MIchael Hudson: The Slow Crash

Yves here. Even though this interview took place in April, the transcript was released only now.

An interview by Guns and Butter with Michael Hudson. His latest book is KILLING THE HOST: How Financial Parasites and Debt Bondage Destroy the Global Economy If you do not see the podcast player below, you can listen to it or download it here.

This discussion covers debt deflation, mortgage and other consumer debt, negative interest rates; currencies, and the erosion of the real economy.

This is Guns and Butter, April 5, 2016.

Most people think of the economy as producing goods and services and paying labor to buy what it produces. But a growing part of the economy in every country has been the Finance, Insurance and Real Estate (FIRE) sector, which comprises the rent and interest paid to the economy’s balance sheet of assets by debtors and rent payers. More and more money is being extracted from of the production and consumption economy to pay the FIRE sector. That’s what causes debt deflation and shrinks markets. If you pay the banks, you have less to spend on goods and services.

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: The Slow Crash. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City, as well as at Peking University. His 1972 book, Super-Imperialism: The Economic Strategy of American Empire, is a critique of how the United States exploited foreign economies through the IMF and World Bank. His latest book is Killing the Host: How Financial Parasites and Debt Destroy the Global Economy. Due out soon, J Is for Junk Economics. Today we discuss in detail the concept of debt deflation; housing, student loan and automobile debt; the oil market; the stock market; negative interest rates; currencies; and the shrinking real economy.

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Bonnie Faulkner: Michael Hudson, welcome.

Michael Hudson: It’s good to be here again, Bonnie.

Bonnie Faulkner: You have indicated that as a result of United States and European debt deflation, there is an economic slowdown. First of all, how would you define deflation?

Michael Hudson: There are two definitions of deflation. Most people think of it simply as prices going down. But debt deflation is what happens when people have to spend more and more of their income to carry the debts that they’ve run up – to pay their mortgage debt, to pay the credit card debt, to pay student loans.

Today, people are having to spend so much of their money, to acquire a house and to get an education that they don’t have enough to spend on goods and services, except by running into yet more debt on their credit cards and other borrowings.

The result is that markets are slowing down. Deflation means a slowdown of income growth. Markets shrink, new capital investment and employment also taper off, so wages decline. That is what’s happening as deliberate policy in Europe and the United States. Falling or stagnant prices are simply the result of having less income to spend.

Bonnie Faulkner: Well, thank you for that, because that is confusing, because I think a lot of people consider deflation simply a decrease in price. Does that have anything to do with it?

Michael Hudson: The price decline is a result of having to pay debts. That drains income from the circular flow between production and consumption – that is, between what people are paid when they go to work, and the things that they buy. Deflation is a leakage from this circular flow, to pay banks and the real estate, called the FIRE sector – finance, insurance and real estate. These transfer payments leave less and less of the paycheck to be spent on goods and services, so markets shrink. Some prices for some products go down when people can’t afford to buy them anymore. There are more sales, there’s shrinkage, but especially incomes go down. Real incomes in the United States have been drifting down for 30 years because there is slower and slower market demand.

That’s why Bernie Sanders and Donald Trump are getting so many votes. When Hillary Clinton said she’s going to do just what Obama does and we’re going to continue to recover, most people know that we’re not recovering at all. We’re shrinking.

Bonnie Faulkner: So then, deflation has more to do with disposable income than it does with prices.

Michael Hudson: That’s correct, and that’s what is rarely pointed out. People tend to think that paying a debt is like going out and buying a car, buying more food or buying more clothes. But it really isn’t. When you pay a debt to the bank, the banks use this money to lend out to somebody else or to yourself. The interest charges to carry this debt go up and up as debt grows. As you have to pay more interest and amortization on what you owe, you’re left with less and less money to buy goods and services – unless you borrow even more and go further into debt.

So basically, unless you’re willing to write down debts and save the economy, you’re going to have deflation and a steady drain in purchasing power – that is, shrinking markets.

Bonnie Faulkner: So then the relationship between debt and deflation: Increasing debt creates more deflation. Would you say that’s the case?

Michael Hudson: Yes. In the 1930s, Irving Fisher wrote an article “The Debt Deflation theory of the Great Depression,” that established the obvious mathematical fact that paying debt service to banks leaves less income to buy goods and services.

Bonnie Faulkner: Oftentimes people wonder, what’s wrong with deflation? We’re always hearing about worries about inflation, but what is the danger in deflation, as you’ve defined it?

Michael Hudson: Markets shrink and unemployment goes up. Wages go down and living standards decline. When we say “people worry” about inflation, it’s mainly bondholders that worry. The labor force benefitted from the inflation of the ‘50s, ‘60s and ‘70s. What was rising most rapidly were wages. Bond prices fell steadily during these decades. Stocks simply moved sideways.

Inflation usually helps the economy at large, but not the 1% if wages rise. So the 1% says that it is terrible. They advocate austerity and permanent deflation. And the media say that anything that doesn’t help the 1% is bad.

But don’t believe it. When they say inflation is bad, deflation is good, what they mean is, more money for us 1% is good; we’re all for asset price inflation, we’re all for housing prices going up, and we’re all for our stock and bonds prices going up. We’re just against you workers getting more income.

Bonnie Faulkner: Right, because inflation puts more money, I guess, in circulation and we get more as a worker, for instance-

Michael Hudson: Well, if the economy is growing, people want to employ more workers. If you hire more labor, wages go up. So the 1% always wants to keep unemployment high – it used to be called the reserve army of the unemployed. If you can keep unemployment high, then you prevent wages from rising. That’s what’s happened since the 1970s here. Real wages have not risen, but the price of the things that the 1% owns has risen – stocks, bonds, trophy art and things like that.

Bonnie Faulkner: So if I were to ask you what is wrong with deflation generally, would the answer ten be that it shrinks the economy?

Michael Hudson: That’s exactly it – lower wages, lower living standards, and more money siphoned off to creditors at the top of the pyramid. When there’s deflation, it means that although most markets are shrinking and people have less to spend, the 1% that hold the 99% in debt are getting all the growth in wealth and income. Deflation means that income is being transferred to the 1%, that is, to the creditors and property owners.

Bonnie Faulkner: Well, Michael, it sounds like in your definition of debt deflation that you are describing exactly what’s going on here in the United States and also in Europe.

Michael Hudson: Yep, that’s exactly what’s happening,. It’s what I describe in Killing the Host.

Bonnie Faulkner: All sectors of the economy are certainly not deflating, that is if we’re going to talk about prices narrowly. What about the housing market? Are we looking at a housing bubble?

Michael Hudson: Certainly not a bubble yet. You still have 25% of American homes in negative equity – that is, when the mortgages are higher than the market value of the housing. So for many people, the mortgages they took out before 2008 are so high that they would be better off walking away from their houses. That is called “jingle mail,” returning the keys to the bank and saying, “You can have the house. I can buy the house next door that’s just like this for 20% less, so I’m going to save money and switch.” That’s what someone like Donald Trump or a real estate investor would do. But the banks are trying to convince the mortgage debtors, the homeowners, not to act in their own self-interest.

Bonnie Faulkner: Yes. I live in Northern California, in the Bay area, so I guess this is an exception to what’s going on overall across the country.

Michael Hudson: That’s a rich area, and houses in expensive areas are going up, but not as fast as they used to. Luxury housing in gated communities is going up. But for blue-collar-income neighborhoods and even middle-class neighborhoods, there has not been much of a recovery. It’s good news for burglar-alarm manufacturers, because crime is going up.

Bonnie Faulkner: It looks like the Bank of America is going back into the subprime loan market, albeit in league with U.S. Government. What do you make of Bank of America’s new Affordable Loan Program, which offers 3%-down mortgages with no mortgage insurance, and partners with Freddie Mac in something called the Self-Help Ventures Fund?

Michael Hudson: This reflects the degree to which the banks have been able to capture the Federal Housing Authority and Freddie Mac as well as the Federal Reserve. They are all trying to re-inflate the re bubble. The myth is that if housing prices go up, Americans will be richer. What banks – and behind them, the Federal Reserve – really want is for new buyers to be able to borrow enough money to buy the houses from mortgage defaulters, and thus save the banks from suffering from more mortgage defaults.

Actually, high housing prices don’t help the economy. They raise the cost of living. Everybody would be better off if they could buy housing for only, let’s say, a carrying charge of one-quarter of their income. That used to be the case 50 years ago. Buyers had to save up and make a higher down payment, giving them more equity – perhaps 25 or 30 percent. But today, banks are creating enough credit to bid up housing prices again.

The aim of promoting low down payments is to push prices back up so that fewer houses are going to be in negative equity and fewer people are going to walk away from the mortgages. That will save the from taking a loss on their junk mortgage loans.

Bonnie Faulkner: The FHA is offering subprime loans, as well. Isn’t that right?

Michael Hudson: For 3.5% downpayment. This was unheard of when I first went to work on Wall Street in 1961. I was working for the Savings Banks Trust Company – the central bank for New York State savings banks, which were the main mortgage lenders. At that time the rule of thumb was that home buyers needed a 30% down payment (equity), so that when the banks made a loan, the property would have to go down by 30% to make the bank in trouble. That was the homeowner’s equity that was at risk. It provided security for the banks.

Now, suppose that a homeowner puts down only 3% of their own money or 3.5% for the FHA. That means if prices go down by only 3%, the house will be in negative equity and it would pay the homeowner just to walk away and say, “The house now is worth less than the mortgage I owe. I think I’m just going to move out and buy a cheaper house.” So it’s very risky when you have only a 3% or 3.5% equity for the loan. The bank really isn’t left with much cushion as collateral.

Now, the banks argue, “Wait a minute. We’re making these loans to people with good credit ratings, and they have enough money to pay, even if the house’s price goes down.” But the banks are taking a risk that the homeowner is going to be naïve enough not to walk away and leave the bank holding a bad debt, so it’s very risky. It’s a degree of risk that no bank would have taken prior to Alan Greenspan’s tenure at the Fed.

Bonnie Faulkner: Why would the United States government be encouraging these risky loans?

Michael Hudson: Because the government is dominated mainly by the financial, insurance and real estate lobby, the FIRE sector. It’s called regulatory capture. The real estate interests and banks are in a kind of symbiosis. They’re the largest-growing part of the economy. This is the sector that backs the political campaigns of senators, presidents and congressmen, and they use this leverage to make sure that their people dominate the Federal Reserve, Treasury and the federal housing agencies.

Bonnie Faulkner: Just for clarification, why would the banks be pushing these risky loans if there’s a high degree of default?

Michael Hudson: When you say “bank,” a bank is a building, a set of computers and chairs and things. The bankers are the people running these banks. They’re the chief officers, and they push the loans because they don’t care if they go bad. For one thing, they may package these bad loans and sell them off to gullible institutional investors. If bankers can push the loans and make more profits for the bank, they get paid higher bonuses. They often also get stock options. If the bank goes under, they get to keep all of these salaries and options – and the government will bail out the bank. These guys will take their money and run, which is pretty much what they’re doing now. I think we’re in the take-the-money-and-run stage of the economy. So the banks may go under, but the bankers, who make the policy, clean up.

Bonnie Faulkner: Thank you for that distinction. What about automobile loans? You’ve referred to them as “junk loans.” How do you mean?

Michael Hudson: There’s been a large increase in loans to people to buy autos to get to work. Just like they’ve lowered lending standards on making home mortgages, they’ve lowered standards on auto loans. So default rates are going up, and so are repossessions of autos. It’s become a common sight in many neighborhoods. So banks are losing on defaults on auto loans, just as defaults are happening more and more on student loans, and are still going on in the mortgage market.

Bonnie Faulkner: You mentioned the student loan debt. How big is it?

Michael Hudson: It’s about $1.3 trillion by now. The government has guaranteed this student loan debt, so banks are eager to make loans to students. Often they’ll get the parents to countersign. The banks make money whether the students pay or not because the government has promised to pay the banks if the loans go bad. And defaults lead to lucrative penalty fees for the banks, which the government also guarantees.

The fact that you have government-guaranteed student loans has created a whole new sector in the American economy that didn’t really exist before – private for-profit universities that sell junk degrees that don’t help the students. They promise the students, “We’ll help you get a better job. We’ll arrange a loan so that you don’t have to pay a penny for this education.” Their pet bank gets them the government-guaranteed loan, and the student may get the junk degree, but doesn’t get a job, so they don’t pay the loan. The government pays the bank anyway, at a pretty high interest rate, 7% or 8%, plus all the penalties that banks charge. This makes student loans a way to organizing a government giveaway to the banks and to the junk universities they subsidize.

Bonnie Faulkner: Is it true that one cannot declare bankruptcy on student debt?

Michael Hudson: That’s right. Someone in Congress said, “We want to make sure the government can collect and the taxpayer doesn’t lose on this. So these loans are not subject to being written down by a bankruptcy proceeding.” Normally, if someone goes bankrupt, you wipe out the debt and get a fresh start. But that’s not permitted with student loans. So the effect is to impoverish many graduates with very high debts.

Just like a house is worth whatever a bank’s going to lend against it, an education is worth whatever the bank is going to lend the student to pay the university. So the availability of government-guaranteed student loans has vastly inflated the cost of education, just like it’s inflated the cost of housing.

But in housing you have jingle mail and you can walk away and leave the bank holding the bag. In the case of student loans, the debt follows you through life, and the banks or government will turn it over to collection agencies that are not very nice people and can do all sorts of harassing things to you. It’s becoming a nightmare.

Bonnie Faulkner: I also have read that with regard to student loans they can attach your salary. They can even attach your Social Security check.

Michael Hudson: Even the Social Security – mainly for parents who have countersigned for loans for their children. Their Social Security can be sequestered and attached by collection agencies. Most of the defaults are on junk education, the private for-profit diploma mills.

Education is something that should not be organized on a for-profit basis, because in that case its purpose is not really to provide an education. It’s not to teach students how to get better work, but how to provide banks with a free giveaway opportunity from the government, by making junk loans that are defaulted on. The effect may be to wreck the futures of the graduates that fall for the false promises that are being made.

Bonnie Faulkner: The default rate on these student loans is pretty high, isn’t it?

Michael Hudson: High and rising.

Bonnie Faulkner: Then there’s also, I noticed, something called a workout where they adjust your payment length and other factors to keep you from defaulting.

Michael Hudson: They try to prevent defaults because if banks show higher default rates, this gets the regulators to say, “You’re going to need higher capital reserves against these default rates.” So the banks say, “We’ll stretch out the loan. We’ll give you more years to pay. We’ll slow it down.” But the workout just increases the overall ultimate amount of debt service that has to be paid. It’s a short-term solution.

That’s the problem with the financial sector. Banks and the financial sector live in the short run, not the long run. In principle the government is supposed to make regulations that help the economy over time. But once it’s taken over by the financial sector, the government lives in the short run too.

Bonnie Faulkner: There’s a technology boom in the San Francisco Bay area. Do you think this tech boom could be in a bubble?

Michael Hudson: It’s only a bubble if the prices of technology firms are going up in the stock market. Right now, the stock market is funded on credit, just as the housing market and the student loan market. One of the reasons the Federal Reserve is keeping the interest rates low with Quantitative Easing and low interest rates is to keep sending the flow of credit into the stock market.

The other dynamic keeping the stock market up – both for technology stocks and others – is that companies are using a lot of their income for stock buybacks and to pay out higher dividends, not make new investment,. So to the extent that companies use financial engineering rather than industrial engineering to increase the price of their stock you’re going to have a bubble. But it’s not considered a bubble, because the government is behind it, and it hasn’t burst yet. A bubble is only called that after it bursts, after the insiders get out, leaving the pension funds and small investors, Canadians and other naïve investors holding the bag.

Bonnie Faulkner: In terms of keeping the stock market up, I thought that the Fed had ended QE.

Michael Hudson: QE is still going on. It means a zero interest-rate policy. The aim is to hold interest rates low at 1/10 of a percent. The Federal Reserve continues to make sure that interest rates are low, so we still have near-zero interest rates. And now they’re even talking about negative interest rates to help spur Wall Street gains.

Bonnie Faulkner: That was going to be my next question: What is your opinion of these negative interest rates? There’s a lot of talk of if you have a bank account you have to pay the bank rather than vice versa.

Michael Hudson: The idea is, number one, that banks won’t have to pay interest on your account. They’ll actually pay you less and less, while they’re making 29% on many of their credit-card loans, and while they’re making a killing on student loans. They can pay you less while they make more, increasing their profit margins.

So that’s part of the problem, but the underlying strategy of the Fed is to tell people, “Do you want your money to lose value in the bank, or do you want to put it in the stock market?” They’re trying to push money into the stock market, into hedge funds, to temporarily bid up prices. Then, all of a sudden, the Fed can raise interest rates, let the stock market prices collapse and the people will lose even more in the stock market than they would have by the negative interest rates in the bank. So it’s a pro-Wall Street financial engineering gimmick.

Bonnie Faulkner: That’s very interesting – the effect that a negative interest rate would have on stock market prices. I hadn’t thought of that.

Michael Hudson: They’re trying to convince people, “Do you want your savings deposits to go down or do you want to get a dividend return and buy stocks?” If a lot of money goes into the stock market, it’ll push up prices, making money for stock speculators. Then the insiders can decide that it’s time to sell out, and the market will plunge.

Stocks always go down much faster than they go up. That’s why it’s called a crash. People who put their money into the stocks will find, all of a sudden, that stock prices are no longer being supported by the debt leveraging that’s been holding them up.

Bonnie Faulkner: I understand that former Harvard University president Larry Summers has proposed the banning of large denomination currency, i.e., $100 bills. Similar proposals are being made regarding the euro. What do you make of this?

Michael Hudson: I think something like three-quarters of American currency is held abroad, by drug dealers, by tax evaders, Russians and Chinese. Other people think that they want to protect themselves against their own currency going down. When you have 75% of the currency and even more of the high-denomination $100 bills held abroad, you wonder whether these are people we really want to pay. If you get rid of the $100 bills, its foreign holders will be the main losers.

During the Bush administration and the war in Iraq, whole planeloads of shrink-wrapped $100 bills were used to buy off foreign officials and soldiers that are now ISIS. They bought off the Sunni army, they bought off the corrupt gangs, and essentially ISIS has been fueled by these shrink-wrapped billions of $100 bills that the US used to pay them to fight, people who wanted to control their own currency, or groups that want to be independent, such as Syria or Russia. So this basically is an attempt to hurt drug dealers and people who America doesn’t like.

Bonnie Faulkner: I was thinking that banning these larger denomination bills would take a lot of currency out of circulation. It seems to me that it would hurt the-

Michael Hudson: This is not really currency that circulates. It’s like the old joke about expensive vintage wine. Wine prices will go up and once in a while somebody will buy a 50-year-old bottle of wine and say, “Wait a minute. This has gone bad.” The answer is, “Well, that wine isn’t for drinking; that’s for trading.” These $100 bills aren’t meant to circulate. They’re not to spend on goods and services. They’re a store of value. They’re a form of saving.

Bonnie Faulkner: You know, Michael, when I’m in line at, say, Costco here in California – it’s a big, major store – I see people at the checkout counter pull out rolls of $100 bills to pay their food bill with. It seems to me that $100 bills … Well, now that prices of food basically are so high people actually use these bills.

Michael Hudson: That’s correct, but the people who use these bills, that’s only about 10 or 15% of all the $100 bills that are in circulation. The vast majority of $100 bills are abroad, not in the United States. So yes, of course there’s a use here but nowhere near as much as there’s a use for $100 bills abroad.

By contrast, in China the largest denomination bill they have is 100 yen, and that’s maybe $7. So here you have a whole economy working with only a $7 note as the largest denomination. The euro wants to get rid of the 500-euro bill just as the United States years ago got rid of the $1,000 bill because only the criminals used $1,000 bills.

Bonnie Faulkner: Don’t you also think, though, that getting rid of $100 bills is going to hurt the little guy, maybe the guy that’s working for cash under the table, maybe they’re skirting taxes. Wouldn’t banning $100 bills also hurt the people that are on the edge to begin with?

Michael Hudson: It’s not that hard to have two fifties instead of a hundred. It really isn’t that hard to use smaller denominations. That’s why I mentioned China.

Bonnie Faulkner: The price of oil is very low by historical standards. There are even reports of a gasoline glut in addition to an oil glut. Is the low oil price due to speculation or oversupply?

Michael Hudson: High prices can be the result of speculation, and maybe plunging prices can be attributed to the end of speculation, but low prices over time aren’t caused by speculation. That’s oversupply, mainly by Saudi Arabia flooding the market with low-priced oil to discourage rival oil producers, whether it’s Russian oil or American fracking.

Bonnie Faulkner: What does the price of oil have to do with debt deflation? Is there a relationship there?

Michael Hudson: No, it’s different. Debt deflation is when there’s less money that people have to spend out of their paychecks on goods and services, because they’re paying the FIRE sector. Oil going down is a function of the supply and demand of oil in the market. It’s a separate phenomenon.

Bonnie Faulkner: So the oil glut is real, that there’s too much oil?

Michael Hudson: Yes, it’s real.

Bonnie Faulkner: I see. Okay. And then, of course, perhaps the lower oil prices – and you mentioned Saudi Arabia flooding the market with oil – that this could also constitute, do you think, a financial war against Russia and Venezuela? I guess you’ve implied that.

Michael Hudson: That’s why the United States wasn’t unhappy to see this. So yes, it’s a kind of war. Recently, there have been a lot of talks between Russia and Saudi Arabia to try to resolve this.

Bonnie Faulkner: What about fracking and tar sands and new technology in general? What effect does new technology have on the oil price?

Michael Hudson: It increased fracking and therefore it increased the supply of oil and gas, so it’s contributed to part of the oversupply. But because it was very high-priced oil and gas, it has not really been responsible for the flooding of the market. It’s below the cost of fracking production.

In other words, oil now, as a result of the Saudi production, is priced so low that there are not going to be new fracking investments made. A lot of companies that have gone into fracking are heavily debt-leveraged, and are beginning to default on their loans. The next wave of defaults that banks are talking about is probably going to be in the fracking industry. When the costs of production are so much more than they can end up getting for the oil, they just stop producing and stop paying their loans.

Bonnie Faulkner: With the price of oil lower than the cost of production, is this a dangerous situation for the economy in general or not?

Michael Hudson: Not for the economy in general, no. Only for the frackers. I think the less fracking there is, the better it is for the economy and society. You have a choice. Either you can have more oil, or more clean water. Fracking is not good for the water supply. So nothing could be better for the economy than to get rid of fracking. What’s bad for the frackers usually is good for the rest of the world.

Bonnie Faulkner: I had asked you about re-inflating commodity prices, and you said that it’s hard to inflate commodity prices without massive hoarding. How do you mean?

Michael Hudson: In the case of the oil spike a few years ago, there have been a number of studies that have showed that almost all of the demand for oil that suddenly pushed prices up was speculative demand. People began to speculate not only in stocks and bonds and real estate, but also in commodities. The market went up for old tankers, which were used simply to store oil in. A lot of the oil was simply being stored for trading, not used.

The same thing happened in the metals market. Speculators were buying metals simply to store away, thinking that maybe they can push the price up. I remember 50 years ago when the price of silver went up from about $3 an ounce to almost $50 an ounce. At that time, only the small buyers and the Canadians were buying silver, and then it was all left to collapse back to about $3 an ounce. So you have speculative binges in these.

I don’t think that governments should permit speculation in raw materials, because they’re what the economy basically needs. The effect of metals speculation was to push up the prices that China had to pay to countries like Australia. This squeezed China. Once the speculative demand ended, all of a sudden the added production facilities that had been brought into production by the high prices went out of production again, and there was a glut.

Bonnie Faulkner: The price of gold is going back up. To what do you attribute the reversal in gold prices?

Michael Hudson: There are so many currency exchange rate problems that people are buying gold as a safe haven. Right now, gold looks like a safe haven if international exchange rates break down. The United States is pushing as policy division of the world into rival currency camps – the dollar area on the one hand, and the Russia-Chinese-Shanghai Cooperation Organization group on the other, especially now that the IMF has changed its rules. People think that if there are rival currency groupings and national currencies are going bust, we might as well use gold as a safe haven.

Bonnie Faulkner: We did an entire program on the change in IMF rules. That was very important. In terms of these rival currency camps, I guess you see the international financial system breaking down. What do you think the timeline is going to be on this? It’s already starting, right?

Michael Hudson: Probably later this afternoon. [Laughing.] I mean, it’s ongoing. Look at Ukraine. Its currency, the hernia, is plunging. The euro is really in a problem. Greece is problematic as to whether it can pay the IMF, which is threatening not to be part of the troika with the European Central Bank and the European Union making more loans to enable Greece to pay the bondholders and the banks. Britain is having a referendum as to whether to withdraw from the European Union, and it looks more and more like it may do so. So the world’s politics are in turmoil, not to mention the Mideast, where the US has mounted attacks from Libya to Iraq to Syria, and ISIS is attacking governments in today’s pipeline rivalry.

Bonnie Faulkner: Do you think the United States is conducting a financial war against Europe?

Michael Hudson: That’s a byproduct. The financial war is aimed first of all at China and secondly at Russia. Europe is the collateral damage in this, because the natural geopolitical arrangement is for Europe to be part of Eurasia, especially for Germany to develop trade and investment relationships with Russia. But US opposition to Russia and China has entailed sanctions against Russia, and Russia in turn has made counter-sanctions against Europe. So Europe is essentially sacrificing its opportunities for trade and investment in order to remain part of NATO. It is also agreeing to bomb Syria and the Near East, creating a wave of refugees that it doesn’t know what to do with.

It’s amazing that Europe says, “What are we going to do with these refugees?” It’s as if it doesn’t realize that being part of NATO and bombing these countries forces them to choose to live by fleeing, or to stay and get bombed. Europe is creating the flight of refugees that’s tearing it apart politically, and leading rightwing nationalist parties to gain power to withdraw from the Eurozone.

So Europe is acting in a very self-destructive manner, but is doing so because it’s trying to be loyal to the United States. Most of the European leaders look at themselves as having to follow the United States, because if the US opposes them, there will be a regime change.

Bonnie Faulkner: It seems as if the United States is willing to sacrifice Germany and the rest of Europe to conduct this war against Russia and China.

Michael Hudson: When you say the United States, we’re talking about really the neocons and a particular group within the U.S. Government. The neocons are led by the old Bush-Cheney people, including Obama and Hillary Clinton, who is to the right of Cheney. Hillary says that we should go back into Libya, that we should fight even more, and that Putin is Hitler. That means that when she comes to power you can be pretty sure that there’ll be a confrontation. If there is, a number of former generals in America have been warning that the chances of atomic war have never been higher. If Hillary gets in Russia’s going to go on an immediate nuclear alert and there’s a good chance of war. But Hillary is not the United States, although the United States may end up electing her, in which case, in my mind, there’ll be a disaster.

Bonnie Faulkner: Yes, it’s very terrifying, the prospect of her becoming president. She’s very scary. You say that the real economy is suffering debt deflation, and by the real economy you mean goods and services and real production not the asset markets of the 1%. So then, would you say that there are two different economies?

Michael Hudson: That’s the essence of the book that I’m writing. That was what I was describing in The Bubble and Beyond, and later in Killing the Host. Most people think of the economy as producing goods and services and paying labor to buy what it produces. But a growing part of the economy in every country has been the Finance, Insurance and Real Estate (FIRE) sector, which comprises the rent and interest paid to the economy’s balance sheet of assets by debtors and rent payers. More and more money is being extracted from of the production and consumption economy to pay the FIRE sector. That’s what causes debt deflation and shrinks markets. If you pay the banks, you have less to spend on goods and services.

Bonnie Faulkner: You have said that one could even say that China’s slowdown is a reflection of lower exports to the US and Europe as their economies shrink. In what ways would you say that our economy is shrinking? How would you describe it?

Michael Hudson: Well, employment, wage levels and overall wage payments for starters. And then, the shrinking proportion of net income available for spending after paying debts and real estate costs. If you look at payments to labor as a proportion of national income or gross domestic product, you find profits going way up, investment and savings going up. All the growth in the last 10 years of the economy, the rise in national income, has gone to the 1%, not to the 99%.

So when I say the economy is shrinking, it’s the economy of the 99%, the people who have to work for a living and depend on earning money for what they can spend. The 1% makes its money basically by lending out their money to the 99%, on charging interest and speculating. So the stock market’s doubled, the bond market’s gone way up, and the 1% are earning more money than ever before, but the 99% are not. They’re having to pay the 1%.

So there are two economies, not only of the 1% and the 99%, but a division between the economy of consumption and production – consumer spending and tangible capital investment on the one hand – and payments to finance, insurance and real estate on the other. That includes healthcare, insurance, and also FICA wage withholding to produce more of a budget surplus enabling the government to cut taxes on the higher income brackets.

They’re also cutting back pensions. One of the big problems in America’s economic polarization and shrinkage is that pensions can’t be paid. So there are going to be defaults on pensions here, just like Europeans are insisting in rolling back pensions. You can look at Greece and Argentina as the future of America.

Bonnie Faulkner: Do you think that there is another 2008 crash in the making, and if so, will this one look a lot different or will it be very similar?

Michael Hudson: Yes. It’d have to be very similar. The problems of 2008 were never cured. The Federal Reserve’s solution to the crisis was to lend the economy enough money to borrow its way out of debt. It thought that if it could subsidize banks lending homeowners enough money to buy houses from people who are defaulting, then the bank balance sheets would end up okay.

But the volume of debt was never written down. Mathematically, debts grow exponentially at compound interest. Banks recycle the interest into new loans, so debts grow exponentially, faster than the economy can afford to pay.

You’re having this in Europe, causing instability with Greece, Spain, Portugal, even Italy now. And you’re having it here. You’re also having shrinking markets in Argentina, which has just voted in a rightwing government and cut back spending. So you’re having government spending on the economy being cut almost everywhere. That means that the only source of spending for growth has to come from borrowing from the banking system.

Bonnie Faulkner: So then if there is another 2008 crash in the making, you think it will look similar to what then happened?

Michael Hudson: Yes, that’s how it happens. It’ll be yet more real estate going down, more bankruptcies, more government giveaways.

Bonnie Faulkner: I remember at that time, in 2008, the money market froze up. I remember this. It was really alarming.

Michael Hudson: This is why there’s been so much money going into treasury securities. Right now you can buy treasury securities and after you pay the management fees, whether it’s to Vanguard or someone else, you get a fraction of 1%, maybe a fraction of 0.1% in interest. People are putting their money into treasuries because they worry that the risk of putting their money into the bond market, the stock market or even the money markets is very high.

So Vanguard, for instance, which is one of the largest money management companies and best for the people. If you have a retirement account, Vanguard is no longer accepting treasury bond accounts into the overall money market because so much money is going in wanting to play it safe that there aren’t enough treasury bonds to absorb all of this flight to safety.

Bonnie Faulkner: Wow. So then would you say it’s only a question of time before we hit another financial panic?

Michael Hudson: Yes.

Bonnie Faulkner: What do you make of this Panama offshore banking haven that has hit the news?

Michael Hudson: I haven’t followed it that closely, because I’ve been working on completing by the end of the summer the new book that I’m coming out with, J is for Junk Economics. So I really haven’t followed it. Apparently the Atlantic Council and the US Government have wanted to expose certain politicians who are not on its favorite list. So it’s part of a political stunt.

I notice that in the news they keep talking about Vladimir Putin, although he hasn’t been tied at all directly to this. There’s so much propaganda in the way that the popular press has been treating this that it’s hard for me to make head or tail of it.

Bonnie Faulkner: That’s right. The propaganda in the mainstream news is actually quite important, because in order to try and figure out anything, you have to try and decide what’s real and what isn’t. And so much of it isn’t real.

Michael Hudson: I guess the main thing that came out of the Panama Papers was that Ukrainian President Poroshenko had promised to divest of his chocolate company and instead, he simply moved it into an offshore account. And on the very day that he was increasing the attacks on the eastern Donbass region of Ukraine, the export sector, he was signing documents to conceal his own money offshore. So the exposé of the Panama money laundering has hit some of the dictators that America is protecting and promoting.

Bonnie Faulkner: Would you like to describe your new book, Michael?

Michael Hudson: It’s basically a set of definitions on junk economics and showing that what people usually receive in the mainstream is what George Orwell would call Doublethink. It’s euphemism. When people are running up more and more debt for housing, they call that “real wealth.” It exposes what’s wrong in the mainstream economics and why most of the economics that justifies austerity programs and economic shrinkage is in the textbooks is not scientific. Junk economics denies the role of debt and denies the fact that the economic system we have now is dysfunctional.

Bonnie Faulkner: Is there anything that you would like to say that you think is most important for people to understand about the present economy?

Michael Hudson: Just that the economy is being run primarily by the banks for their own interest. The bank’s product is debt, because the banks want to make sure that they can get paid for the debt. But ultimately the only party that can pay the debt is the government, because it runs the printing presses. So the debts ultimately either are paid by the government, or they’re paid by a huge transfer of property from debtors to creditors – or, the debts are written off. Throughout history, the only way of restoring stability is to write down the debts That is treated now as if it’s something that can’t be done. But it’s the only thing that’s going to revive the economy.

Bonnie Faulkner: Michael Hudson, thank you very much.

Michael Hudson: It’s good to be here, Bonnie.

* * * * *

I’ve been speaking with Dr. Michael Hudson. Today’s show has been: The Slow Crash. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend, a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book, Super-Imperialism: The Economic Strategy of American Empire, is a critique of how the United States exploited foreign economies through the IMF and World Bank. He is also author of Trade, Development and Foreign Debt and The Myth of Aid among many others. His latest book is Killing the Host: How Financial Parasites and Debt Destroy the Global Economy. Due out soon, J Is for Junk Economics. Dr. Hudson acts as an economic advisor to governments worldwide, including Iceland, Latvia and China, on finance and tax law. Visit his website at Michael-Hudson.com.

 

Guns and Butter is produced by Bonnie Faulkner, Yarrow Mahko and Tony Rango. Visit us at gunsandbutter.org to listen to past programs, comment on shows, or join our email list to receive our newsletter that includes recent shows and updates. Email us at faulkner@gunsandbutter.org. Follow us on Twitter at gandbradio.

 

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65 comments

  1. hreik

    His book is great. I just finished it. Yves, you are mentioned many times, lauded even.

      1. Dirk77

        Yes. It seems obvious now that he’s mentioned it, but it didn’t strike me really before the connection between easy student loans and soaring education costs. And junk degrees. So sad.

        1. diptherio

          That’s something I’ve gotten a lot of strange looks for: saying that loans for education and housing should be illegal, as it’s largely the availability of finance (with government guarantees, of course) that has caused the prices of these things to skyrocket. I saw a chart of average college tuition since the 70s the other day and it was crazy. It looks like a staircase….

          1. different clue

            As to the cost of State Colleges and Universities specifically, which came first . . . the price rise or the loan increases?

            My memory is that State Governments began boycotting support to their State Universities FIRST . . . under pressure of various tax revolts and so forth. Then the State Universities had to raise their tuitions to make up the unsupported difference. And then various lenders, including Uncle Shark, increased credit to mine the money from a whole new class of debtors. And then Biden and others conspired to make student debt non-dischargeable in bankruptcy, transforming student debt payers into student debt slaves. And then the various lenders, including Uncle Sharkey, increased credit still further to mine the newly legislation-created pool of debt-forever slaves. And State Universities kept raising their tuitions as State governments kept deepening and broadening their boycott against their Universities. Do I have the sequence of events wrong?

            Now . . . did the State Universities also increase their actual net costs by empire building, pharaonic building booms, metatastic Administrationoma, etc.? Does anyone have actual data and history on this?

      2. Sunny129

        Now pause for a few seconds.
        This interview was conducted in April ’16

        Review his comments on the World, Economy, Currency, UK-Europe and the Global commerce after the last Friday events – BREXIT which he never mentioned even once ( if I am wrong, please correct me)

        Everything he has analyzed and the events he anticipates has dire consequences to Global Economy, Mkts and of course top 10% who own most of FIRE sector + 80-90% of Bonds and Equities!

        Repeat of 2008 is more nearer than one thinks!

        1. John Zelnicker

          He did mention it, just once, saying that the movement appeared to be gaining strength. It was right after talking about the rival currency areas, but he didn’t use the word Brexit. He referred to Britain leaving the European Union. That’s probably why you missed it.

  2. Which is worse - bankers or terrorists

    All I want for my birthday is to see Deutsche Bank in liquidation.

  3. hreik

    The relevant 2016 election quote

    Michael Hudson: When you say the United States, we’re talking about really the neocons and a particular group within the U.S. Government. The neocons are led by the old Bush-Cheney people, including Obama and Hillary Clinton, who is to the right of Cheney. Hillary says that we should go back into Libya, that we should fight even more, and that Putin is Hitler. That means that when she comes to power you can be pretty sure that there’ll be a confrontation. If there is, a number of former generals in America have been warning that the chances of atomic war have never been higher. If Hillary gets in Russia’s going to go on an immediate nuclear alert and there’s a good chance of war. But Hillary is not the United States, although the United States may end up electing her, in which case, in my mind, there’ll be a disaster.

    1. Disturbed Voter

      A metaphysical conundrum … is Germany Nazi? Are the Nazi’s Hitler? If we fight Hitler, do we have to fight the Nazis too? If we fight the Nazis, do we have to fight the Germans too? Maybe we could have had Interpol arrest Osama bin Laden or maybe not.

      In the case of so called democratic countries, this is more obscure, compared to a dictatorship like Nazi Germany. In a democratic country, the People are the government, and the government officials work for them, by some kind of delegation. If a democracy commits a crime, can Interpol arrest the whole country?

      1. polecat

        well…if Interpol had arrested Obama bin Lyin, in, say. 09′ or 10′, for crimes against humanity, that maybe we could’ve avoided the mess we collectively find ourselves in !!

    2. pretzelattack

      yes, that really caught my attention. i hadn’t thought about whether clinton is to the right of cheney; could very well be.

      1. readerOfTeaLeaves

        Hillary Clinton elevated Victoria Nuland to the level of Deputy at DoS.
        Nuland had previously worked under Dick Cheney, when he was VP.

        About 18 months ago, the Russians released an online recording of Nuland in a phone call, telling her DoS ambassador in the Ukraine, “F*ck the EU”. Nuland had become pissy about the EU, and wanted it ‘f*cked’, after that august body failed to earnestly support DoS intentions to destabilize the Ukraine.

        To encourage the color revolution in the Ukraine, Victoria Nuland handed out cookies on the Maiden to the ‘revolutionaries’.
        Hard to believe, but there are numerous credible reports.
        Former Secretary of State George Marshall and Former Amb to Russia George Kennan were probably rolling in their graves as Clinton’s right hand gal ‘Vicki’ Nuland was cheering on neo-Nazi’s in their efforts to help destabilize the Ukraine and kill civilians.

        Putin (and others) seem to view this as yet one more effort by the US to foment one more ‘color revolution’ and Russia did not look upon it kindly.

        If you can explain to me WTF the US is doing fomenting ‘revolution’ in the Ukraine (other than serving hedge funds and trying to obtain farming regions by force), then I’d thank you for enlightenment. So far, it all looks very, very dark.

        Victoria Nuland, wife of Robert Kagan, is a neocon, who believes that ‘regime change’ is an acceptable foreign policy.

        Her spouse, Robert Kagan, was an original signer of the seminal PNAC (Project for a New American Century) document ‘A Clean Break’.
        It’s provenance traces to a myriad of sources, including Israelis. I believe that current Israeli PM Netanyahu was also a signer, or involved in its authorship. Many of the people around Dick Cheney, who were critical to getting the US into war in Iraq, were members of PNAC.

        You may wish to google: Nuland, Kagan, PNAC, hedge funds + Ukraine

      1. annie

        hillary brags about being a favorite of kissinger. kissinger is invited to the white house recently by obama. somehow neither clinton nor obama views their fealty as shameful.

    3. P Walker

      Actually, the neocons are the leftovers from what George H. Bush called “the crazies in the basement.” When Clinton became president, he looked around to shore up his weak foreign policy experience and found these guys.

      They’ve been in the White House ever since. They keep coming back. Like a bad case of herpes.

    4. Benedict@Large

      I think Cheney is the wrong comparison. To her, he’s merely a contemporary. Hillary wants to be Henry Kissinger. Henry is a legend in her eyes. The problem is that instead of brains, which Henry had, she has a temper.

        1. FluffytheObeseCat

          What do you get? A misogynist on an internet blog of course. You anti-Clinton whiners are really getting a little too obvious about it lately.

          Which is a damned shame. There are very good reasons to detest Empress-in-waiting Clinton. The shape of her body is not one of them.

          1. polecat

            My point is that she is not fit, mentally and physically, to hold the office of the presidency of U.S.!!

            my statement still stands……she is not fit for office!

            nice try with the misogynist shaming!…go back to your safe space..

  4. Blunt

    hreik, it seems that in your mind there is already a disaster.

    Please explain sensibly and in detail how Hillary Clinton is to the right of Dick Cheney. Thanks.

    1. Archie

      Uhh, Michael Hudson said it, not hreik. And if you read the entire quote you’ll see why Hudson feels that way.

    2. ScottW

      “Please explain sensibly and in detail how Hillary Clinton is to the right of Dick Cheney.”

      For starters, you should read, “How Hillary Became a Hawk,” in the pro-Hillary NYT’s. http://www.nytimes.com/2016/04/24/magazine/how-hillary-clinton-became-a-hawk.html?_r=0

      Maybe your point is no one can be to the right of Dick. But does being aligned with Dick’s interests, admired by other neocons, and in the mutual admiration club with Kissinger give you comfort?

      I remember when the neocons under Papa Bush were relegated to the closet because their policies were considered crazy and dangerous. With Hillary’s election, we will see the bipartisan acceptance of neocon foreign policy, as her supporters do what they did when Obama expanded targeted killing by Drones. Support the policies because they identify with their proponent.

      So does it really matter if Hillary is to the “right” of Dick?

        1. Marco

          Boggles the mind. Another reminder that any self-respecting liberal (not just progressive…nor leftist) should ever vote for her.

          1. readerOfTeaLeaves

            This is an admission by the neocons that Hillary is their best hope.
            Nothing more; nothing less.

    3. diptherio

      Besides of foreign policy, Cheney at least had an understanding of MMT…”deficits don’t matter” is something it’d be nice to hear a Democrat say every once in awhile, you know?

      1. Benedict@Large

        I doubt Cheney ever had a sense of MMT. What I think is that Cheney had noticed that for all the clamoring about deficits, nothing bad ever seemed to come from them. In turn, he figured that running up bills on his wars would not matter, and so felt free to do so. But for understanding why “deficits don’t matter”? No, I don’t think he ever had a clue. He just knew they didn’t.

      2. different clue

        Cheney was merely telling that to Dubya in order to ease Dubya’s mind about huge deficits. That doesn’t mean Cheney believed in MMT. It may mean that Cheney supported the Grover Norquist “starve the beast” agenda whereby Government would be put into so much debt as to never be able to pay it back except by selling all the National Forests, National Parks, BLM lands, Taylor Act Grazing Lands, National Wildlife Refuges, all the paintings in the National Gallery, all the minerals in the Smithsonian Museum, all the books in the Library of Congress, etc. etc. to private buyers.

        Maybe THAT is why Cheney told Bush that “deficits don’t matter”.

    1. sharonsj

      Thanks for the link; it is a fascinating article. My question is: Will Americans finally revolt and will it be violent or non-violent?

  5. Carla

    “When you pay a debt to the bank, the banks use this money to lend out to somebody else or to yourself. ”

    Did Michael Hudson really say this?

    Now I’m totally confused.

    1. Buck Eschaton

      I was just going to ask about that too. I really like Michael Hudson and I’m trying to keep MMT straight, but he often leaves me with these head scratchers.

    2. Alex Hanin

      Same here. I read his latest book, and he repeats that banks lend out the money being repaid. Not sure he means that literally.

      Any clarification would be most welcome.

    3. Carla

      Here’s more:

      “The 1% makes its money basically by lending out their money to the 99%, on charging interest and speculating.”

      And here I thought I had learned that the 1% makes its money by CREATING it, then charging interest on and speculating with it.

      Mr. Hudson, do the 1% really lend us their money?

        1. Carla

          That’s what I said. They do both. And more: they also charge fees for each transaction, creating the frosting on the … gravy.

          But what they don’t do is risk any of their own “assets” (or asses). God, no. Can’t have that.

      1. Jamie

        Can’t pretend to know what Hudson means by this, but the way I understand it is that people (or corporations) with piles of “extra” cash they don’t need invest it. Since virtually no one is spending on increasing production, much of that “investment” is going into financial speculation… i.e. debt. After all, Bill gates does not use his dollars to stuff his mattress. But if he buys, say, stock in Exon… since Exon is sitting on billions of cash reserves, he is not contributing to the capitalization of new production… so where does that money go? Except for a tiny proportion that does go into funding new facilities and production, ultimately it goes into some form of debt creation. That certainly can be construed as the 1% “lending” the 99% “their” money.

    4. hreik

      If I understand correctly (a big if, as I’m new to MMT) the way the bank makes money is to lend it out, with interest. So if you repay your loan or part of it, the bank turns around and lends that amount out again. Why? to make more money. They’d rather lend out the $100 with interest than have it sit around languishing and not making money. The bank doesn’t care to whom they lend it (w/in reason) so if you are a good risk, they’ll lend it right back to you………. or Zelda. They don’t care.

      I might be wrong…. I often am.

      1. Jamie

        I think you’ve got the basic idea, but:

        the way the bank makes money is to lend it out

        Implies that the bank must first have dollars to lend. What actually happens is that the bank creates the dollars it lends, so it doesn’t need to have them in hand first. It can make loans (temporarily creating more dollars) to the limit of its capitalization (by regulation, not by math or physics). Repaying a loan creates space for more lending and paying interest provides a cushion against defaults, pays the bank employees and operating expenses, and, if there’s any left over, allows for an increase in the capitalization leading to the ability to make more loans.

        1. different clue

          Here is where we play Big Credit’s game by Big Credit’s rules . . . . it seems to my utterly lay amateur self.

          Big Credit in general and its chartered and licensed public interface entities in particular are legalistically empowered to emit and release these credits to the rest of us. It costs them zero to do so. They simply decree them into existence.

          But yet we all accept these credit units as if they actually have “value” and are worth their “stated price” in whatever commodity or commitment of time is measured in these “units” of “value”. NOW . . . .IF! we were permitted to emit our own personal willed-into-existence “units” of “value” to pay the lender back with, then we could be playing the same game as Big Credit. But WE are not aLLOWED to do that. No! WE . . . must “earn” the “right” to possess any of these “units of value” by exchanging actual things or actual labor-per-unit-time to get any of these “units of value”. Only THEN can we pay our “units of value” back to the lender. Plus interest denominated in these same “units of value”. The creditor class benefits from the actual things or worktime we have produced and can buy some of them with units of value which cost them zero work and zero things to emit because the law is written to allow them to do that.

          We can somewhat short circuit a little of that process by using what units of value we possess which are symbolized by physically possesable coins and bills and notes. We of the non-creditor class could not get these units till we bought them with things or with work.
          So we didn’t “cheat” to invent them for free. We thinged or worked to earn them in exchange for their actual value-equivalent in things or work. And once we have them, we can sell these physical symbols of unitized value directly to other people in exchange for their things and/or work. That is the “medium of exchange” use of money. The more we could do bussiness exchanges with eachother in work and things for money and money for work and things, the less we might need to seek new credits from lenders which we would have to pay back in real wealth. Real wealth which is a totally free totally unearned free gift/ free lunch to the lender of the imaginary invented-on-the-spot units of credit.

          No wonder Big Credit wants to abolish cash. They want to stop people entirely from exchanging value for money for value directly without paying a toll to Big Credit or giving
          Big Credit the earned-money-equivalent of free unearned gifts in return for Big Credit’s imaginarily invented units of value. Big Credit would also like to abolish barter if it could, all the way down to “I give you X vegetables from my garden if you mow my lawn Y times.”

  6. Chauncey Gardiner

    Thank you for posting this wide ranging interview from April. The huge global debt overhang is perhaps the central issue of our time.

    Particularly interesting that student loans are a rapidly growing new category of debt that are not specifically dischargeable through bankruptcy and that provide a state-enforced policy mechanism for not only increasing debt-based money; but for wage suppression, social control, justifying austerity policies, and for further increasing the wealth of a small percentage of the population to the detriment of the vast majority. That the degrees from many of the for-profit colleges are virtually useless is also essentially fraud IMO.

    That the incremental money from debt growth is being largely channeled into purchases of financial securities, real estate, high end art, and other nonproductive purposes favored by the One Percent is reflected in the long-term decline of the velocity of money since the Reagan administration. Dr. Hudson’s prescription of debt writedowns would likely decrease prices of those assets in the short term, but would be beneficial to the real economy.

    It was unfortunate that Dr. Hudson did not pursue the interviewer’s lead when she opened the Panama Papers door to discussion of tax code and criminal law revisions to address the enormous wealth disparity and income inequality that have resulted from legacy monetary and globalization policies.

  7. NeqNeq

    the student may get the junk degree, but doesn’t get a job, so they don’t pay the loan.

    What is a junk degree? Is not getting a job sufficient for having a junk degree? Does the job have to be in the field of the degree? Is a bachelors degree junk if working in the field requires a graduate/professional accreditation? Is a degree junk if it does not come from the ‘right’ school? This sounds more like dog whistling and doesn’t even matter to his larger conclusion.

    QE is still going on. It means a zero interest-rate policy. The aim is to hold interest rates low at 1/10 of a percent. The Federal Reserve continues to make sure that interest rates are low, so we still have near-zero interest rates.

    Saying QE means zero interest rate policy is pretty misleading. It conflates the intended consequences of a thing with the thing itself. The fed could set rates at 3% and still technically engage in QE, although one might wonder if it is rational to do given that they could just lower the rate.

    Second, what purpose does the statement “The Federal Reserve continue to make sure that interest rates are low, so we still have near-zero interest rates” serve? If he was making some point I am unclear about what it is.

    I admit I did not read the entire interview because it was ahorror-show argumentatively. All I have seen of Hudson is the odd interview and excerpt and perhaps that format limits what/how he can say what he wanyts to say. Is his longer form, or academic, work more precise and better argued?

    1. Auntienene

      For-profit colleges have been popping up like mushrooms for the sole purpose of soaking up student loan money.

      1. NeqNeq

        I assume that is in response to the junk degree questions I had. But, to be honest, I dont see the relevance. Can you expound on your statement?

    2. Pepe Aguglia

      What is a junk degree?
      A degree that confers little if any economic benefit (broadly defined).

      Is not getting a job sufficient for having a junk degree?
      No

      Does the job have to be in the field of the degree?
      No

      Is a bachelors degree junk if working in the field requires a graduate/professional accreditation?
      No (because you generally can’t get graduate/professional accreditation without a bachelors degree)

      Is a degree junk if it does not come from the ‘right’ school?
      No

      For-profit colleges are essentially diploma mills. They’ll grant degrees to anyone who pays tuition. If you earn a degree without learning enough to justify the cost of the degree, you’ve got a junk degree.

  8. ewmayer

    Excellent interview overall, just a couple of quibbles:

    Bonnie Faulkner: All sectors of the economy are certainly not deflating, that is if we’re going to talk about prices narrowly. What about the housing market? Are we looking at a housing bubble?

    Michael Hudson: Certainly not a bubble yet. You still have 25% of American homes in negative equity – that is, when the mortgages are higher than the market value of the housing. So for many people, the mortgages they took out before 2008 are so high that they would be better off walking away from their houses.

    Those underwater mortgages are *not* a “no bubble” indicator … they simply represent mortgages taken out near the peak insanity of the previous bubble, with the resulting debt not yet having been forced/permitted to deflate. The current reflation-bubble is simply not as uniform nationally as the last one, thus significant parts of the country have not seen housing prices recover to 2007-8 “peak nuttiness” levels. At the same time major locales (e.g. NYC and Bay Area) have far surpassed the previous bubble’s crazy levels. Hudson would do well to compare 2008 price/income levels averaged nationwide (or perhaps as a census of major metro areas as Zillow does it), to now, and to look at both in the context of the long-term historical trend. Does Hudson think it a mere coincidence that the household formation rate is at historically abysmal levels? It’s not only the mountain of student debt causing that.

    Bonnie Faulkner: What does the price of oil have to do with debt deflation? Is there a relationship there?

    Michael Hudson: No, it’s different. Debt deflation is when there’s less money that people have to spend out of their paychecks on goods and services, because they’re paying the FIRE sector. Oil going down is a function of the supply and demand of oil in the market. It’s a separate phenomenon.

    Not separate at all … the 99% having less to spend on everything but debt service –> economic slowdown –> less demand for things that need oil to manufacture and transport.

    Lastly, I got a good chuckle out of whatever robo-transcriber came up with “the Ukrainian currency, the hernia”. :)

    1. craazyboy

      Yeah. How can anyone be in the mood for sex when you got a $150k student loan and in the only places that have jobs a tiny house in a slummy area costs half a million.

  9. Jamie

    There’s lots of interesting things here, but I found this particularly interesting:

    The United States is pushing as policy division of the world into rival currency camps – the dollar area on the one hand, and the Russia-Chinese-Shanghai Cooperation Organization group on the other, especially now that the IMF has changed its rules.

    Can anyone point me to articles that might illuminate the whole “rival currencies” thing?

    1. different clue

      Why would the Lords of U S Dollar want to do that? Wouldn’t they deny themselves privileged access to the real resources of the whole Rival Currency Area?

      1. Jamie

        I admit I’m out of my depth on this, but my current understanding is that it has something to do with the advantages of being the “reserve currency” for the rest of the world. Perhaps the nation who’s currency is accepted as the world’s reserve currency can deficit spend a greater amount before running into problems with inflation, because so much of the currency is drained from the domestic sector and ends up basically sitting on the sidelines?

  10. Sunny129

    Excellent post!

    Now pause for a few seconds.
    This interview was conducted in April ’16

    Review his comments on the World, Economy, Currency, UK-Europe and the Global commerce after the last Friday events – BREXIT which he never mentioned even once ( if I am wrong, please correct me)

    Everything he has analyzed and the events he anticipates has dire consequences to Global Economy, Mkts and of course top 10% who own most of FIRE sector + 80-90% of Bonds and Equities!

    Repeat of 2008 is more nearer than one thinks!

  11. cripes

    NeqNeq–is he being obtuse about the for-profit-college fraud, or has he been living under a rock for the past, oh, 15 years or so?

    It’s no secret that for profit colleges are churning out junk diplomas, at outrageous cost, by hard-sell tactics, that wouldn’t get you a job at the Gap, and have huge default rates.

    But who cares, if it’s backstopped by federal student loan guarantees?

    The profits are so enormous, that the Washington Post makes more money from their for-profit “education” subsidiary that it does from operating one of the two most influential papers in the country.

    “The Washington Post Co.’s Kaplan unit and four other for-profit colleges are being investigated by Florida’s attorney general for possible misrepresentations about financial aid, recruitment and accreditation.”

    “The other schools under investigation include Education Management Corp.’s Argosy Education Group Inc., Education Affiliates Inc.’s MedVance Institute, Apollo Group Inc.’s University of Phoenix and Corinthian Colleges Inc.’s Everest College, according to Wiggins.”

    So, yes, this is very large scale fraud, soaking the taxpayer to guarantee defaulted loans and saddling low-income students with undischargeable debt for fraudulent degrees, all in the effort to extract social wealth through debt, or debt deflation, which is Hudson’s main topic. Fraud so bad, even the feckless Obama has created and funded an investigative body. Fraud so bad that thousands of students have brought formal fraud claims against these criminals.

    “The Obama administration plans to boost the federal government’s power to investigate and punish colleges accused of deceptive marketing tactics and other misconduct, part of a campaign to address years of student complaints about for-profit institutions.

    Under a plan announced on Monday, a new Student Aid Enforcement Unit within the Education Department will be given a broad mandate to investigate claims of “potential misconduct or high-risk activity” from a college or university.”

    The conclusion that these parasites are churning out junk diplomas at huge cost, back-stopped by the federal government, and trapping victims in lifetime high-interest debt is a fact, and not in any way controversial.

  12. Gaylord

    There’s a reason the banks adamantly refuse to write down the debt: resource scarcity. The banksters know about Peak Oil and Peak Water and Peak Minerals and Population Overshoot and, most dangerous of all, Abrupt Climate Disruption due to global warming. All of these factors mean a contracting economy and massive costs to recover from the impacts of climate disruption. They have no solution other than to keep the scheme going as long as possible, because there is no solution! Industrial Civilization is a heat engine and we have irreparably overheated the earth’s climate moderating system, which leads to mass extinction. So, I suggest we give up on “economics” as a solution to anything.

  13. Russell

    After reading Killing the Host I determined the US people ought demand USPO Service banking.

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