Bonnie Faulkner of Pacifica Radio’s Guns and Butter show broadcast the presentation by Stephanie Kelton and Michael Hudson on “There IS An Alternative To European Austerity: Modern Money Theory” . presented at the Italian MMT Summit last month. You can listen to the recording here, or read key parts of the transcript below.
(c. 19:10): “We are all overwhelmed to see how many people are here. “Our message is very simple. And that is why it is threatening. From Margaret Thatcher to President Obama, you were told that there is no alternative. And we are here—and will spend the next two days—telling you that there is an alternative. And we will spell out what the alternative is.
“What we are seeing now is a fight for what is going to be the rest of the 21st century by creating a new kind of class, a new class much like the invasions of Europe a thousand years ago. A thousand years ago, invaders from the north and from Italy would grab land and grab public utilities by military means. But today—ever since the United States went off gold in 1971—aggressors can no longer afford military war. So, what you have today is a new kind of a war. It’s a financial war. You can get by privatisation and financialisation what armies used to get by force of arms. This is not the class war that people spoke of a hundred years ago. It is a financial war. And it is a war that classical economists warned against.
(c. 20:51) “300 years of classical political economy sought to get rid of landlords and bankers. A hundred years ago people spoke of technology. Nobody believed that the vested interests could fight back. But they did fight back in the way that parasites do in biological nature. I’ve read in the Italian newspapers—coming over on the airplane—that people talk about parasites. And people think about parasites, as taking the host’s energy and lifeblood. But, in biology, the smart parasites do something else: They take over the brain of the host. They make the brain think that the parasite is part of the body, to be protected.
(c. 21:53) “In America, President Obama and Treasury Secretary Timothy Geithner, say the economy cannot survive without bailing out the banks, without bailing out the debt, without making the gamblers and the cleptocrats whole on what they have taken. The production economy, the consumption economy, the real economy is being sacrificed to the financial sector. But matters don’t have to be this way. There is an alternative. And we will be spelling out the alternative in the next two days.
(c. 22:36) “We’re overwhelmed that so many of you are here. We’re excited. And we will do our best to explain to you that there are many alternatives. And then it will be your turn to carry the fight on. [Applause]
(c. 23:03) “I’m going to elaborate in a different direction from what Stephanie has said. I’m going to discuss the difference between central bank credit, or money, and commercial banks. Central banks create money, you can say. And commercial banks create credit. The last three years since September 2008 have seen the largest money creation and credit creation in history in the United States. And, yet, prices have not gone up at all. That is, consumer prices have not gone up since 1980. Wages in the United States have drifted downwards for 30 years. And consumer prices and commodity prices have been stable. But there has been an immense inflation; the largest bond market price increase in history has occurred, as interest rates have fallen from 20% to only one-quarter of 1% today. What has gone up is the price of real estate, the price of bonds, the price of stocks. So, the result is that the value of wealth—and most wealth is held by the wealthiest1% of the population—wealth has gone way up relative to wages. The result is a new kind of class war, as I said last night. It’s not the typical kind of class war between employers and employees. It’s a war of finance against the economy.
(c. 25:10) “Under industrial capitalism, the idea was that credit would be created productively to fund capital investment that would employ labour. That is not what is occurring today. When commercial banks create credit, it is create claims on wealth. It is create mortgage debt. It is create corporate debt. It is to create personal debt, and student loans, and credit card debt. This is what makes commercial bank credit creation different from the central banks’ creation of money.
(c. 26:00) “When central banks create money, they do so for a long-term public purpose. They fund government spending and capital investment and public infrastructure. In most countries in the world, public infrastructure, roads, communication systems, railroads, water and sewer systems have all taken a capital investment that is larger than all the manufacturing capital investment. In the United States, the value of New York’s real estate, alone, is larger than the value of all of the plant and equipment in the United States. The result is: The textbooks that are taught in the United States ignore this difference that we have been talking about. There is a formula, MV = PT. It means an increase in the money supply increases the price level. But the price level that the textbooks talk about are only consumer prices and commodity prices. Nowhere in the textbooks do you find a relation between the credit supply and asset prices, real estate, stocks and bonds. And, yet, 99% of the credit spent in the United States economy is spent on these financial claims. Every day an amount equal to the entire year’s gross national product passes through the New York monetary clearinghouse and the Chicago Mercantile Exchange. The vast amount of payments are within the financial sector. And, within the last ten years or so, all of the growth of bank lending is to other financial institutions.
(c. 28:17) “In the textbooks there are happy pictures about banks lending to industry to build machines and factories with a smokestack coming out and employing labour. But this is a fiction; this is not what occurs in practice. All of the increased capital investment in the United States economy comes from the retained earnings of corporations—not from banks. Banks do not lend to bring new capital investment into existence. They lend against mortgages, against capital in place, against real estate, against assets that already exist—not to create new assets.
(c. 29:14) “So, when we talk about government money. We talk about government spending that is, indeed, to spur the economy, to spur economic growth, to spur new investments. The function of government investment and government central bank money creation is very different from the private banks. The government money is, indeed, debt, the lira that you have in your pocket are debt. Paper currency is debt. But it’s debt that nobody ever intends to be repaid because, if government currency is debt, than to repay it would mean that you would not have any currency left in the pocket.
(c. 30:00) “The commercial debt is expected to be repaid; and it bears interest. And, as this commercial debt has grown—the mortgages, the bank loans to companies, the corporate raiding debt—this has loaded down the economy with an enormous debt overhead. The more money commercial banks lend, the more interest has to be paid to carry this debt overhead. And the problem is that money that is spent on paying banks debt cannot be spent on goods and services. So, the result is that when commercial banks create debt, you have a diversion of income away from spending on goods and services—to pay debt service—and that is known as debt deflation. And when debt deflation proceeds as long as it has today, we move into a late stage of finance capitalism, which is the debt deflation stage—the austerity stage. And that’s the stage that Europe finds itself in today.
(c. 31:38): “There is a political aspect to all of this technical discussion of money. The political aspect is if governments create money, then they’re creating a mixed economy—a mixed economy of private and public capital investment. This is what made all of the countries of Europe and the United States rich. The government investment in the public infrastructure that has been able to be supplied to the economy at cost; so, you get to drive on most roads for free; you get to use this huge capital investment in infrastructure for free. But if governments are not allowed to create their money, then all of the credit the economy needs is created by the commercial banks. And when the commercial bank credit creation leads to debt deflation and the government cannot finance the deficit to pay the interest, then the commercial banks say: Alright, sell off and privatise your infrastructure. This is what we’re seeing in Greece today, in Ireland. You’ve seen it in Iceland. What you are seeing is a financial grab of infrastructure that is taking place by the ability of commercial bankers to prevent the central bank from creating credit.
“And this is a vast new bank loans. Most of the infrastructure that is being purchased—the water and sewer systems, real estate—is all being bought with borrowed money from the banks. So, that, first of all, the commercial bank political strategy is to block the central bank from creating money. And then saying the governments need to borrow from the commercial banks and need to pay interest to the commercial banks, instead of issuing interest-free debt. And then, to pay the commercial interest, they have to sell off the infrastructure. And the result is that bankers today are able to seize the property that in the past it took a military invasion to seize.
“So, what you are seeing today is a new kind of warfare. It is a financial warfare against the entire society, not only against labour, but against industry and, most of all, against government. And a tool in this warfare is to convince people that government money creation is going to be inflationary. You have all seen in the last 30 years here in Italy that your prices have not gone up much; your wages have not gone up much. And what has gone up is the price of your houses, the price it takes to buy a house—that you have to take on a lifetime of debt in order to get a place to live. In America, students have to take a decade of debt to get an education, in order to get a job, instead of the government financing education freely, as was the ideal a hundred years ago.
(c. 35:14): “In the textbooks, it is as if the economy operates without debt and on a barter basis. The reason they don’t discuss what we are discussing here today is that they don’t want you to realise that there is an alternative to commercial bank credit creation and a power grab. The Belgian poet, Baudelaire, said that the devil wins at the point where society believes that he doesn’t exist. The financial sector wins at the point where you don’t see that the prices that the banks are inflating are asset prices—real estate prices, bond and stock prices—and that the role of commercial banks is to increase the power of wealth over the rest of society, over labour, over industry, to create a new ruling-class of bankers that are even more heavy than the landlords that were criticised in the last part of the 19th century.
(c. 36:29): “For 200 years, classical economics sought to purify industrial capitalism from the carryover of feudalism. And these carryovers were the private land ownership of a hereditary aristocracy and commercial banks that had held governments in debt and then foreclosed and exchanged their debts for monopolies. In Britain, this is how the trading companies were formed, the East India Company and the Bank of England with its monopoly, and in the United States you had similar creations of monopolies through the railroads that became the largest landowners through land grant. What Balzac wrote in one of his novels was that behind every family fortune was a great theft, often an undiscovered one. And, yet, modern economics treats all of the theft, the capital transfer, the transfer payments that are occurring today, as if it were all productive, as if all income is earned. Every government in the world now prints National Income and Product Accounts that say that rent is earnings of landlords and interest is the earnings of bankers. In the United States, the financial sector has 40% of all reported corporate earnings. So, you have this shift of the economic surplus shifting away from industrial capital that’s invested in new plant and equipment—to hire labour—to finance capital that is lent out. And the interest earned by the banks is lent out again. And the result is an exponential growth, which Americans called the magic of compound interest. The growth of compound interest is so large that it is much larger than any government’s ability to pay. And, so, the result has to be default. And the default position that Europe and America finds itself today is the point at which the financial sector makes its grab for assets and takes for itself the public domain, the public enterprises, the roads, the broadcasting systems, the ports and the harbours. And that is what is happening today. And the difference in privatising these assets is that when you privatise the roads and the infrastructure, the ‘buyers’ have to pay interest; they pay dividends; they pay exorbitant executive salaries; they pay financial fees to the underwriters; they offer stock-options to the management. And then they raise the price of these public services to the highest rent extraction that they can charge. The economy is turned into a toll booth opportunity. Toll booths are placed on the access to housing, the access to roads, the access to telephone systems, the access to credit for the money that you use by credit cards in payments. And, all of a sudden, instead of paying for the cost of operating an economy, you’re paying for the privileges of people—the financial sector and what used to be called rentiers—that are simply charging whatever they can get and siphoning off the wealth into their own hands.
(c. 40:54): “So, in the United States, the real economy of production and consumption has actually declined over the last 30 years. All of the growth in the economy is overhead to the rentier sector—to what we call the FIRE sector: Finance, Insurance, and Real Estate, which now should include the legal system and the monopoly system. So, almost without the textbooks or anyone noticing, what used to be analysed as industrial capitalism has turned into finance capitalism. And this finance capitalism has not been the kind of finance that was imagined a hundred years ago. It is not financing of industry. It’s financing of economic parasitism and overhead. And all of this is presented as if the way to get rich is to go into debt—to borrow—to buy assets that are being inflated in price. When your real estate and your public enterprises have risen in price, this is not because they’ve actually grown. It is because a house and a property is worth whatever a bank will lend. And as the lending terms have been loosened, you’ve had this huge inflation in asset prices that is way beyond the ability of the economy to pay. Foreclosure time arrives and, so, financial capitalism turns into a bubble economy because the only way that banks can avoid default and a break in the chain of payments is to lend more money.”
(c. 43:13): “In America, the Obama Administration’s policy has been described as having to borrow your way out of debt. If people can’t pay, the idea is to continue to borrow the money from the banks; and you simply add the interest onto the debt. This is how Latin America financed itself during the 1970s until, finally, it couldn’t pay; the debts had to be written down.
“Now, the end of this shift away from government central bank money creation to commercial bank credit creation is that there has to be a bankruptcy—a debt write down. The basic premise underlying my analysis is that a debt that can’t be paid won’t be. All of the Wall Street analysts I know realise the debts can’t be paid. The political question is how won’t they be paid. Will they not be paid by letting the banks foreclose? One quarter of all American real estate today owes more money on the mortgage than it actually is worth. That means one quarter of homeowners—almost ten million people—could walk away from their property and come out ahead on their balance sheet. Donald Trump would walk away. Certainly, Goldman Sachs walks away from bad investments. But individuals are told that their debt should be paid, that only the debts of the rich don’t have to be paid. Only the debts of the 99% to the rich have to be paid. And there’s a shift in the understanding of how the economy works.
“So, the way to get rich today isn’t really to borrow money and buy a property that you hope will rise in price because when the price collapses—as they have today in America, Spain, Ireland, England—when the price crashes, the debts remain in place. And there’s the negative equity that occurs. This is the point at which property is transferred from debtors to creditors. So, that the way to make money today is to get the 99% of the population into debt to the 1% of the population. It’s not really to borrow. Never in history before was there any temporary period where people thought that the way to get rich was to go into debt. They were tricked into that by junk economics when Alan Greenspan told American homeowners: Borrow against the value of your house; treat your house like a piggy bank; and sustain your living standards that your wages are no longer paying for.
(c. 46:25) “So, while the American workers have to pay to send their children to school and to get an education to pay for what used to be publicly supported, you’ve had the banks, all of a sudden, financialise education, financialise the public sector, and even financialise the public sector and the corporate sector. The stock market in the textbooks is presented as a means of financing industry and providing equity capital—that’s not debt—that is a means for industry to make investment and hire labour. But that’s not what has occurred for the last 30 years. The stock market has become a vehicle for corporate raiders and management buyouts to borrow money to buy a company to calculate how much a company makes to pay the profit to the bankers and to be able to buy a company just like a real estate investor would buy a building.
(c. 47:45) “When a real estate investor, whether it’s Donald Trump in America or Italian and European investors, want to buy a commercial property; they calculate how much rent it will yield; they bid against each other. And the winning bidder is whoever is willing to pay the most rent to the banks to get the mortgage to buy the property. That’s what’s called using other’s people’s money. But it really isn’t other people’s savings. It’s freshly created money the banks create on their own computer keyboards. And they can create this freely by writing a bank account for the borrower; and the borrower signs an IOU, whether it’s a mortgage debt or a personal debt to pay off at interest. Now, the banks say that this is not inflationary; only government money creation is inflationary. And, yet, there’s no reason why the government can’t go to its own computers in exactly the same way that commercial banks create credit. The question is: Why should the government be called inflationary by creating money and commercial banks not be called inflationary when they create credit when you’ve seen that the banks are inflationary? They make their money by getting people to pay all of the rent or all of the corporate profits hoping to come out with a capital gain.
“And in the United States the corporate raiders and the leveraged buyout companies make a capital gain by cutting wages, by downsizing the labour force, by outsourcing it to other countries, and, especially, by seizing the pension funds and using the pension funds to pay off the bankers and write down the debt, so they have more equity.
“A few years ago in Chicago, where I grew up, Sam Zell, a real estate operator, borrowed the money to buy the Chicago Tribune. He looted the employee stock ownership plan. He used the money to pay the creditors that leant him the money to buy the Chicago Tribune. He began to fire the staff. He sold off Chicago Cubs, the baseball team that the Chicago Tribune owned. And then, even so, he mismanaged the company so badly that the company went bankrupt, wiping out the employee stock holders. They have brought a case of fraud against him claiming that they have had their money stolen. President Obama recently gave a speech claiming there is no fraud; it’s all legal; that’s the ‘free market.’ The free market has been redefined to be free for the financial sector to grab, to misrepresent, and to do the things that Mr. Bill Black is going to be talking about in his talk.
(c. 51:29) “So, when you talk about the fraud that has, essentially, become the basis for making financial money, you have that as the new economy without anybody saying it. I don’t know any textbook that talks about how the way to get rich is to steal money. The way to get rich is to borrow money to buy a property that’s going up in value and make the economy shrink and grab property from the public domain. Why is it that French novelists like Balzac and poets like Baudelaire understand the economy better than what Nobel prizes are given in the textbooks that are written today? Why would one go to movies and drama, rather than a textbook? [Applause]
(c. 52:27) “What we are trying to do in this meeting today is to give you a new view of how the real economy works today and teach reality economics, instead of the parallel universe that you have in economic textbooks. At the beginning of Paul Samuelson’s textbook—which is used to indoctrinate students in the United States—he says that the criterion in economic theory is whether its axioms are consistent. This is what I was told when I studied literature in college. If you’re reading a novel, you have to suspend disbelief. You have to believe in the science-fiction or the characters that the author writes and imagine that it’s all consistent. You know when you go to a movie and after you come out of a thriller, or a mystery movie, you think, ‘Wait, a minute. There’s something wrong with that picture. They forgot how it happened. What Mr. Samuelson did not say was that these assumptions have to be realistic. So, instead of learning how the economy operates, students are told how a parallel universe might operate on a different planet, if there were no government, if there were no fraud, if the entire economy operated on barter, if there was no debt, and that everybody wanted to help everybody else, that nobody inherited money, that everybody earned all of the income and wealth that they have. The reality is the opposite, but it seems to be talked about only in novels these days.
(c. 54:27) “Whenever you have a misunderstanding of reality year after year, decade after decade, and now for a century, when a false picture of the economy is painted you can be sure that there is a special interest benefiting. A false picture of reality does not happen by nature; it is subsidised. And the banking sector has subsidised a junk economics that is taught in the universities, broadcast from your newspapers, mouthed by the politicians, whose election they sponsor, to try to make you believe, that you’re living on Mars in a different kind of a world—instead of the actual country that you’re living in—and to pretend that there is no financial class that is trying to grab what belongs to the public at large. This is what ends up with a difference between central bank creation by the government with the government aims of economic growth and full employment, as compared with commercial bank credit that aims at economic shrinkage, at austerity, at lower wages, at lower output, so that it can do to you what the commercial banks are doing to Greece, to say give us your ports and your land and your tourist areas and your water and sewer systems, so we can charge you for water and sewer. And we can take the money that you had expected to get in pensions and we can scale it down, so that we can pay ourselves.
(c. 56:10) “This is what it took an army in times past. And today it’s done without an army, as long as you will be passive and believe the science-fiction of the world that banks are painting. Thank you. [Applause]”