Michael Hudson: Capital Allocation, Debt, and Stock Market Volatility

Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His two newest books are The Bubble and Beyond and Finance Capitalism and its Discontents. His upcoming book is titled Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Here he’s interviewed by Sharmini Peries, Executive Producer of The Real News Network.

And here’s the transcript:

SHARMINI PERIES: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

On Wednesday this week, the S&P 500 took a dive and then partially recovered itself in what stock market watchers call a selloff scare.

To talk about what is behind the volatility is our regular guest, Michael Hudson. Michael Hudson is distinguished research professor of economics at the University of Missouri-Kansas City. His latest books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thank you so much for joining us, Michael.

MICHAEL HUDSON: It’s good to be back.

PERIES: Michael, if you heard stock market reporting yesterday or saw The New York Times’ business section today, you would have thought we were in another stock market plunge. What’s behind this fluctuation?

HUDSON: The markets are confused, because there are two sets of forces at work, one positive and one negative. The positive thing for the 1% is that we’re going into a serious depression – austerity in the United States, austerity in Europe. For the last six years, since 2008, almost all of the gains have been going only to the 1 percent. They’ve kept the debts on the book. It’s creating large unemployment.

So the 1% in Europe and America are saying, this the best opportunity we’ve had in a century. Here is a chance to do what we call “reform.” A century ago, reform meant increasing wage levels, increasing living standards and taxing the rentiers. But now, neoliberal reform means, in Europe, breaking the labor unions, lowering wages, and putting the squeeze on labor. All that is supposed to be good for profits.

PERIES: But, Michael, just last week the Bureau of Labor Statistics in the U. S. announced that unemployment is the lowest it has been in a very long time. Why? This is contrary to what you’re saying.

HUDSON: It’s true that the unemployment rate among people searching for jobs is low, but there’s been a large movement out of the market for a number of reasons. Number one: Fewer people are even looking for work. They’ve given up. Number two: Many of the jobs that are being created are very low-wage jobs at the low end of the spectrum, or they’re part-time jobs. If you work for part time at all, you’re not considered unemployed. If you’ve given up looking for work, you’re not considered to be unemployed.

So even though the minimum wage has been raised in Massachusetts and out West,when the minimum wage level is raised, that means the families that have been living on food stamps while they’ve been working at McDonald’s or at other low-wage companies don’t qualify anymore. So there’s been very little change in the actual family budgets.

The markets were expected to sort of somehow take off with higher profits as ifthere is a business cycle recovery. But it’s become apparent that we’re really not in a business cycle anymore. We’re at the end of a long 50-year cycle since World War II, where the debts have been rising so much that all of a sudden, the economy can’t be financed by debt anymore. And if the economy isn’t financed by debt, that means that markets can’t grow. All of a sudden, what was fueling the growth and consumer demand that was increasing profits has come to an end. This is especially apparent in Europe. So, basically, what people thought was supposed to be good news – no more room for debt to grow – turns out to be quite bad news.

PERIES: Michael, when the World Bank and, actually, the IMF adjusted the global growth rates last week, which has been a trend – you know, they’ve done it consecutively for a number of years now where their long-term projections just aren’t turning out the way they had planned and projected. Why is that happening?

HUDSON: Well, they had thought when the World Bank and other people had forecast a trend, they’d take past growth rates as they were up to 2008 as normal and as if they could just continue automatically. But what was fueling all of this growth was debt, largely to inflate real estate prices. Bank credit creation, and government spending running a deficit was part of thistrend.

For economies to grow at the past trend rate, they would need credit and also income growth. The credit either can come from governments running a budget deficit and pumping money into the economy, or it can come from bank lending. But at the IMF meetings last week, it was clear that as far as Europe is concerned, the banks have not recovered yet. They are not lending. And American banks are not lending. There has not been any lending in Europe or in the United States for new capital investment. And it’s capital investment that builds factories and makes new means of production that employ labor.

This source of employment that was fueling the global economy since World War II is coming to an end. The only capital investment that’s occurring really is in the BRICS countries, not in America and not in Europe. So the kind of employment that occurred in the past has not been occurring since 2008. What we have is living on the corpse of the economy that was left in 2008. It’s basically an economic shrinkage process. There’s no infrastructure spending. The infrastructure’s aging. There’s little new corporate industrial investment. That’s stopped. There’s simply services trade in the military.

PERIES: Michael, only thing that held up yesterday were some of the transportation stocks. Why is that? And also explained to me–you wrote to me saying 91 percent of the S&P 500 earnings are spent on stock buybacks and dividends. What does that mean?

HUDSON: Well, in 2008 the Federal Reserve here and the central bank in Europe lowered interest rates way down to almost nothing. It’s one-tenth of a percent in the United States. That means that banks can borrow cheaply from the Fed to make loans. What they’ve been lending for is for corporate takeovers and for stock buybacks. In the stock market in the last year, one-third of all of the stock transactions in the United States were corporate buybacks. The S&P 500 have used, I think, 54 percent of their earnings to buy back their own stock, and they’ve been using another 40 percent or so to pay dividends. Now, that has left only 9 percent of earnings of the S&P 500available for new investment. Never before has this ratio been so low.

In textbook theory, most companies use their earnings to reinvest and expand. They try to earn more by investing more to produce more to make more profits to keep on growing. But that hasn’t been occurring. They’ve been using their earnings basically to give stock options to the managers. The manager says, “Okay, I’m paid according to how much I can increase the price of the stock. I’m not going to use my corporate earnings of IBM or General Motors or whatever to build more plant. Instead, I’m going to use it to push up the stock so I’m going to get more out of my stock option.”

You have activist stockholders such as Carl Icahn pressuring Apple and other companies to actually borrow – not borrow to invest as the textbooks say, but to buy back their own shares. So you have companies that are actually going into debt to buy their own stock.

The problem is that the low interest rates that in theory are supposed to make it more profitable for companies to invest and employ more labor and grow, are having the opposite effect in practice. Low interest rates are creating a new stock market bubble, which is why the stock market has gone up so much since 2008. But this rising stock market bubble has only been reflected in the price of the stock. It’s stocks going up without any new capital investment, without any new hiring, and, in fact, with downsizing and outsourcing. So they’ve turned the traditional textbook model of economic recovery inside out. Earnings per share are rising mainly because fewer shares are left after the buybacks!

Gradually, investors and hedge funds are realizing that this isn’t your textbook kind of recovery. It’s a recovery that’s only occurring in the FIRE sector: finance, insurance, and real estate. It’s not occurring in the economy at large. If earnings on Wall Street are not recycled in the economy at large, then markets are going to shrink, there’s not going to be much of a rental income for commercial space, and with shrinking markets you’re not going to have companies earning more profit on investment, even if they’re holding down wages.

PERIES: Michael, does this have anything to do with the murmurs out there that the interest rates might actually increase?

HUDSON: There was a fear that the Federal Reserve was going to stop quantitative easing. They’ve been saying, look, we can’t hold down interest rates forever. And at the IMF meetings last week, the Europeans said that they worry that these low interest rates are spurring a financial bubble.

But if interest rates go up, that means that all of a sudden all this borrowed money that’s gone into stocks is going to disappear. People are going to say, okay, we can’t make money borrowing to buy stocks, we can’t make money borrowing for real estate, so we’re going to pay back the bank loans. We’re going to stop gambling.

All this was exacerbated by the U. S. New Cold War against Russia. Essentially the United States went to Europe and said, let’s you and Russia fight. So Europe imposed sanctions, and Russia imposed reverse sanctions. The European economy is shrinking and the euro is going down. The Eurozone is turning into a dead zone, and the Europeans are moving their money into the United States. That’s pushing up the dollar.

If the Federal Reserve were to raise interest rates at this point, this would not only slow, bring down the stock market and bring down the bond market; it also would bring so much money into the dollar – because Europe cannot raise its interest rates – that this would price American goods out of world markets. That would shrink the market for U.S. industrial exports all the more. So the United States has painted itself into a corner where it really can’t increase interest rates. Even though investors worry that the Fed is going to raise them, the Fed knows that it can’t raise interest rates without crashing the market down.

PERIES: Michael, thank you so much for joining us.

HUDSON: It’s always good to be here.

PERIES: And thank you for joining us on The Real News Network.

Lambert here: Sounds like a controlled flight into terrain, to me. Remind me why these guys are in the cockpit, and people like Hudson are flying coach?

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

48 comments

  1. not_me

    We’re at the end of a long 50-year cycle since World War II, where the debts have been rising so much that all of a sudden, the economy can’t be financed by debt anymore. And if the economy isn’t financed by debt, that means that markets can’t grow. All of a sudden, what was fueling the growth and consumer demand that was increasing profits has come to an end. Michael Hudson

    So let’s obliterate much of the debt with something like Steve Keen’s A Modern Jubilee (scroll down about 1/3) which does not disadvantage non-debtors, eliminate all subsidies, both explicit and implicit, for private debt creation and remove all penalties on the use of shares in Equity, common stock, as private money instead.

    Not that this alone is sufficient for justice, the equal redistribution of agricultural land and the common stock of all large corporations is justified too but that might be a bridge too far at present. But Keen’s “A Modern Jubilee” should be eminently doable, politically speaking, because it helps everyone, including the banks though they would be largely transformed into mere intermediaries between savers and borrowers or, at least, would bear all risks along with their 100% voluntary depositors and other creditors.

    1. petercoop

      From Keen’s Manifesto
      “” A Mod­ern Jubilee would cre­ate fiat money in the same way as with Quan­ti­ta­tive Eas­ing, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt. “”

      Well, if central bank – interbank ‘reserves’ were fiat money , there might be a glimmer of feasibility here, but the CB has zero power to create fiat money, and has never paid a nickel to a public bank account without Treasury authorization.
      QE involves assets swap, and not a payment of fiat ‘monies’ from the CB to anyone.
      The only entity with paying power for U.S fiat monies is Treasury.

      Prior ‘debt-jubilee’ iterations by Dr. Keen had Treasury issuing bonds to fund the debt buydowns.
      Now we move to central bank issuing ‘monies’ to the public, avoiding the Treasury debt option.
      Neither will work, but both ‘sound good’.

      What this dance is primarily about is trying to engender historic sovereign debt-forgiveness power into a modern private debt-based money economy. Today, the debts are owed to the private bankers, those preferring deeper austerity and wealth confiscation at any costs.

      If we can’t just let the banks go belly-up because there’s not enough money to pay these debts, then the funding source for a real debt-writedown program can be found in the ‘citizens dividend’ aspect of Dennis Kucinich’s NEED Act.
      https://www.govtrack.us/congress/bills/112/hr2990/text
      Scroll down to Sections 507 and 509 of the Act for the potential authority.

      Point being, we’ll only end the mortgage debt, and other debt-saturation phenom(students, etc) by legislative remedy, not just Keen thinking.
      And the NEED Act has everything required to advance Keen’s debt-normalizing ideas to fruition.

      1. not_me

        Actually bank reserves are fiat since Federal taxes can be paid with them and the Fed DOES create bank reserves so the Fed does create fiat. Fiat is an asset too so how is calling a new fiat for debt exchange a “swap” any different from saying that the Fed buys assets with new fiat except the latter avoids obfuscation? Ah yes, “buying assets with new fiat” sounds inflationary while “asset swap” does not. But what are the receivers of the new non-interest paying fiat going to do with it? Be content with 0.25%(?) from the Fed? Or when the economy really turns (if it ever does) plunge into new bubble blowing?

        But I said “with something like Steve Keen’s A Modern Jubilee.” Where I differ with Keen is that the US Treasury should use the Trillion Dollar Coins option to fund the new fiat distribution. And where Keen would limit new credit creation to certain endeavors I would totally ban new credit creation temporarily while the new fiat was metered out to the population at a rate just equal to or slightly greater than the rate of existing credit repayment to avoid significantly changing the money supply and until banks were 100% private with 100% voluntary depositors (ie. we need a Postal Savings Service for the risk-free storage of and transactions with fiat instead of government deposit insurance for the banks and credit unions.)

        I’ll read the Need Act in a bit and maybe further comment.

        1. Ben Johannson

          The central bank cannot credit demand-deposit accounts, only reserve and securities accounts.

          1. not_me

            The central bank cannot credit demand-deposit accounts

            I never said it could. The US Treasury should mint some Trillion Dollar Coins, force the Fed to accept them in exchange for new reserves in the US Treasury account at the Fed and then send checks to all US citizens drawing on that account.

            1. Ben Johannson

              Not possible without legislation authorizing the spending and if Congress were willing to do it the platinum coin would be unnecessary.

              1. not_me

                and if Congress were willing to do it the platinum coin would be unnecessary.

                But let’s do it anyway, for the sake of the accounting, and for the sake of the legal precedent that Congress may indeed coin money and regulate the value thereof.

                  1. not_me

                    The Fed gets a few trillion dollar coins as “assets” and the US Treasury gets trillions in new reserves (Fed liabilities) to back the new fiat distribution checks or direct deposits.

                    1. Ben Johannson

                      You had previously written that you wanted Treasury, under its own authority, to mint the coins but in your later comment stated that Congress should do it as evidence of its authority over the currency. Furthermore as Congress is clearly unwilling to fund debt-relief I don’t understand your argument it should be done “anyway”.

                    2. not_me

                      Part of the reason Congress is unwilling to fund debt-relief is:
                      1) It would add to the interest paying portion of the National Debt.

                      2) Non-debtors would scream “Unfair!”

                      Neither objection is necessarily true since the Trillion Dollar Coins would pay no interest and the new fiat distribution would go equally to non-debtors.

                      “We should do it anyway” refers to when Congress comes to its senses and decides to fund debt-relief and non-debtor compensation. At that point, it should authorize the Coins as a pure demonstration of its power to issue non-interest paying debt and to firmly establish the precedent.

                      Btw, the Coins could not be resold by the Fed but’s that’s not a problem since there should never be a need to sterilize the new reserves created since a lot of them would end up in a Postal Savings Service where they would 100% back deposits and the commercial banks would be too frightened to leverage the remaining reserves much as 100% private banks with 100% voluntary depositors.

          2. not_me

            Then how does the Fed pay its employees, buy office equipment etc?

            Just a quibble since the US Treasury should be the instrument of a new fiat distribution.

            But if the Fed should were to be the instrument, the Asset entry could read “For services rendered: 100 years of debt and wage slavery”

            1. Ben Johannson

              Profits from open market operations, fimancial services and the discount window. Anything beyond its budget is remitted to the Treasury.

              1. not_me

                Which raises the question: How can the Fed profit from Open Market Operations if it must at least slightly overpay when buying (to ensure enough sellers) and when selling to accept less than market price (to ensure enough buyers)?

                Here’s how the Fed gets away with it, I’d bet. By buying assets with new reserves, the Fed fuels asset price inflation and thus the assets it overpaid to obtain soon become profitable. A self-licking ice cream cone!

                So the profit the Fed remits to the Treasury from OMOs is bogus since it is merely an inflation tax on the poor and other non-asset owners since they don’t profit from the asset price inflation and because they now must pay more for what would be their chief asset, a house, or more for rent, at least eventually.

        2. petercoop

          “”Actually bank reserves are fiat since Federal taxes can be paid with them and the Fed DOES create bank reserves so the Fed does create fiat.””

          Actually the only thing you can pay taxes with is private bank credit or FRN-cash also issued by the priva’te banks. Nobody can pay their taxes with reserves, why would you think that is so?

          Saying ‘fiat’ has no meaning unless you are talking about sovereign fiat ‘money’.
          If you are, then it is the national ‘money’ quality of ‘purchasing power in the national unit of account’ that marks as ‘money’, and the Fed does not ever create money of that type.

          ‘not me’ only called for a Steve Keen type debt-jubilee, and it is Keen that called for using a QE-type of mechanism, but QE only increases reserve balances at the Fed, and never creates ‘money’ balances that enter the real economy and,, as such, NOBODY can use those reserves to pay their debt, nor their taxes.

          If you’re equating a debt-jubilee with funding via Platinum Coin issuance ‘seigniorage’, then those are two pretty different things. If you want to pay off the debts with ‘seigniorage’, then the NEED Act is by far the preferred vehicle over Platinum Coinage.

          There’s no NEED to issue a coin for backing, when you’re issuing sovereign fiat money into circulation. And that’s what the NEED Act does.

          1. not_me

            Nobody can pay their taxes with reserves, why would you think that is so? Petercoop

            The banks do it for you. When you write a check to the US Treasury, when that check clears, reserves are transferred from your bank’s account at the Fed to the US Treasury’s account at the Fed.

            Reserves and physical cash are the real money in the economy; both are fiat; bank credit is merely a claim to reserves (if one has a Fed account, ie. banks) or to physical cash (if one does not have a Fed account).

            1. PeterCoop

              “The banks do it for you.”
              So, first, you think that reserves are money because you can pay taxes with them, and then you say that means that it’s actually the banks doing some reserve transaction on your behalf after you make the bank-credit payment?

              And, second……No, they don’t.
              Interbank reserve activities have nothing to do with settling my debt to Treasury.
              My debt to Treasury is paid by a transaction of M-1 monies from my checking account to the Treasury’s account.
              The Treasury would not accept payment of reserves, and all taxes are due in bank-credit money.
              To say that reserves are the real money in the economy is laughable as reserves never enter the real economy…….. they are interbank settlement media only and have zero effect on the national economy, on gDP or aggregate demand, except to confuse.
              It’s past time to end reserve-based money.
              To say that bank credit is merely a claim on reserves is a myopic, banker-centric view of these relationships.(Someone who cares about reserves)
              ALL of the money in the national economy is bank-credit money.
              It’s the money we spend and earn.
              It is the means for exchange of goods and services among producers and consumers.
              It does all of that without a consideration of whether or not it represents a claim on something called ‘reserves’, whatever they are.
              Who would value a claim on reserves?
              One thing for sure.
              Reserves are not a claim against bank credit, or anything else.
              Reserves must be provided by the central bank, so there are always adequate reserves in the system.
              And there are Trillions of excess reserves in the system.
              So, this idea that reserves are the thing of value in relation to money is again laughable.
              I think I’ll go out and find me some reserves to buy.

              1. not_me

                Reserves and physical cash ARE the real money in the economy; it’s what banks use among themselves and with the US Treasury (reserves that is) while the rest of us have to make do with mere claims to fiat which for non-banks means claims to physical cash.

                Just because 97% of the money supply is bank credit does not make it real money, as a run on the banks will amply demonstrate because the banks create more deposits than they have cash or reserves to buy cash with from the Fed to fully back them, counting on the public to not demand cash because it is too inconvenient and on the lack of a Postal Savings Service where the citizens can escape the banking cartel and on the Fed to provide emergency loans of new Federal Reserve Notes if necessary.

                1. petercoop

                  Sorry,, your reserve-fetish is endearing but clearly advancing more fog than understandings around the money-system.
                  Your “real” money-hierarchy dominated by reserves remains all the more laughable; there is ZERO real economic activity happening either among the banks or between banks and either the Fed or Treasury, the only purpose for ‘reserves’ is to provide settlement media in the national payments system.
                  So, the ”real” economic activity happens with bank-credit monies, so-called, created as a debt contract that lingers in the economy until it is repaid, long after the money that is created is circulating in the economy. The money is in the debt, it comes and goes, and reserves are provided to the banking system to make the payments system work.
                  That we are forced to make use of bank-credit money instead of “real” money is true enough. But central-bank reserves are another step removed from real money beyond bank-credit money, which does meet the ‘means of exchange’ criteria, making it legal to tender for any debt, private or public.

                  Central bank reserves mean nothing to anybody living and working in the real economy., never did and never will. Today those reserves are Trillions in excess in the system. So what?

                  If you read the NEED Act, you’ll see that reserve-based money is the last throwback to gold-backed money systems, and also see that what will make the payments system work in the future is the fact that the money is permanently created and issued into existence. The payments settlement media is the money that is created….. all transacted at the M1 money level.

                  I’ve never thought that ‘bank-credit’ money was “real” money; of course it is not. But it has been ‘legalized’ into existence and as such meets the legal-to-tender requirement for what serves as money today.

                  “”a run on the banks will amply demonstrate because the banks create more deposits than they have cash or reserves to buy cash with from the Fed to fully back them,””

                  More deposits than reserves?
                  Like I said, there’s Trillions in excess reserves, so if reserves were ‘superior’ to bank-credit’, then the banks could use those reserves when they ran out of more bank credits. But they can’t because there’s no ‘money’ there, only reserves, which can never take the place of either ‘bank-credit’ money or ‘real’ money. Again, reserves have ZERO purchasing power, ZERO currency quality, contribute ZERO to GDP , and have ZERO interest among the real people.
                  Try getting over them.

    2. Carla

      “Keen’s “A Modern Jubilee” should be eminently doable, politically speaking, because it helps everyone”

      Precisely why it won’t be done.

    3. Benedict@Large

      Federal debt is identical to money. To say that “the economy can’t be financed by debt anymore” is to say that the economy can’t be financed by money anymore.

      1. reslez

        Federal debt is money but private debt is not. It has important differences. Private debt requires the ability to afford a stream of payments and the expectation of sufficient future income. (These are moot for the federal government which can create currency at will.) In addition the bank or regulatory agencies probably require you to maintain certain financial ratios in order to be eligible to take on additional debt. So while the federal government can take on “debt” at will, private lending institutions and individuals simply cannot. It reaches a stopping point. Once there, the debts are either paid off or wiped out. And right now, they can’t be paid off and nobody is willing to allow them to be wiped out. It’s a zombie economy, the unending night of the Walking Debt.

      2. not_me

        The ONLY debt the Federal Government owes to fiat owners is to accept that fiat back for Federal taxes, fees, etc.

        As for money necessarily being debt, money can also be shares in Equity, common stock, since both Liabilities and Equity are backed by the Assets of a common stock company. If Liabilities (debt) can be money, then so can shares in Equity (common stock).

      3. petercoop

        “”Federal debt is identical to money.””
        You can’t pay your taxes with federal debt.
        Do you mean ‘issuing’ federal debt’ is somehow ‘identical to’ issuing money?
        Or, what?
        Federal debt is on obligation to repay money that is borrowed from the existing supply of money.
        Money is what you use to repay federal debt.
        And that ‘money’ must either be taxed into public use, or borrowed into public use for that purpose from the existing money supply.
        To say that issuing federal debt is equal to issuing the money is an unfounded assertion.
        It implies a lack of caring over who creates the money….. the One Percent or the Restofus.
        I found this.
        http://youtu.be/2HRt6sSXpOQ

  2. Ben Johannson

    I’m glad Hudson discussed the consequences of a rise in the short-term interest rate, a topic we almost never hear discussed in the financial press other than as wealth porn (what will investors do!?). Raising rates now would be a demand drain in an already weakening American economy as consumer spending veers more sharply to the foreign sector.

    The Fed does not have a free hand to craft whatever policies it wants.

    1. susan the other

      Which explains why Fed Policy, with it absurd dual mandate, has become an exercise in sado-masochism.

      1. PeterCoop

        Which absurd dual mandate were you meaning there?
        Was it the one where the Fed’s supposed to be balancing their NAIRU-informed inflation-unemplyment goals, achieving national economic potential by managing the monetary and credit aggregates, or was it the more ridiculous dual mandate, that of both regulator and promoter of the federal reserve banking system. That’s probably more the cause for the Fed’s sado-masochism.
        What’s going on between GS and the Fed is socially more sadistic, blatant corporate corruption in its most natural setting, at the money power.

    1. James

      Agreed. Hudson walks right up to the precipice of acknowledging the truth of the situation…

      People are going to say, okay, we can’t make money borrowing to buy stocks, we can’t make money borrowing for real estate, so we’re going to pay back the bank loans. We’re going to stop gambling.

      …but then backs away.

      So the United States has painted itself into a corner where it really can’t increase interest rates. Even though investors worry that the Fed is going to raise them, the Fed knows that it can’t raise interest rates without crashing the market down.

      Sounds like damned if we do, even more damned if we don’t. This is not going to end well. Unless you believe in magic financial pixie dust, both the market and the Fed are going to have to come to grips with reality sooner or later. And to absolutely no one’s surprise, it looks like it’ll be later… again.

      1. GlassHammer

        Forget the “Reality” of QE’s impact on stocks and how it encourages companies to exchange debt for an EPS boost. Attempts to change that “Reality” always end when we confront the “Real” of the Petrodollar.

  3. Chauncey Gardiner

    Re Dr. Hudson: … “The markets were expected to sort of somehow take off with higher profits as if there is a business cycle recovery. But it’s become apparent that we’re really not in a business cycle anymore. We’re at the end of a long 50-year cycle since World War II, where the debts have been rising so much that all of a sudden, the economy can’t be financed by debt anymore. And if the economy isn’t financed by debt, that means that markets can’t grow. All of a sudden, what was fueling the growth and consumer demand that was increasing profits has come to an end. This is especially apparent in Europe. So, basically, what people thought was supposed to be good news – no more room for debt to grow – turns out to be quite bad news.”

    It’s the downside of compound interest and the end of cheap and abundant oil. I believe that in the U.S. those in control have largely tapped out all the traditional sources of debt, and have been and are pushing toxic debt out of desperation to keep the current monetary system intact. These range from historically high stock margin debt, to subprime home loans, to auto loans in amounts that exceed the purchase prices of the autos (and also essentially amount to channel stuffing), to student loans against future income and household formation, to loans to corporations for stock buybacks and dividends rather than capital investment, to loans to state universities for unneeded physical facilities, and to other debtor groups.

    Rather than deficit national fiscal spending on domestic nonmilitary needs to trigger income growth, MMT, or a debt jubilee, I believe the solution of those in control will continue to be Austerity over the medium term and “Think Locally, Act Globally” in forming a new monetary system in the longer term. Based on what I am seeing, I believe their view is that Debt is too useful to them as a socioeconomic control tool and wealth concentration device for them to willingly give it up.

    1. James

      Rather than deficit national fiscal spending on domestic nonmilitary needs to trigger income growth, MMT, or a debt jubilee, I believe the solution of those in control will continue to be Austerity over the medium term and “Think Locally, Act Globally” in forming a new monetary system in the longer term.

      Now that’s a novel view of things, if nothing else. Kind of wish I’d of thought of it. But I’m not sure what “think locally, act globally actually” means. To my way of thinking at least, once the global financial bubble finally bursts (and I think we’re damn close to that point right now), the only option left will be think and act locally, cause the global option won’t even be possible anymore. But the austerity option for the losers under the current arrangement will, of course, go on without saying for as long as the current arrangement holds sway. Which, in turn of course, is why the current arrangement will fail in the first place. Unlike the board game Monopoly, which the current system resembles more than most would like to admit, the losers don’t simply go away, but instead hang around to muck up the system until they die. And that “deadweight” will literally prove to be western capitalism’s undoing, as capitalist economists come to learn the hard way that actual “people,” as opposed to mere “consumers,” don’t conform so neatly to their high-minded academic models.

  4. susan the other

    Yes, Lambert, it sounds like a lost airliner too. Considering the magnitude of this change – from Cold War economic hubris to waking up with a big hangover – it does make sense that the Fed is the only government standing. We had no government before, only ideology. Now we don’t even have ideology.

  5. MyTwoBits

    I am surprised Dr. Hudson didn’t bring the international aspect, i.e. the role of the U.S. dollar and U.S. “Super Imperialism” into the discussion. That is what has kept the West’s debt-based money and financial system going since 1971 if not before. If I got it right “Super Imperialism” is the US ‘printing’ money and sending it abroad to eventually wind up on the books of foreign central banks as ‘sterilized money’, i.e. U.S. government debt. I believe other governments play this game as well though to a more limited extent.

    Debt as a “socioeconomic control tool and wealth concentration device” is indeed very powerful. Just as the feudal nobility once controlled its peasants by controlling their access to land, the new feudal nobility, the financial oligarchy, the 0.0001% and shrinking, controls them by controlling access to money. The key here is debt. When you have more money than you could ever spend, the only use for money is earning more money, which of course means investing or these days loaning it to someone, i.e. someone else’s debt.

    Take a look at “Frederick Soddy on Lloyd C. Blankfein and “doing God’s work”

    The modern wars that break out between industrialised nations have a precisely parallel explanation. Then the belligerent nations rather than individuals shoulder the debt. The glut of wealth, that in time of peace cannot be profitably exchanged, is now owed for as it is produced by the nations as such Along with the flower of the country’s manhood, it is destroyed as rapidly as the most powerful modern engines of destruction allow.

    There appears to be a great opportunity for a debt jubilee here, for acknowledging that “Debts that can’t be repaid won’t be.” Maybe make some exemptions for government debt held by “little fish”. But simply acknowledge facts on the ground. You call it default; I call it jubilee.

    1. Rosario

      Agreed, US Imperialism has certainly been the primary wealth driver (for common citizens and billionaires alike). This is one of many snags I run into when discussing monetary solutions to the problem. If a sovereign, fiat currency can be used for positive economic ends via sound policy and regulation how can we reconcile this with the sovereign’s imperial ambitions? You have to start with a sound government to have a sound fiat currency. Otherwise you get one of two things. A currency used to corrupt ends and/or a constant currency war between all participating nations (we currently have both affecting us). The irony is semi-isolated nations with semi-sane governing powers are the most immune to the senseless chaos of our global economic order (Cuba comes to mind). Say what you will about political oppression in Cuba (which is deplorable), but they have been chugging along miraculously for over 15 years without consistently receiving many essential imports (energy, medical, food). A fiat can work, but to work to sustainable ends it cannot be linked to a single nation, particularly a major power. The EU was on the right track, but the US dollar is just too powerful to supplant, and the EU has proven to be just as corruptible as the US Treasury/Federal Reserve.

    2. James

      There appears to be a great opportunity for a debt jubilee here, for acknowledging that “Debts that can’t be repaid won’t be.” Maybe make some exemptions for government debt held by “little fish”. But simply acknowledge facts on the ground. You call it default; I call it jubilee.

      Agreed, in principle at least. But the realistic part of me just guffaws at the very idea, and asks if you realize who we’re dealing with? The people at the top of this pyramid scheme are not above starting world wars, holocausts, and all the other current wonders of our modern existence to perpetuate the debt meme. What makes you think they’d just dismiss it all so easily in an aptly named “jubilee?” And for that matter, what makes you think so many who have been held in debt’s bondage for so long (and have thus come to believe in their own unworthiness) would support it either? Just go try to float the idea across the great swath of red state America and see how far you get. Amazing I know, but true all the same.

  6. financial matters

    Mariana Mazzucato seems to be making some good headway with the ideas in her book ‘The Entrepreneurial State: Debunking Public vs Private Sector Myths’

    She points to how governments are uniquely positioned to make large capital investments in risky enterprises and that private enterprise often successfully piggybacks on these when they become successful. Here she would like to see the public get more of these ‘dividends’ that were largely publicly funded in the first place.

    1. Rosario

      Like all of the modern Tech enterprises? I’ve been trying to clear this up for my Modern Libertarian acquaintances but they can’t seem to understand it.

  7. Rosario

    Can’t one argue that this outcome was inevitable for Capitalism. Note the countries that have “saturated”, in terms of Capital investment and overall liquidity, USA/Canada, Western Europe (i.e. every nation able to exploit their roles as a global powers after WWII with the support of the USA). A little policy here and a little regulation there won’t slow the wealth bloat as it fails to critique the system as a whole. We never addressed the problem of the wealthy and the powerful and today, with nothing left to suck dry they have achieved what always inevitably happens in a system that tolerates inordinate accumulations of wealth. We are already seeing the BRICS countries fast tracking the same course the USA and Western Europe took in the mid-twentieth century. They’ll be in the same place we are in 10 years. All this is built on cheap labor and resources either within the developed/developing countries (service in USA/Western Europe, urbanized industrial labor in China/Southeast Asia) or abroad (most of Africa and fragments of South America). Slick monetary policy might buy us some time, though any implementation seems impossible at this point, the rot runs too deep. Inevitably we have to start creating an ethical/moral boundary for wealth accumulation. It is absolutely an ethical and moral problem that is at best ignored and at worst inverted.

  8. bold'un

    “The S&P 500 have used, I think, 54 percent of their earnings to buy back their own stock, and they’ve been using another 40 percent or so to pay dividends. Now, that has left only 9 percent of earnings of the S&P 500available for new investment. Never before has this ratio been so low.”

    “all this borrowed money that’s gone into stocks is going to disappear.”

    So are companies borrowing to buy back stock or using cash earnings to buy back stock? The low present interest rates do make it attractive to replace equity with debt, but that should not affect the rate of investment, provided the expected return is sufficiently attractive.
    As for infrastructure spending, maybe a Republican congress could see their way to raise it more than a stalemated congress. Who is really against infrastructure?

  9. skippy

    Reaganomics melded with Rubinomics is like a meth addict with stuff to do and a punkin head tripper mulling over cosmological physics… both need expansion…. although the latter does understands the likely hood of – new universes – popping up if’in it stops.

    The new bit scares the bejeezus out of the former tho’, bricolage enemy numoro uno…

    skippy… Even the Higgs field can’t own the photon…

  10. flow5

    Gresham’s law is a statement of the “principle of substitution” applied to money, i.e., a commodity (or service) will be devoted to those uses which are most profitable. It is another one of the paradoxes of money that, unlike articles in the market, the bad drives out the good. Remunerating excess reserves is a good example.

  11. flow5

    All recessions since the Great-Depression are entirely the Fed’s fault. Monetary policy objectives should be formulated in terms of desired rates-of-change in monetary flows [ M*Vt ] relative to rates-of-change in real-gDp [ Y ]. Rates-of-change in nominal-gDp [ P*Y ] can serve as a proxy figure for rates-of-change in all transactions [ P*T ]. Rates-of-change in real-gDp have to be used, of course, as a policy standard.

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