousands of years, through epic booms, busts, whatever, and it always works out.

        The problem since the beginning of organized debt under capitalism, and especially the dawn of mass consumer debt is that it has accelerated, and keeps on accelerating, exposing the inherent Achilles Heel of capitalism over the last century – that is that it must “grow” or consume itself in a cannibalistic riot. Our economy is a mutant extreme of maximum consumption NOW which must be repaid with ever-greater future surplus production. Thing is, there are now 7 billion of us on a badly damaged planet. We simply CAN’T maintain this. We are on an exponential curve across the board, and we hit the Reality Wall well before mid-century. Wipe out everyone’s debt, and leave all else as is, and we’ll have 1 last run at it and collapse in ruin in a decade. We need to radically alter our path. We in the wealthy West are simply going to have to accommodate ourselves to far lower levels of consumption. With proper re-distribution, we can all live good, healthy, full lives if we start acting immediately to reduce consumption, transform our systems and slow population growth globally. But when I say lower consumption for its own sake, I really mean it. Otherwise, it will be Hell on earth. The transformation required is enormous. We are already very late in the game. If we have not acted decisively inside the next decade, we will see humanity’s toughest test since the Ice Age in the lifetime of anyone under 40.

    2. Fiver

      1) There is a great deal of scholarship around ancient/classical economies. Google “Economy of Sumer” or “Economic History of Rome” and start reading. It will take you a very long time.

      2) $2/day really means $2/day. Those people are living on the very edge, and there’s a lot of them. Here’s a table denominated in Purchasing Power Parity. We in the “West” are unbelievably wealthy:

      http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita

      1. hb

        I think you misunderstood. What the poster is saying is that a lot of the population in those countries exist inside a mostly non-cash economy. No rent, grow/hunt their own food, trade labor or whatever for goods.

        Do you really think anyone (the “average person”) can survive in a completely cash economy on $2 a day? If people thought about it for more than a minute, they’d realize there’s something seriously wrong with those numbers.

        1. hb

          To be more clear: The site you linked to is a table of countries by per capita GDP. If e.g. Congo’s per capita GDP = $300 per person, that doesn’t mean that the average person in Congo lives on the equivalent of .82 cents a day.

          It means that Congo, as a country, produces $300 per person IN MARKETIZED GOODS & SERVICES. But there is non-market production going on in Congo (or was before the decades-long war) in which people produce for personal use, barter, and local markets, not for a monetized national or international market.

          It is a great distortion to compare marketized economies to non- or partially marketized economies. It’s like saying feudal serfs lived on the equivalent of $2 a day — which ignores the fact that they didn’t have to pay in the market for their house, land (and the crops grown on it), draft animals, etc — all of which would cost a lot more than $2 if they DID have to pay in the market.

          1. Fiver

            Look at the rest of bottom half re “barter” or some such. This is all in purchasing power parity sums. These people aren’t just dirt poor, they are poorer than dirt.

  11. Murray

    Thank you Dr. Hudson. Interestingly, I wrote a paper for myb own interest a few weeks ago, making much the same point about debt, but from a different perspective, and much oversimplified historically. While I agree with your article in terms of results, I think there is more to it in terms of intent. Debt is a vehicle for investment, permitting development now that can be paid for later out of the resulting stream of income. Debt and technological development go hand in hand, at least historically.That creditors get out of hand for lack of foresight or regulation is not a problem with debt per se.
    That said, we seem to have reached the point where technology no longer gives us the needed return as it eliminates more jobs/demand than it creates, and this point seems to be overlooked by economists. In your article you say:”Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy.” I would argue that the economy’s ability to pay is shrinking because the economy is shrinking, not vice-versa. The combination of outsourcing/offshoring/mechanization/automation/intelimation/TQM driven productivity has finally reached the point of reducing jobs/demand more than it reduces cost, leaving a slow growth economy at best, no or negative growth at worst. Increasing personal debt masked this gradual development for a couple of decades. There is more to the problem than a new oligarchy, the need to regulate and taxing rentier income.
    I would like to send you my thoughts in much more detail if you would send your email address.
    Respectfully, Murray

    1. F. Beard

      Debt is a vehicle for investment, permitting development now that can be paid for later out of the resulting stream of income. Murray

      Third party debt is NOT necessary for investment. Common stock as (private) money allows the necessary economies of scale without usury.

      Also the debt you have in mind is thoroughly unethical since it involves lending money into existence. But where does the purchasing power for the new money come from? Ans: From all money holders including and especially the poor who are usually not considered “credit-worthy” themselves.

      1. Murray

        Most small businesses or startups (absent venture capital) could never get off the ground through stock issuance. That normally requires a going concern. Also large businesses can and do grow by using debt to finance operations while using retained earnings for expansion to optimize results. these are two common and ethical ways of using debt, without any usury.

        1. F. Beard

          The definition of “usury” is any interest charge.

          But a bigger moral problem than usury is the lending of money into existence since this is essentially counterfeiting.

          1. mansoor h. khan

            F. Beard,

            You are not being fair to bankers here. The bankers claim that they are turning savings into investments and that they (via the FED and BLS) monitor inflation and keep it to a minimum.

            Mansoor H. Khan

          2. F. Beard

            that they (via the FED and BLS) monitor inflation and keep it to a minimum. Mansoor H Khan

            Irrelevant. When banks lend money into existence they steal purchasing power from all money holders including and especially the poor. Otherwise, borrowers would have to pay honest interest rates to savers (which the poor especially need) or issue “shares” in their enterprise.

          3. mansoor h. khan

            F. Beard,

            I almost agree with you on this point. Let us say money reform happened as you (I) like (banks are barred from issuing currency only the government is allowed). If the velocity of money was not high enough we would have deflation.

            I have thought long and hard about deflation and I believe deflation would discourage risk taking and investment and slow down business activity. And many money thinkers agree with me on this (but most Austrians vehemently disagree with me on this point).

            Therefore, the government would have to issue more money to stop deflation (I like to call these equity shares) and that is ok with. These equity shares when newly issued should of course be used for general welfare and/or social dividend.

            Keynes also thought is bad. Keynes thought that little inflation is actually better than any deflation due to “sticky” wages explanation (which I accept). And also because inflation is hard to measure (that last part is my thinking not Keynes’).

            Therefore, even if banks are issuing currency into circulation (as they do today) and not causing inflation (essentially converting what would otherwise be unused capacity of the economy into investments) it is still far better to SPEND money into existence than LEND money into existence.

            Why: BECAUSE THEN WE DON’T HAVE TO GO THROUGH DEPRESSIONS

            Mansoor H. Khan

          4. F. Beard

            Deflation is bad. That’s why I advocate that reform be combined with a general bailout (ala Steve Keen) so that the money supply does not shrink. Then the combination of government deficit spending, plenty of genuine fiat to lend (from the bailout) and genuine private money alternatives should fulfill the private sectors need for money.

            And yes, ideally money should only be spent into circulation.

          5. mansoor h. khan

            F. Beard,

            Yes. But i am not talking about initial deflation upon conversion to 100% reserve system.

            Even after the banking system is 100% reserve and money velocity is not sufficient and we have deflation. New money should be issued for public purposes.

            Mansoor H. Khan

          6. F. Beard

            New money should be issued for public purposes. Mansoor H Khan

            Sure, as much as the government desires. But government issued money should only be legal tender for government debts, not private ones. That way, the private sector would not suffer from price inflation if the government overspent relative to taxation.

          7. mansoor h. khan

            F. Beard,

            I have come like the your “allow private currencies idea” (repeal legal tender laws) a lot. The Austrian in me (decentralize as much as possible to limit damage from abuse of power, which will happen) likes it.

            I thank you for opening my mind to this idea.

            Mansoor H. Khan

          8. F. Beard

            I have come like the your “allow private currencies idea” Mansoor H. Khan

            Actually, it comes from Matthew 22:16-22 (“Render to Caesar …”) . Actually, almost all my ideas on money come from the Bible. For instance the Bible commends making profits but not taking profits. How is that possible? Well, common stock as private money is one way. The profits simply cause the share price to appreciate where they remain unless (contrary to my reading of Scripture) dividends are paid out.

    2. LeonovaBalletRusse

      But technology replaces humans in order to pad the pockets of the Elite further. Technology becomes a *wealth creation* strategy for the Elite.

      1. F. Beard

        But technology replaces humans in order to pad the pockets of the Elite further. LeonovaBalletRusse

        That technology was/is financed by the population’s own stolen purchasing power so the entire population is entitled to the benefits. It is rather lame to complain about lost jobs when the true crime is stolen profits. People can find their own useful work IF money is not a problem.

  12. JustSomeGuy

    “Nothing can be done about this until enough people wise up”.

    Sometimes Mother Nature will step in and roll the dice. If, for example, the desertification of the American southwest spreads north and east to the Mississippi, and a few low-lying American cities such as Houston are inundated by rising waters, large population shifts will occur. Starvation and dislocation are powerful motivators for change.

    1. LeonovaBalletRusse

      Have you seen the film, “Salaam Bombay,” which I believe was a stealthy prediction of what should be tolerable to Western populations in the future, a kind of *preparation of minds for acceptance of uberdensity for the masses, gross poverty and prostitution, as the cost of business by the Global Elite*? The 1% are “fine with that.”

  13. Dave Stratman

    Hudson speaks as if there is a disconnect between the bankers and the capitalist class, as if the bankers represent an “oligarchy” which has usurped the role of capitalists and has jettisoned “democracy.”

    The democracy Hudson speaks of was always a mirage. The oligarchy he describes was always in control. In fact the bankers are the leading sector of the capitalist ruling class and are carrying out the strategy of capital as a whole to consolidate its control of workers. (Note that corporate profits are the highest in 40 years as the bankers carry out their strategy.)

    The bankers are now doing to the U.S. and Euroland what John Perkins has described the U.S. doing to Third World countries in Confessions of an Economic Hit Man: loading the country with an inescapable debt burden, used to justify austerity and police state measures which impose a qualitative leap in capitalist domination of the working population. We are living through a crisis which has been intentionally created and artificially imposed on the working class of the West to achieve an otherwise unthinkable level of capitalist domination.

    Hudson the social democrat poses the fond hope that somehow society will eventually right itself, with the capitalists back in control and the banker-oligarchs re-regulated. It is not impossible that, some decades from now, after the population has been sufficiently acclimated to “the new normal”–that is, crushed beneath the jackboot of the New World Order–our masters will move to re-regulate the banks. But that would only be after the bankers had carried out the strategy of the capitalist ruling elite and achieved its strategic aims.

    Here is a terrible thought: someday we may look back at 2011 America and Europe and think, “That was Paradise. Those were the Good Old days.” Indeed, part of the ruling class strategy may be just that, to force us to live in a future reality so ugly that we think nothing could have been better than these golden days of war and inequality, foreclosures and unemployment, wage slavery and poverty. But this is precisely why we have to break out of the straightjacket of capitalism and start thinking about revolution. (See http://www.newdemocracyworld.org/revolution/Thinking.pdf)

    1. Fiver

      I’ve no doubt we’ll be looking back at these as far better times from a perch a decade hence. And the same will be true for each succeeding decade until we are through the serial, severe crises we must contend with until at least mid-century – crises which, taking their complex interactions in aggregate, we may not survive at all.

      We’ve completely wasted a decade that should’ve been aimed at starting to address HUGE, global energy/resource/population/environmental problems. Not just the time. But trillions first in malinvestments of all description, then further trillions to pay for those worthless decisions. And trillions more to piss away on the utterly inadequate efforts to “fix” it. And it’s evident that the longer everyone is focused on the financial crisis or “economic crisis” the longer we are not thinking about how on earth we are going to completely transform every piece of the human built environment and all its supporting systems into something that has a snowball’s chance in hell of being SUSTAINABLE for even the next 20 years, let alone after we’ve added another 2 billion people.

    2. LeonovaBalletRusse

      Yes, IMF Gestapo tactics and The Shock Doctrine come to the *Homeland*, with Storm Troopers at the ready.

      Isn’t it only a matter of time (not long), until “*Special Drawing Right* are the only currency in the world?

      Most telling is the chapter dealing most poignantly with the dream for Special Drawing Rights hegemony harbored by the Grifter Elite in F. William Engdahl’s book, “A CENTURY OF WAR: Anglo-American Oil Politics and the New World Order”–Chapter 7: “A Sterling Crisis and the Adenauer-de Gaulle Threat” – section: “De Gaulle is Toppled.” The real cause of the 1968 riots in France is told.

      1. LeonovaBalletRusse

        From Post-WWI through today, Henry Kissinger ALWAYS is the man behind the curtain, turning the dials in whatever direction profits the Master Race at any time. Of course, he gets a share of the spoils, such a *good boy*.

        This is the infernal machine we’re up against, and history shows that Henry Kissinger does not hesitate to kill, kill, kill. He has expressed summary contempt even for OUR soldiers–all but worthless fodder for his killing machines.

        Think Fritz Lang’s “Metropolis.”

        1. Fiver

          Kissinger indeed belongs in that most exclusive club, the one whose members can rightly claim: “I am personally responsible for the deaths of more than a million people”.

          But he’s not alone in the post-War rankings. We also have:

          Truman, Dulles, Johnson, MacNamara, Nixon are all gold members. Bush I, Clinton, Bush II and Obama have well over a million between them for Iraq/Afghanistan. Always welcome as guests at the club. As is Reagan for his several hundred thousand in Latin America and Angola. Saddam and Pol Pot got the boot for some reason.

          And in peacetime, as a result of the financial crisis, in addition to Bush II and Obama, we have Bernanke, Geithner as failed regulators, and the Big Ten on Wall Street, whose efforts netted tens of millions in poor countries since 2008.

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