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Michael Hudson: America’s Deceptive 2012 Fiscal Cliff, Part III– Why Today’s Fiscal Squeeze Imposes Needless Austerity

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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. His latest book is “The Bubble and Beyond.”

The financial sector promises that privatizing roads and ports, water and sewer systems, bus and railroad lines (on credit, of course) is more efficient and will lower the prices charged for their services. The reality is that the new buyers put up rent-extracting tollbooths on the infrastructure being sold. Their break-even costs include the high salaries and bonuses they pay themselves, as well as interest and dividends to their creditors and backers, spending on stock buy-backs and political lobbying.

Public borrowing creates a dependency that shifts economic planning to Wall Street and other financial centers. When voters resist, it is time to replace democracy with oligarchy. “Technocratic” rule replaces that of elected officials. In Europe the IMF, ECB and EU troika insists that all debts must be paid, even at the cost of austerity, depression, unemployment, emigration and bankruptcy. This is to be done without violence where possible, but with police-state practices when grabbers find it necessary to quell popular opposition.

Financializing the economy is depicted as a natural way to gain wealth – by taking on more debt. Yet it is hard to think of a more highly politicized policy, shaped as it is by tax rules that favor bankers. It also is self-terminating, because when public debt grows to the point where investors (“the market”) no longer believe that it can be repaid, creditors mount a raid (the military analogy is appropriate) by “going on strike” and not rolling over existing bonds as they fall due. Bond prices fall, yielding higher interest rates, until governments agree to balance the budget by voluntary pre-bankruptcy privatizations.

Selling Saved-up Treasury Bonds to Fund Public Programs is Like New Deficit Borrowing

If the aim of America’s military spending around the world is to prepare for future warfare, why not aim at saving up a fund of $10 trillion or even $30 trillion in advance, as with Social Security, so that we will have the money to pay for it?

The answer is that selling saved-up Treasury bills to finance Social Security, military spending or any other program has the same monetary and price effect as issuing new Treasury bills. The impact on financial markets – and on the private sector’s holding of government debt – by paying Social Security out of past savings – that is, by selling the Treasury securities in which Social Security funds are invested – is much like borrowing by selling new securities. It makes little difference whether the Treasury sells newly printed IOUs, or sells bonds that it has been accumulating in a special fund. The effect is to increase public debt owed to the financial sector.

If the savings are to be invested in Treasury bonds (as is the case with Social Security), will this pay for tax cuts elsewhere in the budget? If so, will these cuts be for the wealthy 1% or the 99%? Or, will the savings be invested in infrastructure, or turned over to states and cities to help balance their budget shortfalls and underfunded pension plans?

Another problem concerns who should pay for this pre-saving. The taxes needed to pre-fund a savings build-up siphon off income from somewhere in the economy. How much will the economy shrink by diverting income from being spent on goods and services? And whose income will taxed? These questions illustrate how politically self-interested it is to single out taxing wages to save for Social Security in contrast to war-making and beach-house rebuilding.

Government budgets usually are designed to be in balance under normal peacetime conditions, so most public debt has been brought into being by war (prior to today’s financial war of slashing taxes on the wealthy). Adam Smith’s Wealth of Nations (Book V) traced how each new British bond issue to raise funds for a military action had a dedicated tax to pay its interest charges. The accumulation of such war debts thus raised the cost of living and hence the break-even price of labor. To prevent this from undercutting of British competitiveness, Smith urged that wars be waged on a pay-as-you-go basis – by full taxation rather than by borrowing and entailing interest payments and taxes (as the debt itself rarely was amortized). Smith thought that populations should feel the cost of war directly and immediately, presumably leading them to be vigilant in checking grandiose projects of empire.

The United States issued fiat greenback currency to pay for much of its Civil War, but also issued bonds. In analyzing this war finance the Canadian-American astronomer and monetary theorist Simon Newcomb pointed out that all wars must be paid for in the form of tangible material and lives by the generation that fights them. Paying for the war by borrowing from bondholders, he explained, involved levying taxes to pay the interest. The effect was to transfer income from the Western states (taxpayers) to bondholders in the East.

In the case of Social Security today the beneficiary of government debt is still the financial sector. The economy must provide the housing, food, health care, transportation and clothing to enable retirees to live normal lives. This economic surplus can be paid for either out of taxation, new money creation or borrowing. But instead of “the West,” the major payers of the Social Security tax are wage earners across the nation. Taxing labor shrinks markets and forces the economy into austerity.

Quantitative Easing as Free Money Creation – To Subsidize the Big Banks

The Federal Reserve’s three waves of Quantitative Easing since 2008 show how easy it is to create free money. Yet this has been provided only to the largest banks, not to strapped homeowners or industry. An immediate $2 trillion in “cash for trash” took the form of the Fed creating new bank-reserve credit in exchange for mortgage-backed securities valued far above market prices. QE2 provided another $800 billion in 2011-12. The banks used this injection of credit for interest rate arbitrage and exchange rate speculation on the currencies of Brazil, Australia and other high-interest-rate economies. So nearly all the Fed’s new money went abroad rather than being lent out for investment or employment at home.

U.S. Government debt was run up mainly to re-inflate prices for packaged bank mortgages, and hence real estate prices. Instead of alleviating private-sector debt by writing down mortgages in line with the homeowners’ ability to pay, the Federal Reserve and Treasury created money to support property prices – to push the banking system’s balance sheets back above negative net worth. The Fed’s QE3 program in 2012-13 created money to buy mortgage-backed securities each month, to provide banks with money to lend to new property buyers.

For the economy at large, the debts were left in place. Yet commentators focused only on government debt. In a double standard, they accused budget deficits of inflating wages and consumer prices, yet the explicit aim of quantitative easing was to support asset prices. Inflating asset prices on credit is deemed to be good for the economy, despite loading it down with debt. But public spending into the “real” economy, raising employment levels and sustaining consumer spending, is deemed bad – except when this is financed by personal borrowing from the banks. So in each case, increasing bank profits is the standard by which fiscal policy is to be judged!

The result is a policy asymmetry that is opposite from what most epochs have deemed fair or helpful to economic growth. Bankers and bondholders insist that the public sector borrow from them, blocking the government’s power to self-finance its operations – with one glaring exception. That exception occurs when the banks themselves need free money creation. The Fed provided nearly free credit to the banks under QE2, and Chairman Ben Bernanke promised to continue this policy until such time as the unemployment rate drops to 6.5%. The pretense is that low interest rates spur employment, but the most pressing aim is to provide easy credit to revive borrowing and bid asset prices back up.

Fiscal Deflation on Top of Debt Deflation

The main financial problem with funding war occurs after the return to normalcy, when creditors press for budget surpluses to roll back the public debt that has been run up. This imposes fiscal austerity, reducing wages and commodity prices relative to the debts that are owed. Consumer spending shrinks and prices decline as governments spend less, while higher taxes withdraw revenue. This is what is occurring in today’s financial war, much as it has in past military postwar returns to peace.

Governments have the power to resist this deflationary policy. Like commercial banks, they can create money on their computer keyboards. Indeed, since 2008 the government has created debt to support the Finance, Insurance and Real Estate (FIRE) sector more than the “real” production and consumption economy.

In contrast to public spending for goods and services (or social programs that increase market demand), most of the bank credit that led to the 2008 financial collapse was created to finance the purchase property already in place, stocks and bonds already issued, or companies already in existence. The effect has been to load down the economy with mortgages, bonds and bank debt whose carrying charges eat into spending on current output. The $13 trillion bank subsidy since 2008 (to enable banks to earn their way out of negative equity) brings us back to the question of why taxes should be levied on the 99% to pre-save for Social Security and Medicare, but not for the bank bailout.

Current tax policy encourages financial and rent extraction that has become the major economic problem of our epoch. Industrial productivity continues to rise, but debt is growing even more inexorably. Instead of fueling economic growth, this of credit/debt threatens to absorb the economic surplus, plunging the economy into austerity, debt deflation and negative equity.

So despite the fact that the financial system is broken, it has gained control over public policy to sustain and even obtain tax favoritism for a dysfunctional overgrowth of bank credit. Unlike the progress of science and technology, this debt is not part of nature. It is a social construct. The financial sector has politicized it by pressing to privatize economic rent rather than collect it as the tax base. This financialization of rent-extracting opportunities does not reflect a natural or inevitable evolution of “the market.” It is a capture of market structures and fiscal policy. Bank lobbyists have campaigned to shift the economic arena to the political sphere of lawmaking and tax policy, with side battlegrounds in the mass media and universities to capture the hearts and minds of voters to believe that the quickest and most efficient way to build up wealth is by bank credit and debt leverage.

Budget Deficits as an Antidote to Austerity

Public debts everywhere are growing, as taxes only cover part of public spending. The least costly way to finance this expenditure is to issue money – the paper currency and coins we carry in our pockets. Holders of this currency technically are creditors to the government – and to society, which accepts this money in payment. Yet despite being nominally a form of public debt, this money serves as public capital inasmuch as it is not normally expected to be repaid. This government money does not bear interest, and may be thought of as “equity capital” or “equity money,” and hence part of the economy’s net worth.

If taxes did fully cover government spending, there would be no budget deficit – or new public money creation. Government budget deficits pump money into the economy. Conversely, running a budget surplus retires the public debt or currency outstanding. This deflationary effect occurred in the late 19th-century, causing monetary deflation that plunged the U.S. economy into depression. Likewise when President Bill Clinton ran a budget surplus late in his administration, the economy relied on commercial banks to supply credit to use as the means of payment, charging interest for this service. As Stephanie Kelton summarizes this historical experience:

The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929.

Do you see the correlation? The one exception to this pattern occurred in the late 1990s and early 2000s, when the dot-com and housing bubbles fueled a consumption binge that delayed the harmful effects of the Clinton surpluses until the Great Recession of 2007-09.

When taxpayers pay more to the government than the economy receives in public spending, the effect is like paying banks more than they provide in new credit. The debt volume is reduced (increasing the reported savings rate). The resulting austerity is favorable to the financial sector but harmful to the rest of the economy.

Most people think of money as a pure asset (like a coin or a $10 dollar bill), not as being simultaneously a public debt. But to an accountant, a balance sheet always balances: Assets = Liabilities + Net Worth. This liability-side ambivalence is confusing to most people. It takes some time to think in terms of offsetting assets and liabilities as mirror images of each other. Much as cosmologists assume that the universe is symmetrical – with positively charged matter having an anti-matter counterpart somewhere at the other end – so accountants view the money in our pocket as being created by the government’s deficit spending. Holders of the Federal Reserve’s paper currency technically can redeem it, but they will simply get paid in other denominations of the same currency.

The word “redeem” comes from settling debts. This was the purpose for which money first came into being. Governments redeem money by accepting it for tax payment. In addition to issuing paper currency, the Federal Reserve injects money into the economy by writing checks electronically. The recipients (usually banks selling Treasury bonds or, more recently, packages of mortgage loans) gain a deposit at the central bank. This is the kind of deposit that was created by the above-mentioned $13 trillion in new debt that the government turned over to Wall Street after the September 2008 crisis. The price impact was felt in financial asset markets, not in prices for goods and services or labor’s wages.

This Federal Reserve and Treasury credit was not counted as part of the government’s operating deficit. Yet it increased public debt, without being spent on “real” GDP. The banks used this money mainly to gamble on foreign exchange and interest-rate arbitrage as noted above, to buy smaller banks (helping make themselves Too Big To Fail), and to keep paying their managers high salaries and bonuses.

This monetization of debt shows how different government budgets are from family budgets. Individuals must save to pay for retirement or other spending. They cannot print their own money, or tax others. But governments do not need to “save” (or tax) to pay for their spending. Their ability to create money means that they do not need to save in advance to pay for wars, Social Security or other needs.

Keynesian Deficit Spending vs. Bailing out Wall Street to Keep the Debt Overhead in Place

There are two kinds of markets: hiring labor to produce goods and services in the “real” economy, and transactions in financial assets and property claims in the FIRE sector. Governments can run budget deficits by financing either of these two spheres. Since President Franklin Roosevelt’s WPA programs in the 1930s, along with his public infrastructure investment in roads, dams and other construction – and military arms spending after World War II broke out – “Keynesian” spending on goods and services has been used to hire labor or pay for social programs. This pumps money into the economy via the GDP-type transactions that appear in the National Income and Product Accounts. It is not inflationary when unemployment exists.

However, the debt that characterized the Paulson-Geithner bailout of Wall Street was created not to spend on goods and services, but to buy (or take liability for) mortgages and bank loans, insurance default bets and arbitrage gambles. The aim was to subsidize financial losses while keeping the debt overhead in place, so that banks and other financial institutions could “earn their way” out of negative net worth, at the economy’s expense. The idea was that they could start lending again to prevent real estate prices from falling further, saving them from having to write down their debt claims to bring levels back down within the ability to be paid.

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65 comments

  1. Yes, but...

    The last two paragraphs say it all. The real “war” we have always been fighting is internal and is long since over. The war was between big capital and labor, and no one can possibly doubt who won. At this point, the only question remaining to be answered is what is the end game for big capital with all their ill-gotten gains, especially once the resources start to run out in earnest. Although, I think we all have a pretty good idea what the answer to that question is too. Foreclosure and “termination by other means.” But I think I’ll check out the book anyway. Thanks.

    Oh, one more thing! The austerity part is not “needless” at all. It’s an integral part of the plan. The military calls it “preparing the ground,” or similar.

    1. run75441

      Yes:

      Begs the question; What is the difference between labor intensive investments and capital intensive investments? The difference is gambling on a speculative return rather than producing a true good or service.There is an end to this, when the economy collapses from a lack of moneyed Labor.

      Good comment.

      1. JamesW

        ..gambling on a speculative return..

        I don’t mean to quibble over what some might consider trifles, but is really the crux of the matter, but “gambling” seldom really enters into it.

        When John Paulson got together with Goldman Sachs, and created that Abacus CDO, stuffing it with the crappiest, sure-to-fail mortgage loans/tranches possible, then both of them purches buckets of CDS (at a report $1.4 million per CDS, with an insurance payout of $100 million per), there wasn’t any gambling involved — it was a sure deal of financial fraud.

        Same for Magnetar Capital, Ambac, MBIA, etc.

        Also, when those hedge funds act as banks and give loans to various companies, then utilize insider knowledge for insider trading after perusing their books prior to giving them loans, again relatively no gambling is involved.

        Prof. Hudson has reigned supreme as America’s most brilliant economist over the past 40 to 50 years.

        Why oh why does anyone ever pay attention to mental midget like Robert Reich, a fraudster like Krugman, or a poser like Jeffrey Sachs, one wonders?

    2. ambrit

      Dear Yes;
      Preparing the ground can be a self defeating strategy. One example that comes to mind is the WW1 German General Staffs decision to help Lenin get into Russia to foment insurrection and defeatism in the ranks of the Russian war machine. (Said defeatism etc. already being there, Lenin capitalized on it and ended up running Russia, much to Germanys’ later detriment.) Other such short term thinking fails abound in history. Today looks to be much of the same. When economic shocks turn into social movements, all pretense of control falls by the wayside. When the next, much anticipated, act in the Financial Kleptocracy Drama begins, watch the fun begin. America hasn’t really felt the bite of true austerity, self imposed or externally imposed, yet. Without any credible call for “Shared Sacrifice,” the Social Contract just might fall apart fully. That’s when the prepared visionary has his or her main chance.
      I usually ask; “Who will be our new FDR?” I may have to start asking; “Who will be our next Lenin?”

      1. Nathanael

        Exactly, ambrit.

        You get it, in a way the 0.1% does not get it.

        “I usually ask; “Who will be our new FDR?” I may have to start asking; “Who will be our next Lenin?””

        And if we don’t get an FDR *or* a Lenin, the question becomes “Who will be our next Hitler?”

        So we damn well better hope for a Lenin.

          1. ambrit

            Dear digi;
            Unfortunately for us, Stalins generally follow Lenins, viz, Napoleon after the Directory, Cromwell after the Puritan Revolution, Tiberius after Augustus, etc. One fine example of the opposite would be Washingtons’ successors after the American Revolution. But then, it has been argued that the American Revolution wasn’t a true Social Revolution. We may soon be witnesses to how America does handle one.

          2. Nathanael

            Stalin? Well, it’s still better than the Tsars.

            Napoleon? Still better than Louis XVI.

            People forget this, probably due to right-wing propaganda. Now, I think it is utterly crazy — madness — for the 0.1% to create a situation where they are as bad as Louis XVI or the Tsars. But that’s what they’re doing! The Koch Brothers are opposing *hurricane relief*, and actually have managed to stall it for six weeks already!

          3. NotTimothyGeithner

            Its not quite propaganda. Part of the problem is who we let in. We let in the targets of Soviet reprisal and French slaveholders and their white apparatus flooded this country in the wake of Haitian uprisings and storm clouds in other areas.

            Take the friendly Iranians in this country, they fled for a reason, and it wasn’t about freedom or they would have come prior to 1979. Cuba too.

            Do you think your friendly Iranian carpet store salesmen is going to bring up in polite conversation a story about the time he used a hammer on a free speech prisoner? Probably not, and as an important aside, children reflect the values of where they are raised not their parents. We might know the offspring and wind up buying the same b.s. their parents told because we see a person like us. They will tell you about the old country and how wonderful it was before it was taken by those cruel oppressors because people love their parents and their parents told them that.

            On the flip side, the Irish are here because of a potato famine. My last name is the result of a potato famine, not revolution or a pogrom type event. Not everyone is here because of a famine. To be more outlandish, there is a theory Jack the Ripper died here in the U.S. because Scotland Yard couldn’t reach him here. The guys looking for the Ripper didn’t come here, and neither did the losers of popular revolts.

            We didn’t get the Revolutionary Cubans and French in this country. Our French came here while Louis XIV was king.

            Ultimately, it boils down to who fled and what people we met. Israel let in waves of Jewish nationalists in the 1970′s who weren’t quite the Kibbutz loving crowd many of the powers that be experienced in their youth. Much of our views on Israel are determined by people who were their when it wasn’t populated by assholes. Although the Likudniks are some of the nastiest people on the planet, too many people can’t let go of the kitschy collective farms which weren’t called collective farms so it wasn’t too Communist. Much of our foreign policy really is driven because of what people saw when they were kids.

          4. Nathanael

            N.T.G: that’s a good point. I think it actually dovetails with mine.

            With the US as the home of the fleeing elitists… the fleeing elitists have every incentive to spread self-serving right-wing propaganda, while the other side (average Cubans for whom life was better under Castro than Battista, for instance) simply aren’t here.

        1. JamesW

          I think the history may be a bit off here today, it was Trotsky whom Stalin followed, that would be Trotsky who arrived from New York, who very well may have been supported by some financiers there.

          Trotsky was later supposed to have been assassinated in Mexico, after being overthrown or ousted in the old Soviet.

          1. ambrit

            Dear JamesW;
            I would argue that Trotsky was an extension of the Leninist regime. He did after all win the Civil War for the Bolshevik Government, not Stalin. As for the New York financial establishment support for Trotsky, well, that group is famous for backing ‘Dark Horse’ candidates, just in case. Hitler being just one of the more famous examples.

      2. diptherio

        No more leaders, please, of any stripe. We’ve been down that road plenty of times already. Post-collapse, I’m rooting for Anarcho-Syndicalism and a return of the Goddess (figuratively, of course). Hierarchy is soooo last-millennium.

        You’re probably right though, seeing as we collectively seem to still have this hero-worship problem…ah well.

    3. LeonovaBalletRusse

      It’s no longer between Capital and Labor. Is is between the Global .01%DNA+.99%Agency and The Rest. The new currency is *units of data*. We can withdraw our participation ENTIRELY right now or be slaves forever in the HFT Monopoly Cloud with no recourse on the ground. It’s “Give me liberty or give me death” time. This means not only withdrawal from the global BIS/IMF/WB/FED system, but also complete “cold turkey” withdrawal from ALL forms of digital “socializing” and digital banking/shopping/trading. If this doesn’t work, the Big Pulse will. This means that fbk and ggl founders/”investors” with “the human body and mind as its marketplace” are actively involved in the “Conspiracy” to “Rule the World” via “Pre-Emptive Wars” against We the People for their profit. To comprehend the *new currency* of *units of data* including YOU in every aspect you are inclined or forced to “share” — STUDY:
      http://bcfreedom.wordpress.com/2012/09/25/smart-meters-p-a-a-information-derivatives-the-story-no-one-is-telling/
      HISTORICAL FRAME:
      http://bcfreedom.wordpress.com/2012/12/30/how-it-all-happened/
      ——————————
      It is our DUTY to overthrow this tyrannical “Governance” of criminal traitors.
      Dr. Hudson, will you lead We the People out of bondage? You are not alone.

      1. LeonovaBalletRusse

        Were we born yesterday? It is to leff. (It is to weep. It is to die.):

        //”The Present Crisis, A Pattern
        /Posted on 2 January 2013 by admin
        /Written by Wim Grommen
        /Paper to be presented at the International Symposium, The Economic Crisis: Time for a Paradigm Shift Towards a Systems Approach, Universitat de València, January 24-25, 2013./
        /ABSTRACT
        /This paper advances a hypothesis of the end of the third industrial revolution and the beginning of a new transition. Every production phase or civilization or human invention goes through a so- called transformation process. Transitions are social transformation processes that cover at least one generation. In this paper I will use one such transition to demonstrate the position of our present civilization. When we consider the characteristics of the phases of a social transformation we may find ourselves at the end of what might be called the third industrial revolution. The paper describes the four most radical transitions for mankind and the effects for mankind of these transitions: the Neolithic transition, the first industrial revolution, the second industrial revolution and the third industrial revolution.//
        MORE AT:
        http://econintersect.com/wordpress/?p=30902&utm_medium=email&utm_campaign=Articles+posted+on+02+January+2013&utm_content=Articles+posted+on+02+January+2013+CID_c421c758617c41839f7b091411361937&utm_source=newsletter&utm_term=The%20Present%20Crisis%20A%20Pattern
        ——————————
        Has this Prophet come “Enlightened” from the Mountaintop, now bringing us *The Law of the Gods* dictated by the Panoply of Gods and Demons Most Awful and Most High)? Is he prepping We the People and the next five generations to become Their Willing Sacrifices for Their Magickal Prosperity? But wait! Are these Self-annointed *Elect* Gold Idolators and Their Priest not Chosen to be removed by their Most High God? (See EXODUS for “Divine Justice” on such occasions.) Do you believe in Magick?

        Oh, but this is Insolence Most High.

  2. jake chase

    No working American who can follow this short post has any excuse for supporting any of the idiotic policies now advanced by both major political parties. Why are the rest of you continuing to vote in either Kleptocrat Republicans or Kleptocrat Democrats? Only cosmetic differences separate the candidates.

    1. Nathanael

      At the local level, it is frequently worth voting for Democrats (or even Republican in some localities, though not many).

      At the state level, it is also often worth voting for Democrats…. in some states and some districts. But not others (see below).

      At the national level? Well, there’s Tom Harkin (Iowa), who opposed the “fiscal cliff” sellout *and* has been trying to abolish the filibuster for 30 years.

      Apart from him I don’t see very many major-party members at the national level worth voting for. Maybe a few in the House. None in the Senate.

      The rot of the decaying “major parties” is dripping downwards to the state level, at least in New York, where we would be a *lot* better off voting third-party for Governor and Legislature.

    2. JamesW

      As one who has wasted too much time in volunteer activism over the years, I have long pondered that question with my fellow activists (voted for Dr. Jill Stein, before that, Cynthia McKinney, before that, you know who…) and believe they soulless ones, the sociopathic greedheads as we call them, have so completely captured the so-called American media so remarkably well, beginning long, long ago.

      When Stephanie Miller, who voted RepubliCon up until the time she got that radio program, proclaims herself a “liberal” (or heaven help us all, a “progressive” for God’s sakes!), while stating that Bradley Manning should be fried, WikiLeaks shut down and Assange extradited, because we can’t have free speech after all, and ditto for Ed Schultz, Thom Hartmann (a true confusion specialist), and so on.

      And then you have Noam Chomsky, the “official radical” who is America’s supreme disinformation specialist: in his last public talk, he claimed that the Trilateral Commission is composed of “liberals” or “liberal internationalists”.

      David Rockefeller, Henry Kissinger, John Negroponte, Robert Zoellick, Dick Cheney, Condoleezza Rice, Morton Zuckerman, and so forth, “liberals” — we bloody well don’t think so!

      1. ambrit

        I believe that Chomsky may have been demonstrating the bankruptcy of the ‘Liberal” brand. Time for an entirely new Name Tag for those who dream of better times for everyone, eh?

        1. sgt_doom

          I dunno, I heard Chumpsky talk some months back in North Carolina, and he claimed that the Wall Street banksta gangstas were really swell guys, it was the fault of “the system” — and Noam wasn’t being sarcastic!

      2. diptherio

        And then you have Noam Chomsky…he claimed that the Trilateral Commission is composed of ‘liberals’ or ‘liberal internationalists’.”–James W

        I think Noam is using the word “liberal” in it’s classical, technical sense, not in the everyday sense we normally use it. This is a major cause of confusion.

        From Wikipedia:

        Classical liberalism is a political ideology, a branch of liberalism which advocates civil liberties and political freedom with limited government under the rule of law and generally promotes a laissez-faire economic policy…There was a revival of interest in the ideas of classical liberalism in the 20th century, led by Friedrich Hayek and Milton Friedman, who argued that government should be as small as possible in order to allow the exercise of individual freedom. Some call this modern development “neo-classical liberalism”, because it holds political views similar to classical liberalism.

        I don’t agree with everything Chomsky says (by a long shot), but I don’t think he’s willfully spreading disinformation either. Of course, I could be wrong (or just willfully spreading disinformation…).

      3. charles sereno

        @JamesW
        “We” at NC bloody well don’t think you deserve an answer. Conflating Noam Chomsky with David Rockefeller, Henry Kissinger, John Negroponte, Robert Zoellick, Dick Cheney, Condoleezza Rice, Morton Zuckerman, and, later, unctuously suggesting we read all of Prof. Hudson’s books (“who writes intelligently and highly acurrately (sic)”) confirms you as a TROLL-O-BOT, not of the highest order, not worth wasting effort on. Go away, please.

        1. LeonovaBalletRusse

          cs, speak for yourself. Isn’t Chomsky an M.I.T. lifer? Can’t get past that, no matter how subtle he may be running interference for the Reich. He’s really a prize asset, whose presentations I have praised. But, in his way, he’s a little like John Perkins, “spilling the beans” strategically for the Home Team, paving the way to “BABYLON BANKSTER” Victory with smooth and fiery rhetorical stones.

  3. from Mexico

    Did anyone else find this post as difficult to follow as I did? (And don’t get me wrong. I disagree with nothing Hudson is saying here, I just think the post lacks clarity and is difficult to follow and understand.)

    Take the following passage for instance:

    This Federal Reserve and Treasury credit was not counted as part of the government’s operating deficit. Yet it increased public debt, without being spent on “real” GDP. The banks used this money mainly to gamble on foreign exchange and interest-rate arbitrage as noted above, to buy smaller banks (helping make themselves Too Big To Fail), and to keep paying their managers high salaries and bonuses.

    This monetization of debt…

    But wasn’t the debt already money? I like Stephanie Kelton’s explantion much better than Hudson’s, the one she gives here beginning at minute 29:40

    http://www.youtube.com/watch?v=khaypwRG5C0

    Kelton speaks of a hierarchy of money, and in a post-1974 world US government fiat money sits at the top of this hierarchy. Money created by private banks ranks lower in this hierarchy.

    What QE amounts to is allowing the private-sector banks to trade private, bank-created money for government money. Historically, the Fed only dealt in Treasury bonds, currency and coins in its trades with the private-sector banks. However, with QE the Fed began accepting agency-guaranteed bonds in trade. As I remember, this was actually a two-step process. First, the government made what were implicit government guarantees of agency debt explicit. But wasn’t it treasury, and not the Fed, that did this? Then, once agency debt had the explicit guarantee of the federal government, it made it easier for the Fed to rationalize trading for it. And once the private-sector banks had traded their agency debt for Treasury bonds, currency or coins, and since those are far more fungible than mortgage-backed securities and universally accepted, the banks could then run and play with it, to “gamble on foreign exchange and interest-rate arbitrage” as Hudson puts it.

    Then I had problems with this passage:

    The $13 trillion bank subsidy since 2008 (to enable banks to earn their way out of negative equity)…

    It was actually Yves in Econned who clued me in to how this works. Once the banks have used their agency-backed money as collateral to borrow (essentially to trade it in for) government money at the Fed, at 0% interest rates, then then the private-sector banks can use the government money to 1) lend out, or 2) engage in all the speculative activities Hudson excoriates. But the banks don’t lend the money out at the same 0% interest rate they receive it from the Fed. The difference between the 0% they borrow from the Fed at and the interest rate the banks lend the money out is called the “interest rate margin.” What we saw in the wake of the GFC was greatly enhanced interest rate margins, so that the banks could “earn their way out of negative equity.” Please correct me if I’m wrong, because I don’t have my reference materials in front of me, but as I recall the language Yves used was that the Fed “engineered” the inflated interest rate margin.

    None of the above Fed operations should be confused with TARP, which was fiscal policy (spending money into the economy), as opposed to monetary policy (lending money into the economy).

    1. joebhed

      “Money created by private banks ranks lower in this hierarchy.”
      I know you’re quoting the horizontal-vertical mythology of Dr. Kelton, but did you ever consider?
      If the government ever issued any “money”, which it doesn’t, and if that “theoretical” money was at the hierarchical peak, then it would be lower tier private banks borrowing the government’s money – by necessity – and not the other way around?
      I don’t think MMT gets hierarchy.
      The folks who command that “YOU borrow from ME at interest” are at the top of the food chain.
      Thanks.

      1. JEHR

        When the government issues a Social Security cheque, hasn’t it spend into the economy? The banks don’t have their paws on that cheque because it comes directly from the government (i.e., they can’t charge a fee for it or put interest on it).

        Mind you, the banks next move could very well be the privatizing of Social Security and then you will see borrowing from the bank in a big way.

        1. joebhed

          As a government payment, social security is slightly unique in that it first represented bank-created money that I and my employer earned and paid into the SSA Trust Funds – so it was private bank credit money paid in to the government by both of us.
          Just like all taxes in a way.
          So the governmnet has received my M1 bank-credit money (maybe purchased some Treasuries for income) and returned bank-credit money to my checking account.
          The government has not “issued” the money in my social security check. The government is a user of the money system. The banks created the money in the first place -LIKE ALL MONEY – and they get it back via direct deposit.
          They can use it for reserves against loans made and collect interest on those loans.
          This is what MMTs “endogenous” money is all about.
          Thanks.

          1. Ben Johannson

            “The government has not “issued” the money in my social security check. The government is a user of the money system. The banks created the money in the first place -LIKE ALL MONEY – and they get it back via direct deposit.
            They can use it for reserves against loans made and collect interest on those loans.
            This is what MMTs “endogenous” money is all about

            Reserves are used for clearing payments. They are not used to make loans to customers.

            Every penny government spends is created by marking up accounts. The Treasury alters the digits in bank accounts and the Fed dispatches necessary reserves to clear the payments. The proof of this is that government spending drives interest rates DOWN. How? New reserves are created and added to bank balance sheets when government spends, driving rates down as banks compete with each other to loan the excess to other banks.

            Understanding central bank operations is key.

          2. joebhed

            To Ben
            ‘Understanding central bank operations is key’….. to what?
            What is really key is understanding. That would advance the discussion rather than getting out in the twigs of reserve accounting.

            Like, in understanding that I never said that reserves “are used too make loans to customers”.
            As the Modern Money Mechanics Federal Reserve Bank publication – conspicuously not the FRBNY central bank – very clearly explains: if you lent out reserves, then you wouldn’t have reserves. Got that part.
            What I said was that the movement of the SS payment back to my M1 checking account would increase the balances of my bank, which increases their reserves.
            As such, those excess reserves allow the banks to make more loans, more interest and more profit.
            That was what I said.
            Is that not true?
            Then this: “Every penny government spends is created by marking up accounts.”
            Maybe that is meant to be some kind of techno-speak for computerized financial management, but as a statement of governmental monetary operations, it is completely wrong.
            The government – that is the Treasury which pays all the bills – never creates any money by marking up accounts. The Treasury must FIRST have the money in its accounts as a positive balance before it can debit its accounts and make a payment.
            Why do you deny this is true, and where is the proof that: “Every penny government spends is created by marking up accounts.”
            That is true in a sense with coin seigniorage, but even this must first be collected and deposited before it can be spent.
            Once more. In fact, the government is the user and not the issuer of the nation’s money system and its money supply. That why WE borrow from THEM.
            For the Money System Common.

    2. JamesW

      Prof. Hudson writes intelligently and highly acurrately, never dumbing stuff down for any intended audience.

      Suggest you read his many books, beginning back with Super Imperialism and going forward.

      Sometimes I’ve had to read a paper of his a number of times before I completely comprehend it, but such is the abstractions perpetrated upon us by the Money Masters.

      The same applies to Prof. Joseph Tainter and his insightful papers, etc.

      Sometimes enlightenment requires perseverance of cognition.

    3. craazyman

      It Never Makes Sense No Matter Who Writes It

      You must be a moron South if you don’t understand this stuff on the first quick read! ;) [I'm just kidding]. I don’t understand most of it either.

      I certainly respect Dr. Hudson’s scope of knowledge, overall point of view and righteous rage. But if money is simultaneously an asset and liability, that means if you measure assets with money then you’re measuring assets simultaneously in terms of assets and liabilities AND if you measure liabilities with money, you’re measuring liabilities in terms of assets and liabilities. That means all quantities always collapse to zero before the measuring starts.

      They collapse because you’re always measuring things in terms of both themselves (which is a tautology) and their opposites (which is a form of incoherence). You’re already zero for two and you haven’t even done math yet.

      It may be that people should do certain things and act in certain ways. Even share things with strangers. Strangers of course have a reciprocal obligation. These transactions always collapse to zero, like a circle, but only when they are completed.

      When these transactions are converted into money, you get huge positive numbers because the circles are only potential completed circles and the huge positive number (like debt) measures the amount of circles that have to be connected with themselves through transactions, so they can collapse and start over.

      The only way the circles can collapse is if the transactions are inherently complete-able, which depends on either ability, willingness or compulsion. These are not quantities, they are only phenomenon, so nothing can really be measured with any coherence and it’s all ethics, not economics and not mathematics.

      It would be hilarious to see one of Plato’s sophists go at this with Socrates. It’s probably in there somewhere but there’s a lot of pages and I’m too lazy to look through them all. It’s still football season. QED

      1. Hypothetical_Taxpayer

        I’ve adopted a new policy to not discuss money and credit with people that think a dollar bill, t-bill, money market fund, t-notes and bonds, corporate stock and bonds, commodity futures and a hamburger are all the same thing.

        It only leads one to believe that the treasury is the issuer of hamburgers, and the Fed prints food stamps.

    4. charles sereno

      “Did anyone else find this post as difficult to follow as I did? (And don’t get me wrong. I disagree with nothing Hudson is saying here, I just think the post lacks clarity and is difficult to follow and understand.)” (from Mexico)
      I did too. Very respectfully, I’d urge Prof. Hudson to attend as carefully to communicating to an informed lay audience as he would to his peers.
      I’d also like to add how nice it was to see “Yes,but” start off a productive thread of comments. My favorite Hudson paragraph was his final one.

  4. Tom

    It is amazing to me that we have had to come 100 years to restate the difference between the real economy vs. the gambling, speculative, financially extractive economy.
    Below are some comments from Tax Facts – a pamphlet publication from the 1920s – it reflects the same stuff we see today. Seems back then – they knew a difference that we are just now re-learning.

    “The great sore spot in our modern commercial life is found on the speculative side. Under present laws, which foster and encourage speculation, business life is largely a gamble, and to “get something for nothing” is too often considered the keynote to “success”. The great fortunes of today are nearly all speculative fortunes; and the ambitious young man just starting out in life thinks far less of producing or rendering service than he does of “putting it over” on the other fellow. This may seem a broad statement to some: but thirty years of business life in the heart of American commercial activity convinces me that it is absolutely true.
    If, however, the speculative incentive in modern commercial life were eliminated, and no man could become rich or successful unless he gave “value received” and rendered service for service, then indeed a profound change would have been brought in our whole commercial system, and it would be a change which no honest man would regret.”
    - John Moody, Wall Street Publisher, and President of Moody’s Investors’ Service. Dated 1924

    “In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
    If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
    If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
    If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
    Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.”
    Written around 1925

    “Laborers knowing that science and invention have increased enormously the power of labor, cannot understand why they do not receive more of the increased product, and accuse capital of withholding it. The employer, finding it increasingly difficult to make both ends meet, accuses labor of shirking. Thus suspicion is aroused, distrust follows, and soon both are angry and struggling for mastery.
    It is not the man who gives employment to labor that does harm. The mischief comes from the man who does not give employment. Every factory, every store, every building, every bit of wealth in any shape requires labor in its creation. The more wealth created the more labor employed, the higher wages and lower prices.
    But while some men employ labor and produce wealth, others speculate in lands and resources required for production, and without employing labor or producing wealth they secure a large part of the wealth others produce. What they get without producing, labor and capital produce without getting. That is why labor and capital quarrel. But the quarrel should not be between labor and capital, but between the non-producing speculator on the one hand and labor and capital on the other.
    Co-operation between employer and employee will lead to more friendly relations and a better understanding, and will hasten the day when they will see that their interests are mutual. As long as they stand apart and permit the non-producing, non-employing exploiter to make each think the other is his enemy, the speculator will prey upon both.
    Co-operating friends, when they fully realize the source of their troubles will find at hand a simple and effective cure: The removal of taxes from industry, and the taxing of privilege and monopoly. Remove the heavy burdens of government from those who employ labor and produce wealth, and lay them upon those who enrich themselves without employing labor or producing wealth.”

    “However, the evolutionary process by which monkeys made men of themselves was considerably slower than the reverse process.”

    “Legal Gambling
    The gloom is fading from the real estate situation. More nibbles during the last few weeks than the last three years. If January brings us good rains, this next year will open the door to the sunshine – a case of rain bringing the sun.
    It is to be hoped, however, that there will never be another boom. The crash of the boom of 1923 was due to the same causes that wrecked the wall street stock market. People sold what they did not own. They made a payment down in the hope of getting the property off their hands before it began to burn. Real estate fell into the hands of sharp-shooting gamblers who had no interest in land. To them it was just a pile of blue chips on a roulette wheel.”

    “He isn’t really a big time crook unless you must let him alone to prevent the loss of public confidence.”

    “In the United States, people are wont to talk feverishly and vindictively about the “non-taxpayer”, for it is here that our brother from Mexico, our cousin from over the Canadian Border, our friends from India and the Middle East come to escape the rigors of their respective locations
    They proceed to use our highways and our libraries, our water systems and our police protection. If they have children old enough and stay long enough, they use our public schools etc., whereupon there is a great cry about non-taxpayers taking advantage of our benefits of government. Because these visitors and temporary residents don’t own property and are not listed with the tax man, the general supposition is that they pay no taxes.
    A itemized account of the money spent by these “guests” over a period of time would yield some surprises. Naturally, the itemization includes practically everything permanent residents would buy, food, clothing, housing, luxuries and the usual necessities.
    A little thought will show clearly that while the guest owned no property here, the hotel proprietor, the restaurateur, the merchant, the grocer, the druggist, everyone in fact, from whom he made purchases did own property, and that property was subject to taxation. The tax on the buildings and merchandize was simply added to the other overhead expenses in the bill of the proprietor and merchant.
    The property owner acted as a collector and ultimate consumer, whether a native son or a wandering guest, paid the tax. The guest who owned no property himself in the United States paid a tax whenever he slept with a roof over his head, paid taxes every time he bought a cigar or steak. A man could no more pass through the United States and purchase a meal or a night’s lodging without paying taxes than he could buy a gallon of gasoline for his car without paying the gasoline tax.
    The “non-taxpayer”? He belongs to the class of griffins and unicorns and other fabulous animals. There is no such creature.”

    And then later on FDR

    We had to struggle with the old enemies of peace–business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
    They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.
    Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me–and I welcome their hatred.”
    Election eve speech at Madison Square Garden (October 31, 1936)
    Franklin Delano Roosevelt

    As Simon Patten, the first economics professor at the nation’s first business school (the Wharton School) explained, public infrastructure investment is a “fourth factor of production.” It takes its return not in the form of profits, but in the degree to which it lowers the economy’s cost of doing business and living.

    1. Nathanael

      Having been brought up listening to my grandmothers (grew up in the 1920s) and father (grew up in the 1930s) I knew about all of this stuff.

      Unfortunately the kleptocrats have spent the last 80 years aggressively shoving the knowledge which was widely known in the 1920s/1930s down the memory hole. It is a very successful propaganda/disinformation campaign.

      1. Tom

        Yes – to some degree I feel a deliberate campaign has been going on but, I believe a deeper issue has been evolving – extending into the realm of the effects of neuroplasticity – a great book with this effect on our culture and culture on brain is a good reference – The Brain That Changes Itself by Norman Doidge, MD.

        The point is that, over the long haul, we have this perception that issues have two sides – that we have learned to think binary – either/or and forgot about and, if etc.
        For instance we think of all large corporations as one entity, evil doers vs. the public good as opposed to properly bifurcating corporate types… predatory vs. productive vs. public good. Or, forgot that more exists outside free-market vs. ???. It is like saying dice have two sides when the fact reveals six.
        I would apply that to economics where, the study of this topic has been taught as if it were a true science and not a social science. Or example: Grover Norquist pledge of static frozen thought that does not allow change while the environment is a fluid human environment that changes.
        Then we get to the compromise last night – I did not see compromise because one side was based on non-factual economic principles and religious non-fact based grog. How does one compromise with the non-existent.
        I do not generally go about compromising with a pink flying elephant because, that elephant is non-existent – Caveat: I suppose if I was hallucinatory and legally incapable of entering into a contract with my hallucinatory friend – I could go on compromising with that fellow but, all those negotiations would not be enforceable at the end.

        So yea, a deep unlearning and -relearning has gone on with some aide toward a negative (IMO) direction that has placed either or compromise between items where compromise need not exist. SS does not need to be part of compromise as it is not part of the ‘debt ceiling’. “debt ceiling” is another construct designed to fit into our neural maps but, ought to be called out for it’s resemblance to a flying pink elephant.

        1. Nathanael

          Hmm. I think the issue lies more in the realm of education about things people did not personally experience.

          People old enough to *remember* the 20s would usually able to think about the issues which were discussed then.

          However, with the corporations under a tight government leash from the 30s onward, people had no direct person reason to discuss the “Enron-style” corporations — the government prevented them from happening. Since people were also not being *taught* about the predatory businesses, they started acting as if it wasn’t a real problem.

          Next step, repeal of Glass-Steagal (“What was this for? None of us remember.”) — next step, Enron economy.

          Something similarly stupid caused the creation of the filibuster. The US Senate hadn’t been using the “previous question” motion in the early 1800s, so in a rulebook consolidation they got rid of it. Uh, there’s a reason that was there, guys, a reason it was in the rules you borrowed from the UK House of Commons. Without the ‘previous question’ motion, it’s possible for a minority to obstruct everything forever.

        2. diptherio

          “It is like saying dice have two sides when the fact reveals six. I would apply that to economics where, the study of this topic has been taught as if it were a true science and not a social science.”-Tom

          To wit: Take this paper I was perusing yesterday http://ftp.iza.org/dp7030.pdf
          It’s a behavioral economics experiment where they found that in repeated games where one player was given decision making authority (the principal) and the other was not (the agent), agents tended to exert less effort than the Nash equilibrium would predict while principals exerted more. In short, they found that employees with no decision making power tend to slack-off, while managers turn into workaholics. No shit, right?

          The thing is they ran this experiment, showed that the actual data doesn’t align with game-theory predictions, and then proceed to speculate as to the causes of this deviation, creating pretty mathematical equations to make their case (they posit “regret aversion,” fwiw). But not once do they interview any of the test subjects to find out why they actually acted as they did.

          In any other social science, this paper would have included both quantitative and qualitative data, for obvious reasons. But it’s Econ, so they run their experiment, do some math, present some numbers and equations and not once inquire with the actual humans involved.

          If all you’ve got is a hammer, I guess…

    2. from Mexico

      We know now that Government by organized money is just as dangerous as Government by organized mob.

      Yep. At their cores, there’s no fundamental difference between US finance capitalism and the Mexican drug cartels.

      Profit is their holy grail, and bullet fundamentalism is the means to achieve it.

    3. diptherio

      ‘…to “get something for nothing” is too often considered the keynote to “success.”‘

      I don’t know about you, but I was pretty much raised with this as the ultimate goal, the American Dream. Doesn’t everyone want to win the lottery? Doesn’t everyone wish they were “independently wealthy,” i.e. didn’t have to do squat for their money?

      It seems to me that the “virtue-ifying” of un-earned income has been one of the major PR coups in post-WWII American society. It’s the old master-and-slave routine…the slave only really becomes enslaved when he sets his desire on becoming a master.

      http://www.youtube.com/watch?v=Ztk9t_m1FpY

    4. LeonovaBalletRusse

      Tom, the “Speculative Fortunes” are the top tier of the Entry-Level Criminal Fortunes, and these become one and the same under duress.

  5. from Mexico

    Michael Hudson said:

    In Europe the IMF, ECB and EU troika insists that all debts must be paid, even at the cost of austerity, depression, unemployment, emigration and bankruptcy. This is to be done without violence where possible, but with police-state practices when grabbers find it necessary to quell popular opposition.

    For those who are familiar with the history of US neo-imperialism and the renaissance for the rich that Reagan ushered in, the troika is just following in the footsteps of the good ole USA.

    And since the transnational corporations and coupon clippers are overwhelmingly the beneficiaries of America’s burgeoning police state and permanent war machine (the “security state,” as the combination of the two has come to be known), I propose a new constitutional amendment:

    All military and criminal justice expense shall levied against corporations or those in the top 1% of incomes.

  6. Stephen Zielinski

    Public borrowing creates a dependency that shifts economic planning to Wall Street and other financial centers. When voters resist, it is time to replace democracy with oligarchy.

    I believe Hudson mispoke. What he should have said is this:

    When the “lesser people” (Alan Simpson) contest and truly threaten the actions of the political elite and, transitively, the economic elite and oligarchs who dominate them, a fraction of this larger group may initiate a transition to a dictatorship. Think here of Salvadore Allende and Chile.

    The elite may prefer a minimally democratic form of government to a dictatorship. But they most definetely prefer having a preponderance of poltical and social power to having far less than that. Michał Kalecki long ago identified the political constriants capital holders place on achieving a full employment economy. The democratic mechanism can be one casualty in what has been called the democratic class struggle.

    1. mary

      @Yves Smith or anyone who can help me. I am searching the archives for a radio program on the current plight of the USPS vis a vis the pensions and the sell-off of historic, extraordinary real estate by Blum/Feinstein CBRE in California.

      Please direct me to the link – it was published here either end of November/early December. SOS Please Help and thank you in advance. Post the link here in this thread.

  7. joebhed

    Despite the breadth of the learned Dr. Hudson’s store of political and socio-economic knowledge, I don’t think he gets the monetary-economic science at all.

    “”Most people think of money as a pure asset (like a coin or a $10 dollar bill), not as being simultaneously a public debt. But to an accountant, a balance sheet always balances: Assets = Liabilities + Net Worth. This liability-side ambivalence is confusing to most people. It takes some time to think in terms of offsetting assets and liabilities as mirror images of each other.””

    Given that the balance sheet balances “assets” and “liabilities”, and given that the “liabilities” side of the sheet includes both “debt” and “equities”, or net worth as explained by Dr. Hudson, there is no reason why debt-free issuances of real money by Treasury do not occupy the “equity” portion of the liabilities side of the “balance sheet” of the national economy.

    FYI, this is exactly where those coins the of Treasury non-debt issuance end up.

    Unfortunately, those FR currency-bills are printed, but not “issued”, by the Treasury. They are issued into monetary-economic circulation AS A DEBT by the Federal Reserve banks. Until that point, FR currency-bills are no different from when banks issued their own notes. They could print up Billions and have them in the vault. But until someone signed up for one of them, they have only the value of the paper they’re written upon.

    Dr. Hudson makes what appears to be a contradictory statement earlier (it is not) and an excellent suggestion for consideration when he says:
    “”The least costly way to finance this expenditure is to issue money – the paper currency and coins we carry in our pockets. Yet despite being nominally a form of public debt, this money serves as public capital inasmuch as it is not normally expected to be repaid. This government money does not bear interest, and may be thought of as “equity capital” or “equity money,” and hence part of the economy’s net worth.””

    The key here is what is implied by ‘nominally’. It (governmnet printed money) is said to be NOT a debt – not something owed nor in need of paying back. So, how does it get to be “nominally” a debt? Is it like a little pregnant?

    If, IN FACT, the government ‘issued’ those currency notes, rather than merely printing them, then he hits the nail on the head – part of the national economy’s net worth. However, the far greater significance, left unsaid, is the power of the government (Treasury) to just issue the nation’s MONEY, and not just the currency Bills. This can also be done without issuing any debt, just as was done with the Greenbacks.
    The needed conversation about what is money, and what is debt, and why we err in accepting that money-must-be-debt because we accept the double-entry bookkeeping structure for national accounts is at the door.
    Once done, comprehensive solutions to the problems Dr. Hudson correctly imparts to the oligarchic purveyors of debt will become eminently solvable.
    Let’s get on with it.
    For the Money System Common

    1. Mel

      Hudson is working with an exchange-value theory of money in which the money that government issues on society’s behalf acts as ration coupons, allowing individuals to draw against the goods and services that make up the GDP. In society’s view, the goods and services are the useful assets, and money represents claims against them. Money amounts to IOUs written by society, and counts as a liability just like my IOU would to me.

      You could write up the ledger entries to count some amount of money as an asset, but thereby you only enable a “transaction” down the road of exchanging it for other money. The FIRE sector does this, but they are (or ought to be) acting as individuals in a microeconomic world. They only do it because they think they can find suckers who will make the money-for-money exchange profitable for them.

      1. joebhed

        “Money amounts to IOUs written by society, and counts as a liability just like my IOU would to me.”
        Sorry, you may believe this construct, but it doesn’t really say anything. As I said, liabilities include internal ‘equities’ that have no relation to debt. And, as Dr. Hudson said, there is no real ‘debt’; nobody owes the nation’s public-issued money to anybody and it doesn’t have to be repaid – so its very much different from your IOU. It is merely exchange media.
        I was looking for the science behind it.
        The whole world operates within what German monetary-economist Dr. Bermd Senf terms “the fog around the money”, and nowhere is that more true than with governmental finance – the national balance sheet.
        http://bli¬p.tv/file/¬4111596

        What is true is that equity-money, so created and issued without any IOU, does become media for lending, therefore operates in transactions INVOLVING debts. But the difference is that with ‘real’ Greenback-type money issued, the amount of money at the end of the debt (loan) transaction – the loan being fully repaid – is exactly the same as there was before the loan. And that’s because it is money, and not debt.
        A better understanding of the relationship between society’s use of resources for the production and consumption of wealth is Dr. Frederick Soddy’s book titled “The Role of Money”.
        Dr. Hudson is completely correct on the role of the money-lenders and the capture-by-debt-oligarchy construct of our modern economic paradigm.
        But the solution to that wholly immoral construct includes reform of the private system of money creation and issuance.
        Thanks.

      2. Ben Johannson

        Correct. A dollar is the non-government sector’s asset and the government sector’s liability.

        1. joebhed

          Not correct.
          Neither what I said.
          The currency unit, the dollar that you speak of, does not hold any accounting identity until some ‘person’ owns it.
          There is no ‘sectoral’ accounting in the real world. It is a top-rate analytical tool for economic study.
          But there are no sectoral balance sheets with accounting identities.
          For the sake of discussion:
          The private ‘sector’ could be holding this dollar.
          It will show up on the private ‘sector’ balance sheet.
          The government ‘sector’ cannot hold that same dollar.

          For EVERY dollar-denominated item that exists on the asset side OF THE PRIVATE SECTOR balance sheet, there exists an equal dollar-denominated item on the liability side of the PRIVATE SECTOR balance sheet.
          That’s how the sector, or any business, balances it statement of accounts.

          The same is true for the government ‘sector’ balance sheet, admitting slightly differing federal accounting standards.
          Everybody’s statements of accounts must balance by an accounting norm.

          The only dollars that I can think of that are at the same time equally an asset to the private sector and a liability to the government would be inter-party certificates of public indebtedness of the federal government.

          1. Robert

            joebhed says: “not correct…”

            Does it matter? More importantly, to whom? It’s important to the technically-minded, perhaps, in a *technical* forum (which this isn’t). But them apart?

            Michael wrote: “This liability-side ambivalence is confusing to most people. It takes some time to think in terms of offsetting assets and liabilities as mirror images of each other”. As one whom this fits like a glove, I applaud his use of more down-to-earth language and avoidance of accountancy-speak.

            The *political* message he (and every poster here) wants to get across, and which deserves and desperately needs to, is nothing but hot air unless it’s capable of being expressed intelligibly to as wide as possible an audience. Anything less intelligible (or even remotely interesting, let alone attention-grabbing) to such a target-audience than “sectoral balances” and the like would be hard to imagine.

            And I’m not talking about dumbing-down (I hardly think Michael’s papers would qualify for that description!). I’m talking about the art of communication, to ordinary, reasonably well-informed, people who are *not* (and don’t propose to become) versed in esoteric jargon.

            Why does so much discussion of economics have to be – apparently – expressed in gobbledegook? Is it the “priesthood” thing again? Or is it just a refuge for the second-rate?

  8. Jim

    The reason why Kelton’s explanations are clearer is that her perspective is straightforward MMT. The reason Hudson’s explanations are not as clear as that he has one foot in and one out of the MMT paradigm, and his terminology is at certain points ambiguous.

  9. Doug

    I think I found a typo. You meant, to say “Unlike commercial banks” below, right?

    “Governments have the power to resist this deflationary policy. [Un]Like commercial banks, they can create money on their computer keyboards. Indeed, since 2008 the government has created debt to support the Finance, Insurance and Real Estate (FIRE) sector more than the “real” production and consumption economy.”

    Thanks for the knowledge!

  10. Jim

    The progressive mindset is inadequate to solving are present cultural/financial/economic/political crisis because its epistemological assumptions (about the nature of truth) and its historical monetary/fiscal policy solutions(advocating, in essence, greater and greater State participation in managing society) actually contribute to an acceleration– of the absence–of democratic participation.

    Even thought there has been a gradual decline (since the 1960s) in the authority of our country’s governing bureaucratic institutions (in both the public and private sectors)–such mistrust has done little to halt the growing concentrations of power between Big Capital, Big Finance and Big State). The historical emergence and then consolidation of this structure of power took place between the 1890s and the 1920s when the progressive political philosophy was in its ascendency.

    People like Walter Lippmann argued (see Liberty and the News, A Test of the News, Public Opinion, The Phantom Public and A Preface to Morals) that only a staff of highly trained specialists had the expert knowledge to administer our increasingly complex modern government and that truth grew out of such supposedly disinterested scientific inquiry—with the average citizen reduced, in his perspective, to an emotionally confused member of the crowd.

    MMT theory fits nicely into this progressive mindset with its advocacy of monetary system ruled by MMT experts which in the words of Cullen Roche begins with the State(the state theory of money and ends with the State (the job guarantee) and in the process requires combining the Federal Reserve with the Treasury, eliminating bond sales and making fiscal policy the key instrument for maintaining the status-quo structure of power.

    The Progressive State replaces the People and as the people dissolve the Progressive State thrives.

    But I would argue that a renewal of democracy cannot occur through simply a substitution of Big State for Big Capital—but only through a dismantling of both Big Capital and Big State.

    1. LifelongLib

      A democratic State is an agent of the people. It has to be big enough to do the things the people ask of it. A state that (taking these events at face value) is able to get George Wallace out of the schoolhouse door and Soviet missiles out of Cuba is not going to be small.

    2. LeonovaBalletRusse

      Jim, what fails to be mentioned is how much of “government” (actually BIS “governance”) has been PRIVATIZED. “Government” as it existed before 1970 has been drowned in a bathtub, but the term “government” still is used strategically for obfuscation of the reality of our Fascist Governance (Global PrivateEq “State”).

  11. Hugh

    Re Hudson’s last paragraph, some of us have been writing for nearly 4 years now that the Obama-Geithner plan was to bail out banks, prop up asset prices, and allow banks to cook their books (with mark to fantasy) to give them time to cheat, steal, overcharge, and gamble their way back to solvency. Other components of the Obama-Geithner plan were the non-prosecution of banks and bankers and, more recently, a string of settlements which allow banks to duck their massive civil and criminal liabilities for what amounts to not even pennies on the dollar.

    Looking at comments, Nixon went off the gold standard in 1971. Since then, our monetary situation has been confused. We have a fiat currency but most of our institutions and policies continue to act as if we were still on a gold standard. This discrepancy has been exploited by the rich and our elites. When they want money for bailouts, wars, and tax cuts, or for banks to loan money ex nihilo, the underlying fiat nature of the currency shines through. On the other hand, they continue to finance deficit spending through debt. This is very gold standard and completely unnecessary with a fiat currency, but the interest on Treasuries accrues primarily to the rich and banks. It is a financial subsidy to them worth hundreds of billions every year.

    I think the confused nature of our monetary system is a feature, not a bug, because the confusion lends itself both to looting and to covering the looting up.

    Then there is this “cosmologists assume that the universe is symmetrical – with positively charged matter having an anti-matter counterpart somewhere at the other end.” I have no idea what this means. Other end of what? Nor is anti-matter the opposite of positively charged matter. A big question for cosmologists is why our universe lacks symmetry with regard to matter and anti-matter. It is precisely this asymmetry which gives us our matter dominated universe.

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