Michael Hudson: Debt Deflation in America

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Edited Interview by Bonnie Faulkner September 2, 2011 (first aired on Pacifica, September 14, 2011).

“Without consumption, markets are going to shrink. Companies won’t invest, stores will close, “for rent” signs will spread on the main streets and local tax revenues will fall. Companies will lay off their employees and the economy will shrink more. Why aren’t economists talking about these effects of debt deflation, which are becoming the distinguishing phenomenon of our time? They advocate giving more money to the banks, hoping that somehow everything will be okay, as if the banks would lend out the money to fund new production and employment. Mainstream economics and political leaders in both parties are failing to ask why the banks are using these giveaways to speculate abroad, pay their managers bonuses and high salaries or to pay dividends rather than to lend to small businesses or do other things to actually get the economy moving again. This phenomenon cannot be explained without seeing that debt service is siphoning off revenue into the financial sector, which is not recycling it back into the production-and-consumption economy.”

Michael Hudson, let’s start by talking about Germany. Angela Merkel is to attend an important European Union meeting on September 7. What is going to be discussed?

The Bundestag is meeting to discuss how the German courts will rule on whether the European Central Bank (ECB) and the German government can bail out Greece and Portugal by buying the bonds of their governments directly, or whether the German Constitution prevents this. The European Union is having a similar discussion over what has become a constitutional crisis over whether the ECB should buy these government bonds.

The problem is that Germany and the EU are constitutionally blocked from doing this. Their banks have perpetuated the “road to serfdom” myth that a central bank runs the danger of fueling inflation if it creates money – in contrast to commercial banks, which supposedly run no such danger if they create money on their own computer keyboards. It is not considered inflationary for them to charge interest to the government, which then needs to pay by taxing the economy at large.

When you find this kind of distortion being popularized and even written into law, there always is a special interest at work. The supposed contrast between “bad” central banks and “good” commercial banks is a lobbying effort seeking to monopolize credit creation in the hands of commercial banks, by promoting a travesty of how central banks are supposed to act.

The reality is that commercial banks have fueled an enormous asset-price inflation in recent years. The debt they have created imposes an interest burden that deflates the economy – even while adding to the cost of living and doing business. Meanwhile, central banks monetize government deficits that are supposed to spur recovery, not simply be giveaways to financial institutions and other vested interests.

Unlike the United States and England whose central banks were founded to monetize the government debt so that they wouldn’t have to pay interest, the EU’s Maastricht and Lisbon Treaties rule that the European Central Bank must be independent from the government – which means in practice, acting on behalf of the commercial banking monopoly. They must avoid creating “inflationary” credit (any money at all that takes business away from the commercial banks) by not buying government debt. The ECB is to serve the commercial banks only. It can create money to bail them out, for them to give away, to lend out, to pay dividends or to pay their own salaries and bonuses. But it cannot fund government operations. It must starve the governments to make them entirely dependent on commercial banks.

The effect, of course, has been to create a captive market for the banks. It enriches them at taxpayer expense – needlessly! Whether a bank is private or public, money and credit are created electronically on computer keyboards. So it is a myth that government money is more inflationary. But this myth has a political function reflecting private self-interest: it blocks the “public option” of creating money without paying interest to banks which have obtained the privilege of creating credit freely. They are not lending out peoples’ savings deposits, but are creating deposits much like they used to print bank notes. They then look for customers willing to pay interest.

Governments are the largest borrowers, and under normal circumstances are the safest clients because they always can print the money. That is one of the three basic criteria of statehood: being able to create money, levy taxes (whose payment gives value to the money being created), and declare war. But as written by bank lobbyists, Europe’s constitution deprives the continent of the money-creating function. That is why its economy is shrinking, and why its own commercial banks are now suffering. Their business plan has created a continent-wide financial short-circuit.

Angela Merkel wants the German government and the ECB to buy the debts of Greece and Portugal and other countries in trouble, because otherwise they’re going to default. This would mean losses for the French and German banks have bought these governments’ bonds. As governments are unable to roll over their loans – that is, to re-borrowing the funds as past borrowings fall due – banks and other investors insist on much higher yields to compensate them for the risk of default. They also buy default insurance, paying a premium over the interest rate that governments pay. But the investors and guarantors then turn around and demand that the government take all the risk and promise to bail out the governments – leaving the banks with large interest premiums while taking insurance speculators off the hook. So there is an underlying hypocrisy at work.

If governments default on these bonds, the banks will lose money. So the banks are now saying that they’re sorry they insisted that the ECB not create money. Creating it to pay the banks turns out to be a good thing, they say. It’s only bad if it benefits labor and employers instead of the financial sector.

Mrs. Merkel insists that she has no qualms at all about pushing Greece and other debtors into poverty and demanding that debtor economies act as defeated countries and forfeit their land, their water and sewer systems and even the Parthenon to the creditors as if they were conquered militarily. So the question is whether Germany and Europe can do this without an army, as used to be the case.

Greek labor unions and citizens are protesting and holding general strikes to protest the fact that the EU is turning out not to be the peaceful and basically socialist project anticipated half a century ago, when the European Economic Community was formed in 1957. It is a financially bellicose, extractive attempt to create a financial oligarchy and impoverish Europe, stripping the assets of debtors to pay creditors. This partly explains why Mrs. Merkel is finding such opposition even in her own right-wing party. Many Germans do not want to see themselves taxed to bail out their banks for the reckless lending these banks have made – and the even more reckless “road to serfdom” ideology that prevents EU governments from financing their own budget deficits. The euro is threatening with being pulled apart by the greed, short-sightedness and ideological extremism of the anti-debtor, anti-labor neoliberals who have gained control of the legal system and much of the political system.

European banks have the same fallback position that U.S. banks had here in 2008 after Lehman Brothers failed. They are threatening to wreck the economy if the government doesn’t save them from taking a loss on loans gone bad as a result of the over-indebted economy. They have the power to disrupt the payment system and hold the economy hostage if the government doesn’t take their losses onto the public balance sheet.

This is what Ireland’s government did, bailing out the banks for blatantly crooked loans (that turn out to be worth only about 22 cents on the dollar) and making taxpayers pay. The reality, of course, is that the banks have enough assets to pay their retail depositors. But they can’t pay the wealthiest layer of depositors at the top of the economic pyramid. The financial core institutions say that they are the economy. In practice, that means financial wealth-holders. So what you’re seeing today as a purely technical financial crisis is actually a stage in the class war. The financial sector’s tactic is to threaten to wreck the economy if politicians don’t surrender and strip the economy bare to pay the creditors. This is its weapon of mass financial destruction.

The bankers who wrote the ECB constitution followed up their mess with mass fiscal destruction. The EU treaties limit governments to running budget deficits of only 3% of GDP. This blocks them from counter-cyclical “Keynesian” spending to pull their economies out of depression. So these economies are now able to “grow their way out of debt,” any more than they can borrow their way out of bad debts. Their hands are tied, fiscally as well as financially.

No wonder there is talk of the Eurozone breaking apart, polarizing between creditor and debtor economies – which in turn are polarizing domestically as creditors seek to cap their victory by reducing their labor and industry to debt peonage. The fact that all this is being done with the trappings of political democracy and an “informed electorate” no doubt will strike future historians as remarkable.

Needless to say, a political split has developed in Angela Merkel’s own party over whether Germany should go along and help buy the debts of countries running fiscal deficits so as to support the banks. At issue is whether governments and the EU should put the interests of the banks and wealthy investors first, or the economy at large. Should governments be permitted to do what governments are supposed to do, and create their own money to spend? That is what the Bank of England was created to do in 1694, and the U.S. Federal Reserve in 1913. Or should Europe resist this “public option” and let only private-sector banks create credit? That would put the narrow layer of wealthy individuals first, sacrificing the economy. But so far, that has been the policy choice.

If your listeners are trying to follow the news in Europe they should realize that the morality of European finance and economics is different from that of the United States. Here, states can go under – like California, or Alabama with the problems it’s having in Birmingham – but the federal government will say that this is a local problem that does not concern Washington. There is no federal liability for state and local insolvency.

For example, I understand that yesterday, September 1, Republicans in Congress blocked the spending of federal money to help the victims of the hurricane on the East Coast. Republican leaders insist that the federal government not spend any money to help unless it cuts spending somewhere else – preferably in Social Security. This is unthinkable in Europe. Germans have explained to me that their government always supports or bails out the city of Berlin, which runs a chronic deficit. There’s a feeling that national governments have to support their states and the cities as part of a basic mutual aid ethic.

The question now before Europe is whether this principle of a government supporting a poorer region – such as Italy has supported the southern Mezzogiorno for 50 years – should be applied on a continent-wide level. Should Europe’s rich nations take responsibility for supporting other countries, or should they be treated as completely separate? So the political and social character of Europe is now being determined. Unfortunately, what really is at stake is bailing out the rich, not the poor – saving the financial markets that have profiteered from government deficits and now want to avoid taking a loss on the unworkable plan their short-term self-interest has created.

This is what really underlies the debate about whether the European Union overall or its individual governments can issue debt: What is going to happen to the banks that hold these bonds? Will populations be taxed to save them?

If the government is going to bail out banks, then why shouldn’t banks be public in the first place? What is the point of having banks private – if wealthy creditors are to be given absolute priority over everyone else, over governments and over the economy to the extent of shrinking it deeper and deeper into depression until all Europe looks like Latvia?

European banking is different from that in the United States. The Federal Reserve can create as much money as it wants to fund the U.S. Government spending. But no continental European central bank monetizes public deficits. Instead, Europe relies on banks and insurance companies to do this. They are required under the law to hold a specific portion of their reserves in the form of government bonds. So now they’re stuck with the prize they’ve obtained.

Their right-wing ideology has blocked governments from being able to create the money to pay them. And they’ve already lost huge amounts on their bad real estate loans, so many banks are so close to insolvency that U.S. banks and others are closing down the credit lines that have been keeping these banks afloat.

So the EU meeting will discuss whether the European central bank should buy government debt, should buy bonds of Greece, Portugal, Spain, Italy and other governments that have big fiscal deficits. Who exactly is to buy these bonds?

The European Central Bank, possibly backed up by the governments of Germany and perhaps France. They will create Europe-wide debt to replace the bonds of countries that have difficulty paying and are unwilling to tax property or the rich to balance their budgets. Technically, this is to be done by expanding the European Financial Stability Facility (EFSF) to go far beyond its supposed ceiling of €440 billion. It would issue the equivalent of a eurozone bond – which Mrs. Merkel and others are opposing, and which the German courts apparently are blocking in principle.

Is the European Central Bank part of the government, or is it privately owned?

It’s government-owned, but Europe’s governments themselves are being privatized by a financial oligarchy. The Europeans can’t imagine a private central bank – at least, not yet. So it is a government body, but it’s independent of the government. It’s run by bank officials, not by elected officials or by parliament, although its heads are appointed by parliament. So the situation there is very much like the Federal Reserve here. Bankers in effect have a veto power over any bank officer that does not act as a lobbyist to defend their interests vis-à-vis the rest of the economy.

The kind of administrators that are going to get appointed either to the U.S. Federal Reserve or to the European Central Bank are those with financial experience that can be got only by working for the big banks. Heads of the Federal Reserve, for example, are basically appointed from Goldman Sachs to act as their lobbyist, as Tim Geithner did when he ran the Federal Reserve Bank of New York. His first concern was to bail out the big banks and Wall Street, shifting the loss onto taxpayers.

The kind of people who are appointed to any central bank are former bankers who have the worldview of the financial sector – or brainwashed professors such as Ben Bernanke at the Fed. Their worldview is that no matter what happens, the banks have to stay solvent for the economy to operate. But this view shrinks the economy keeping the debts in place, so that is the basic internal contradiction at work.

Well, the banks now, if they’re buying a bond of Greece or somewhere else, all of a sudden they have to pay huge risk insurance premiums in order to protect themselves against the fact that Greece may simply say, “Look. We don’t have enough money to pay the bonds.”

And this brings up the other moral issue that’s being talked about here. To what extent should a country impose austerity and even depression on itself – more than a great recession, an entire lost decade on itself – simply to pay interest to bondholders who’ve been financing a fiscal system that hasn’t really taxed the rich in Greece?

The countries that are in trouble were fascist at one point – Spain under Franco, Portugal, Greece under the Colonels. Right-wing military dictatorships put in place tax systems that favored the rich and avoided taxing real estate or financial wealth. You could think of these tax systems as the Republican Party’s dream, or for that matter that of the Obama Administration’s Wall Street backers. Shifting the tax burden onto labor and industry seems to be the direction in which the world is heading these days. That is what is causing such trouble for countries going neoliberal, that is, favoring a financial oligarchy.

What does the Lisbon Treaty prescribe?

It says a number of bad things. For starters, Eurozone members – that is, countries using the euro – should keep their budget deficits within three percent of GDP. This blocks them from running a countercyclical Keynesian policy. What governments should be doing to pull economies out of depression in Europe and America is to run deficits to restore employment and markets. But the deficits that Greece, Portugal, Spain and Ireland have run up in past years have obliged more and more of their budgets to be paid in interest. These payments, along with rising the subsidies to the wealthy and to the financial sector, are crowding out social spending. So their economies are shrinking – and polarizing at the same time.

Are there laws to restrict the European Central Bank from how much debt it buys?

Yes. It’s not allowed to buy government debt. It exists to help private banks, not governments or the economy as a whole. The economy exists to provide a surplus to the financial sector, not the other way around.

Then why are they discussing the purchase of government debt right now?

Because Angela Merkel recognizes that if the ECB or the EFSF do not somehow change their rules to buy government debt and lend money to the PIIGS – Portugal, Ireland, Italy, Greece and Spain – then they’re going to default on their bonds or simply write down their debts. That’s what the Greeks are rioting about as a class war of the population against the financial sector breaks out in full force. And governments pay less on their bonds or simply say that they cannot and will not pay, then it will be obvious that leading French, German and other banks lack the reserves to back their deposits and financial gambles. Other banks will not lend to them, and they will go under. And to avoid this, they will do everything they can to cause a crisis to wreck their economies, and then blame the wreckage on the failure of governments to “act responsibly” and sell off whatever is in their public domain, Thatcher-style, to save the “poor rich” – epitomized by widows and orphans living off trust funds.

What you’re saying, then, is that Angela Merkel is proposing a constitutional change in Europe.

That’s what’s involved. But it’s as hard to change constitutions in Europe as it would be in the United States. So in effect, they’re proposing that the European Central Bank and European Financial Stability Facility simply ignore the constitution.

Has the European Central Bank ever done this in the past?


So this would be a break with the past.

Yes, a break with the past. For instance, Christian Wulff is Germany’s president. He was elected on a platform of “fiscal restraint.” Last week he warned that the European Central Bank is going beyond its mandate by purchasing Spanish and Italian government bonds. He said that this rush towards a fiscal union is striking at the very core of democracy. If Europe is going to act against its constitution, decisions have to be made in parliament in order to be politically legitimate.

So the basic question concerns just who is to make European financial and fiscal policy. Is it the Constitution? Governments? Who is decide whose debt to buy, and how much?

On September 7 the Constitutional Court in Germany will rule on the legality of the European Union’s bailout policy. Investors are wondering how it will rule. That’s why the stock market is plunging, and why the euro is under such pressure and falling.

[As matters turned out, the Court permitted the purchases made so far, but blocked further bailout spending.]

If the Constitutional Court rules that the 440 billion euro – about $600 billion – rescue fund breaches treaty law or undermines German fiscal sovereignty, this will post the question over whether the country wants to expand the half-baked monetary union into a fiscal union. If not, what does that mean for the EU as currently mal-structured?

The problem is that the EU has been turned into the opposite of what it was in the beginning. Back in the 1950s it was created by Social Democrats and Socialists who wanted to save Europe from ever going to war again within its own borders. The left took leadership. But as financial and monetary union has risen to the fore since the 1980s, the continent has become more right-wing. Planning has been shifting out of the hands of government and elected officials into those of bankers, especially through their proxy in the European Central Bank. What now is at issue is whether Europe will be run for the bankers and financial sector or for the population at large. So far, Angela Merkel has worked with Nicolas Sarkozy to try to represent the bankers’ position, not that of political democracy.

Is there public opposition to bailing out the banks in Germany and the rest of the EU?

Sure. Many voters believe that economic recovery should come first, and that banks and the financial sector should serve the economy. Government budgets should be spent on social programs, not mainly on bailing out banks. If there’s a crisis because of bad fiscal policy stemming from the rich blocking taxation of their own wealth and property Greece and other post-dictatorship countries, the solution isn’t simply to lend them enough to subsidy this regressive tax policy. It’s not to tell Greece to sell off the Parthenon and other tourist sites for privatizers to buy on credit and pay the rental value to the banks. It would be a reversal of the past few centuries of European reform to carve up the public domain and sell it to the interests that organize financial backing. This would turn bad fiscal policy into a victory for the privatizers. Europe would go Thatcherite and Blairite. The Greek colonels would have “won the peace.”

The moral hazard problem is that banks, investors and speculators rely on governments to bail out their bad bets that in turn reflect a self-defeating business plan to load economies down with debt and extract the entire economic surplus as debt service – and then foreclose and get one’s capital back via privatization sell-offs.

It’s the same in the United States. Most American voters said they were against the bailout. Even Republican Michelle Bachmann has made a big point of having voted against it in September of 2008. So politicians have said that they are against further bailouts. But Treasury Secretary Tim Geithner and the Federal Reserve are saying that Washington may indeed have to bail out the banks again. It’s as if they can keep squeezing enough out of the economy to pay the financial sector to make up for the losses that its debt-deflation business plan is causing.

Earlier you said that Europe’s banking crisis wasn’t as severe as it is in the United States. I had thought it was worse.

There are a number of differences. There hasn’t been the wholesale financial mortgage fraud in Europe that flourished in the United States – except in Ireland, where they found the average mortgage to be worth only about 20 or 22 cents on the dollar, especially with Anglo-Irish Bank and the Royal Bank of Scotland there was a huge fraud. But in Continental Europe there was less fraud – merely over-lending against property, in the context of a fiscal policy that taxes labor and industry rather than land or natural resources and gives tax subsidy to debt financing.

Only now are Europeans having the discussion that they should have had 10 or 20 years ago. Nobody wants the Greeks and Portugal to starve. The question is, what’s the best way to help them? Is it simply to give money to their governments? They would simply pay their bankers. Supporting bond prices by buying bonds in the market would reward speculators. If the aim is to support Greece, why include the financial sector or gamblers?

Treasury Secretary Geithner is reported to be pressuring the Europeans to bail out the banks because Goldman Sachs and others American banks have gambled that Greece and other countries can pay, and written default insurance. It seems that if these U.S. banks lose the bets that they’ve made, they’ll go under and Washington will have to bail them out. So Mr. Geithner is telling Europeans to sacrifice their economies so that U.S. financial casino gamblers won’t take a loss. This did not go over very well in Europe.

Are you referring to the credit default swaps that U.S. banks hold, and the insurance policies they have written against European bond defaults?

That’s a big part of the problem, along with lines of credit. Throughout Europe and the United States most banks have lines of credit with other banks. Just as individuals have overdrafts with their bank, most banks have credit lines with numerous other banks. Right now, banks are canceling their lines of credit with many European banks, because nobody knows really what bank balance sheets are worth. Europe has been as lax as U.S. authorities in conducting “stress tests” to get honest reporting. Banks are allowed to fiddle with their accounting practice so much that most analysts view them as being pretty fictitious.

So if a bank finds out that you’ve lost your job or that you’ve been misrepresenting your income they’re going to say, “I’m sorry. We’ve got to lower your credit card amount from $10,000 to $2,000,” or “We’re canceling your credit card.” Well, that’s what the American banks are doing to the European banks. So all of these lines of credit that are all created on a computer keyboard are being canceled and that’s creating a balance sheet problem. So that’s why people call this the balance sheet recession, not really a worker spending recession.

Has the financial system reached its limit?

It’s reached its debt limit. The financial system is much more a debt system than one based on equity financing, that is, a share of the gains made from the loan. The bank’s product is debt – and neither businesses, real estate or people (or governments, for that matter) can afford to pay more than they’re paying now. Much of the economy already is in negative equity.

Is any financial investment safe?

Nobody knows of any. That’s why people are buying gold. They’re trying to protect what they have at this point more than to make further gains. It’s not that they love gold as such, because there isn’t all that much use for it, after all. Its price is rising because investors have lost faith in governments – except for the U.S. Treasury, whose short-term debt now is yielding almost nothing. People are moving into Treasury IOUs because it can simply print the money to pay. It doesn’t need to borrow – as we’ve seen with the $13 trillion in financial bailout debt created just since 2008.

Everything else is insecure. If you look at markets going up 400 points one day, down 400 points another, this wild zigzagging is a market for professionals. If you don’t have a billion dollars in computer-driven trades, you don’t have much chance, because there’s no rational explanation grounded in the real economy is to why the stock market should careen so wildly up and down.

Do you think that lack of confidence in governments is driving the precious metals markets, specifically gold?

It’s also copper, and even food. People are trying to move out of financial securities into thing that are tangible – farmland, wheat and trophies.

Do you feel that that the move into tangibles is rational?

It’s a self-protective response by people who worry that they may lose if they buy stocks or bonds. Not since the 1920s has the stock market been so limited to professionals, especially as the Bush and Obama administrations have decriminalized financial fraud by not prosecuting it and by understaffing the government’s major regulatory and justice agencies. If people buy stocks today, they may lose money – and even if they put their money in a bank, it may go bust. So investors want to get out of the financial superstructure back into the real economy.

The problem is that what people call “the economy” has been financialized. In the United States last year, 40 percent of corporate profits were made by the banking sector. The rest of the economy is shrinking under the weight of debt deflation – interest and fees paid to this financial sector.

Germany is the strongest economy because it’s better structured in many ways, and more industrial. It has a higher proportion of the real economy to GDP, and also is much lower-cost, because it hasn’t built financial overhead into real estate and family budgets to anywhere near the extent that has occurred in the United States.

Countries that have let themselves become post-industrial service economies are finding out that if you don’t make things, you can’t live forever by going to Las Vegas. The casino always wins – and today’s casino is Wall Street. It’s a zero-sum game for the economy – with the economy’s losses plus Wall Street’s gains netting out to zero. So in economic jargon, the financial sector has become a transfer payment, not playing a productive role.

As long as we’re speaking of Germany, what is good about its economy? Can you describe its social safety net and what you began to say about housing there?

The typical American family spends about 40 percent of its budget on housing. In Germany it’s only about 20 percent. There are a number of reasons for that. For starters, real estate prices are whatever a bank will lend. Easier credit means higher debt leveraging – and hence, higher property prices.

German homebuyers must pay 20 or usually 30 percent of the purchase price down, so they don’t have 100 percent mortgages like there are in the United States. And mortgages are self-amortizing. For renters, there are co-op arrangements for a much larger market supplied at cost, in contrast to the United States, where the rental market is owned by landlords who squeeze out as much as possible over and above the actual cost of maintaining the property.

A German moving to Hamburg or Frankfurt may join a co-op organization and pay perhaps $1,000 or $2,000. Anyone can join. So there’s not much motivation to buy houses as a speculative means, because it’s usually cheaper to rent than to buy – and less effort for upkeep. As a result, there has not been a German financial bubble to bid up prices as has occurred in the English speaking or neoliberalized countries where people have been panicked to buy before prices rise even further beyond their reach.

In the time of Ricardo two hundred years ago, the most important element in labor’s budget was food. He judged wage competitiveness largely by the price of bread. But today, labor costs are set by what it costs workers to buy or live in a home, whose price is set by highly debt-leveraged credit terms. So Germany’s low unit labor costs are not simply the result of high technological productivity. They reflect low housing costs and relatively low social security costs. It hasn’t financialized its economy to anywhere near the extent that the United States has done.

You have said that Social Security in Germany is pay-as-you-go. Who is paying: the government or citizens?

Basically, individual citizens. Pay-as-you-go is an American way of putting it, but the Germans call it a “generation treaty.” The young generation agrees to support retirees, on the understanding that when it gets old, new employees will support it in turn.

By “pay as you go” I mean that there are no financial intermediaries as in the United States – no saving in advance to lend to the government to provide funding to cut taxes on the higher income and wealth brackets. Alan Greenspan and his right-wingers claimed that government budgets were just like private budgets, so that workers need to pay for their own Social Security by saving in advance – and then drawing down these wage set-asides. So FICA withholds over 13 percent of employment costs to pay much more into a government fund than actually is paid out.

This extra money is used to buy Treasury bonds. The Treasury uses this revenue to cut taxes on the rich, and on real estate and to give subsidies to the financial sector. So the effect is to move away from progressive taxation into regressive taxation.

What makes the U.S. system a con game is that when it comes time for the Social Security Administration to start paying out more than it is taking in – by selling off the Treasury securities that it’s been buying for all these decades – these sales have the same financial effect as when the government issues and sells fresh Treasury bills to finance a new budget deficit. So all this pre-saving is unnecessary from the financial standpoint. The gimmick has been to shift the year-to-year tax burden off wealth onto employees.

The idea of pre-saving for Social Security is as absurd as trying to pre-save for a war. What if the government said, “Maybe there’s going to be another war that may cost, say, $3 trillion. Let’s prepare by saving that in advance, by taking it out of employee paychecks to buy Treasury bills.” Soon enough, politicians would get the idea of using this money to cut taxes on their major campaign contributors, the wealthy.

The trick has been to convince voters that paying excess Social Security contributions is a user fee, not a social program to be paid out of the general budget by progressively taxing the wealthiest brackets. By contrast, Germany’s policy of paying out of current tax revenue is what Adam Smith recommended that governments do. Just as he said that wars should be financed on a pay-as-you-go basis, so that people would understand their cost.

So employees and employers pay much more into the system than is paid out.

That’s the idea: to save enough in advance, beyond what you currently have to pay, to lend the revenue to the government to cut taxes on the rich. It’s pay-in-advance rather than pay as you go. Pay much more than the government needs at present, so that the Treasury has enough money to slash the income tax that wealthy people have to pay. You can follow the Treasury Bulletin or the Federal Reserve Bulletin to see how the savings of the Social Security Administration go up every year – and are lent to government. (George W. Bush wanted to put this money into the stock market to create a stock-price boom that would enrich Wall Street – and would collapse once the flow of funds was reversed and more stocks were sold to pay retirees than new employees paid in. Thank heavens that potential bubble was averted.)

The result that we have today is not really a Social Security system. It’s a system of taxing employees instead of the rich. This tax shift increases the cost of employing people in the United States. That is one of the reasons, in addition to the housing costs, that prices America out of world markets.

The system that financial lobbyists have put in is designed to tax labor and siphon off so much that American labor cannot compete in any market in the world except in arms markets and special markets, and food. So what they call free-market efficiency is crippling the efficiency of the United States by adding to housing costs and adding needlessly to the Social Security and Medicare costs.

There’s no need for these pre-savings to have taken place. Workers could have kept much more of their wages and the government would have had to maintain higher taxes on the rich. But the Republican policy was to tax labor and un-tax wealth – class war with a financial fist.

Since we’ve talked about Social Security, what about the new Super Congress – the Committee of 13, with Obama being the 13th member? What is the composition of this committee, and what automatic budget cuts will go into effect in November if Republicans reject the Obama budget?

The Super Congress is made up of people that President Obama has selected largely because they want to cut Social Security. They pretend that it must be paid as user fees, in advance, to stem the budget deficit that has resulted from untaxing the estates of billionaires – the super-rich – and continuing the regressive tax shift that has been underway since the 1980s.

The basic rule of high finance is that big fish eat little fish. Millions of Americans have put their paychecks into Social Security. Just as corporate raiders set their eyes on emptying out pension funds to pay themselves (and their stockholders and bondholders), so financial lobbyists are seeking to raid the Social Security fund. Their motto is, “Let’s take the employees’ money and give it to ourselves.”

President Obama’s “Main Street” is Wall Street. His talent as a politician is to get votes from Main Street and deliver policies to Wall Street. He actually seems to believe that Social Security should be cut back to give money to his major campaign contributors. The rich are his constituency today, just as they were for George W. Bush. So Obama may cast the deciding tie-breaking vote, but as we’ve spoken on your program before, he’s already appointed people to the Budget Commission and the Social Security Commission when he was first elected, people who want to cut back Social Security by pretending that there’s a crisis. Their working assumption is that if the government needs money the poor should lose, not the rich.

It’s hard for congressmen or senators to vote against Social Security and Medicare, because most voters are in favor of these programs. So President Obama’s strategy is to take the Social Security issue out of Congress – and give himself an opportunity to posture during late September and October to propose pro-labor policies that he knows a Republican Congress will reject, thereby triggering the “automatic” budget cutbacks he negotiated in August with the Republicans.

If you look at who the campaign contributors of the Super Committee, they’re mainly in the financial sector. Even if they committee members are unpopular, they’re going to be able to retire with such high paying jobs in the financial sector. This is what the Japanese call Descent from Heaven. They’ll get their payoff for taking the heat on stiffing the Social Security recipients for their Wall Street constituency.

I’m amazed that there’s not more of a political reaction against this. People have worked hard to save for Social Security out of their paychecks. These are real savings. For Republicans to characterize these payments as an “entitlement” is to treat the elderly as if they’re mere welfare recipients freeloading off the rich – while it’s actually the banks and big fortunes that have been given the handout.

If the Bush and Obama Administration can give $13 trillion to the banks to save them from taking losses on their bad investments, then why can’t they give another trillion to Social Security? The reason is, there’s a class war on. If you don’t realize this, then you’re not going to understand what politics is all about these days.

However, it’s not the kind of class war that people talked about a century ago. It’s fought in the financial arena. The idea is for the big sharks to take the savings of the little savers. They exploit labor not by employing it – as in Marx’s description in Vol. I of Capital – but financially, by loading it down with debt and making labor spend a working lifetime to pay it off. So instead of the wage slavery socialists used to talk about, you have debt peonage today.

Food is becoming very expensive in the United States. Do you see this trend continuing, and is the rise in food prices a consequence of the weak dollar?

It’s not a consequence of the weak dollar. One factor is global warming, which is creating water shortages all over the world. Urbanization also is doing this. But also there’s been a huge diversion of cropland to grow gasohol – to make gasoline out of corn or rapeseed or other crops. This has diverted land and water away from food for cars and other energy.

We are now seeing incipient water wars in the West. Who will get the scarce water? Will it be urban areas, or agricultural farmland? What will the price of water be? Will it be diverted to make gasohol and coal liquids?

The Canadian tar sands are one of the worst projects, because they use about ten gallons of water for every gallon of coal gas. I was the economist working for ERDA, the Energy Research Development Administration, around 1975 and did the study of this. The Carter Administration came in they said, “Look. How are we going to pay for all this high-priced OPEC oil now that the OPEC countries are raising the price?” Carter’s solution was for coal gasification and liquefaction to lower oil costs while raising the price of wheat, by diverting water away from agriculture.

Speculators all over the world are buying land as they move out of credit and finance. Land is real, and everybody needs to eat, after all. So food is becoming as speculative an investment vehicle as gold, copper or stocks – and water monopolies.

So you would say that speculation is one of the big reasons why food is going up – land speculation, food speculation and water.

Not only speculation, but the fact that water levels are falling. Food is made as much out of water as out of soil. The weather is another problem. Global warming is causing weather changes that reduce crop yields, as flooding and droughts go together.

Putting land into gasohol production was a political decision, right?

Yes. The mainstay of America’s trade balance has been food exports. A constant in U.S. foreign policy since 1945 has been to promote food export markets to cover the cost of American imports and military spending abroad.

Why is the cost of gasoline rising?

This would be a job for anti-monopoly regulators to look at if they were still regulating. President Obama has appointed a justice department that refrains from prosecuting economic crime, and an environmental department much like the Reagan version. It gives the oil companies whatever they want, such as new offshore drilling rights. Obama has put deregulators everywhere in a way that George Bush, as a Republican, was not able to do, because the Democrats would have opposed a Republican president from disabling the regulatory agencies to the extent that Obama has done. But they can’t stop their own party leader doing this.

Are there similarities between the economic crisis of September 2008 and the present situation?

Yes, we’re still in the aftermath of 2008. Economists are talking about a double-dip recession, but we’ve never gotten out of the first crash. The economy has not recovered. The stock market has gone up, because the Federal Reserve has been flooding it and the bond market with liquidity. But employment, living standards and sales are not going up. Housing is still down. So we’re in more than a Great Recession. We’re going into a lost decade.

We’re entering a period where wages will drift downward in a slow crash, because the government is not renegotiating mortgages downward or canceling bad debts. It is not bailing out the cities that are in trouble and there’s a downward financial spiral basically coming from the debt situation.

The question shouldn’t be whether we’re in a double-dip recession, but why a recovery from the crash has not taken place. Why haven’t the bank bailouts created jobs? How could the government create $13 trillion of Treasury and Federal Reserve cash, loans and guarantees to Wall Street for the wealthiest one percent of our population without this trickling down and created jobs?

How do we jumpstart an economy when 70 percent is consumer spending, but consumers aren’t spending because they’re spending their money to pay off debts taken on in the past, or worried that they may be unemployed? In other words, what has Washington not been doing that it should have been doing? What has it left out of account?

Before President Obama he was elected he said he was going to renegotiate mortgages downward. But the banks have not done this. So did he just give up and say, “Well, just forget it”? The Federal Reserve flooded the banks with liquidity, but they sent it abroad. They argue – with good reason – that the economy is shrinking too much to qualify for enough loans to borrow its way out of debt.

It should be obvious by now that giving money to the banks doesn’t create jobs for the people. It is mere propaganda to call the rich “job creators.” They have put in place an extractive financial system that has destroyed jobs. They’re the ones that are closing down the factories and outsourcing American labor.

Are the banks creating a permanent depression?

That’s the outcome of their business plan, which is to take the entire economic surplus in the form of debt service. Banks want to create as much debt as they can. Debt is their “product.” The economy is merely “collateral damage” to a financial dynamic that is impersonal, not deliberate.

Every economy for hundreds of years has seen debts grow more rapidly than can be paid. At a point there’s a crash, which normally wipes out debts. It also wipes out savings on the other side of the balance sheet, of course. But this time the government has tried to keep the debt overhead on the books – and to tax the population to give banks enough to make sure that the rich don’t lose money. Only industry and labor will lose.

The effect will be to de-industrialize the economy even more, because markets shrink without consumer spending. Companies won’t invest, stores will close, “for rent” signs will go up, tax payments to the cities will fall, and municipal employees will be laid off while social services are cut back. The economy will shrink and life will get harder.

Why aren’t economists talking more about this obvious phenomenon of debt deflation? It is the distinguishing phenomenon of our time. But opinion-makers are insisting that the solution is simply to give more money to the banks. Not many people are asking why this isn’t working. And when they do ask, they don’t get much media coverage.

Could you explain debt deflation? It’s a confusing term.

Economics textbooks depict people earning income and spending it on the goods and services they produce. This is why Henry Ford said he paid his workers $5.00 a day – so that they could buy the Fords they made. Economists call this circular flow Say’s Law.

But people spend a rising proportion of their income to pay debt service. That is their first charge. Before they decide how much is available to spend on goods and services, they have to pay their credit card debt, student loans, other bank debt, and of course the mortgage. The more they pay the banks, the less they have to spend on goods and services.

Business sales shrink, because the banks recycle their interest receipts into even more loans – on even “easier” terms, meaning more debt leveraging. So the “real” economy of production and consumption shrinks while the payments to the financial sector go up.

Financial investors don’t buy many goods and services. They leave their revenue in the financial system, mainly to be lent out on new loans, sent abroad or used for speculation. Debt deflation is what happens when spending is diverted away from buying goods and services to paying debts. The financial sector grows, relative to the “real” production-and-consumption economy. So debt deflation of the underlying economy goes hand in hand with asset-price inflation fueled by increasingly loose credit and steeper debt leveraging.

I see. And then that deflates the economy.

Yes. Less national income is available to be spent on goods and services, and more is given to the financial sector.

The Federal Housing Authority is suing the major banks – Bank of America, Chase, Citibank, Deutsche Bank and other big banks. What is the lawsuit about?

These banks misrepresented the junk mortgages that they were making and selling to outside investors. They packaged mortgages and sold them to pension funds, insurance companies and foreign banks. Ratings agencies bid for clients by agreeing to give junk mortgages AAA ratings – as good as the U.S. Government. But the mortgage lenders and the ratings agencies they hired assured clients that these mortgages were good and could be paid – or at least that the market would continue to rise, so that if there was a default, new buyers would play the role of the proverbial “greater fool” and buy properties being foreclosed.

It turned out that the appraisals were based on unrealistic appraisals and either fake or absent reports on the borrower’s income and hence ability to pay. They were no-documentation loans, and the biggest banks have turned out to be running a fraud. Bill Black has written more on this than anyone else, at the University of Missouri in Kansas City.

By the way – if we’re talking about debt deflation and other financial issues, there’s a UMKC economic blog, called New Economic Perspectives. Prof. Black and I (and others) write about how the financial sector has become what he calls criminogenic. In other words, it’s been criminalized, and bankers have run what he calls “control fraud.” The economy’s largest financial market, real estate mortgage lending, turns out to be based on crooked real estate brokers, appraisers, underwriters, ratings agencies and so9 forth. Right down the line almost everybody’s been engaged in a gigantic fraud that’s helped inflate the real estate bubble. Whereas when similar fraud happened in the 1980s with the savings and loan associations thousands of people went to jail, nobody’s gone to jail yet. Hardly anybody’s been arrested. And yet they’re on a much larger scale than Bernie Madoff.

The Justice Department is reluctant to prosecute fraud, because the largest perpetrators are the banks that already are dependent on the U.S. Government for bailouts. So from the Justice Department’s vantage point, the government simply would be fining itself, because it would turn around and lend the crooked banks enough to keep them in business. So they’re not sending anybody to jail, not even Angelo Mozilo of Countrywide, the toxic bank at the core of junk mortgage lending. It’s now part of Bank of America.

So in effect the United States has decriminalized financial fraud. The Federal Housing Authority that brought the suit you cite had three years from the time it took over Fannie Mae and Freddie Mac, the housing guaranty agencies, to bring up fraud. So it’s making the point that government-guaranteed agencies bought “toxic waste” from crooks. The inference is that Citibank, Chase Manhattan, Wells Fargo and Bank of America are a financial gang. It’s now being asked to make restitution. Or at least the FHA has to pretend to go after them.

The banks tried to stop this by having the Iowa attorney general head a group of attorneys general to make an overall agreement with the banks, basically to forgive them. In effect, their position is that “They’ve stolen $13 trillion. Let’s fine them $100.” The Obama Administration is backing this little slap on the wrist.

But now the New York attorney general and I think his Nevada counterpart have said, “Wait a minute. These guys have falsified loan documents and written in false figures. These guys are crooks. Bank of America is like a mafia. These are absolute crooks and we’re going to go after them and fine them and get restitution.” And that’s why Bank of America stock is down six percent today, because now they think, “Oh, my God. What if they actually enforce the law?”

Obama’s attorney general Eric Holder, seems reluctant to enforce the law. He seems like the crooked sheriff who works for the gangsters who run a small town, as their protector. So this should be what the election is all about – to make Holder and Obama prosecute the frauds rather than making sure that the crooked banks don’t lose anything.

But despite all this, the important thing is that the real estate bubble would have developed in any event, simply because of the exponential financial dynamics at work and the increasing tax favoritism for real estate – taxing labor and industry rather than land rent.

Talk about the University of Missouri-Kansas City economics blog, the New Economic Perspectives on MMT that you mentioned. What is modern monetary theory?

Basically, it’s the realization that we’re not on a gold standard anymore. When banks make a loan, they create a credit on their computer keyboard and their customer signs an IOU. So the loan creates the deposit, not the other way around.

Governments can do this too. They don’t need to borrow from banks. They can create the money on their own keyboards to pull the economy out of recession. Some people call this post-Keynesian, others call it heterodox. We’re the opposite of the Chicago School, which claims to be free market but actually is pro-banker. Its idea of a free market is to let gangsters be part of the economy, as if crime is all part of individualistic gain seeking.

What is “modern” about today’s money is that it is created by banks electronically at will – “freely.” If the government runs a deficit, it pumps spending power into the economy – either the goods-producing sector, or Wall Street balance sheets. But if the government runs a surplus, it sucks revenue out of the economy.

If we’re going to spur recovery today, we need employment. The way to get this when there’s a lack of private sector demand is for the government to become the source of demand, by running a deficit. This is the opposite of what the Republicans and the Democrats are saying. But even Herbert Hoover as well as Roosevelt said back in the 1930s. The Republicans and the Democrats back then realized that the government had to spend more money to get the economy out of recession. Today both parties are pushing austerity plans.

If people want to read about Modern Monetary Theory, where would they go on the Internet?

To the UMKC (University of Missouri-Kansas City) economics blog: New Economic Perspectives. Most of my articles are posted there. Another good source is Yves Smith’s Naked Capitalism, and also the Levy Institute.

What about currencies – the dollar and euro as well as the renminbi and yuan?

Currency markets are in turmoil because nobody knows how Europe will resolve its debt crisis. People are moving out of the euro into the dollar, and then out of the dollar into gold. They’re moving out of everything financial. Meanwhile, currency markets are being swamped by huge computer programs. There’s no underlying way to relate exchange rates to domestic consumer prices, labor’s wage rates anything that the textbooks talk about. It’s now all about the flow of funds – on credit, dominated by speculators.

If debts are canceled, how would this be done?

The original plan for bad mortgage debt was to reset mortgages to match the current property prices. That’s one method. Or, you can bring mortgages in line with rental valuation, by asking what a home would rent for – and then capitalize the net rental revenue at, say, 5 percent interest. That would be a reasonable price for the property, so banks would be told to reset the mortgage at that level.

So the banks would write off a lot of the debt.

Yes. And somebody would have to lose and it would have to be the big bank depositors because the Federal Deposit and Insurance Corporation insures depositors up to $100,000 or $200,000, I think pretty positively. So the big rollers would lose.

And they’ve increased. The wealthiest one percent of Americans in 1979 had 39 percent of the interest, dividends, rent and capital gains. Now they have about two-thirds. They’d have to go back to their historical proportions and the economy would become much less polarized between rich people and the rest of the economy. So you’d have a much more normal economy by writing down this financial fat or parasitism. You’d get rid of it.

Michael Hudson, thank you very much.

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    1. sgt_doom

      And he’s been right and on target for over forty years now.

      They’ve offshored the production assets and capital assets, principally to China but elsewhere as well.

      And the focus of the Transnational Capitalist Class, and their World Bank, is on China, and there is no interest in the banksters in investing in America’s infrastructure — zero interest on the part of the republicon wing of the bankster party, and little to no interest — regardless of Obama’s speeches and useless talk — on the democratic wing of the bankster party.

      That’s all, folks…..

  1. Mark P.

    I was afraid of sounding like I was gushing, but I wanted to say the same. I deeply appreciate Hudson’s integrity and intelligence.

    1. Jim Haygood

      Several years ago, Michael Hudson proposed a model detailing how the FIRE (Finance, Insurance and Real Estate) economy tends to outgrow the underlying productive economy. It proved to be a very description of a ‘financializing’ economy up to 2007.

      What’s striking about this incredibly prolix interview is how few insights, not to mention solutions, it offers. Hudson is indeed a treasure (despite his MMT slumming). But it seems like he’s off his game the last few years.

      1. Bev

        Here is a solution for you:
        Michael Hudson will be on a panel at this weekend’s AMI American Monetary Institute 7th Annual Monetary Conference. Dennis Kucinich’s solution is being promoted; it is his H.R.6550 NEED Act (National Emergency Employment Defense Act) which is BIG as it changes the Monetary System to benefit everyone, not just bankers.

        Can someone here report on this conference please. The Monetary Reform Conference starts tomorrow. It needs more coverage.

        These protests should turn into a Main Street Rally with messages of the road to take to help everyone.


        Congressman Kucinich’s Historic Monetary Reform Bill
        Congressman Dennis Kucinich introduced an employment bill Reforming Our Money System: The NEED Act proposes a historic money reform, containing all the monetary provisions of the American Monetary Act including ending “fractional reserve” banking.

        2011 Monetary Reform Conference Speakers/Schedule

        The 7th Annual AMI Conference will be held at University Center, in Chicago, Sept. 29 – Oct. 2, 2011.

        …Congressman Dennis Kucinich introduced the National Emergency Employment Defense Act (“NEED,” HR 6550*) which contains all the monetary reform provisions of The American Monetary Act- see the brochure at http://www.monetary.org. It is much more than regulation; it fundamentally reforms our private CREDIT/DEBT system now wrecking our nation and harming all humanity, and replaces it with a government MONEY system.

        The Act achieves reform with 3 basic provisions. All three are necessary; doing one or two of them wouldn’t work and could cause more damage.

        In brief:

        First the Federal Reserve gets incorporated into the U.S. Treasury where all new money is created by our government – what people think happens now.

        Second, It ends the fractional reserve system. Banks no longer have the accounting privilege of creating our money supply. All their previously issued credit is converted into U.S. Money through an elegant and gentle accounting change. The banks are held accountable for this conversion and from that point operate the way people think they do now – as intermediaries between depositors and borrowers.

        Third, new money is introduced by the government spending it into circulation for infrastructure, starting with the $2.2 trillion the engineers tell us is needed to properly maintain our infrastructure over the next 5 years. Infrastructure will include the necessary human infrastructure of health care and education.

        Banks are encouraged to continue lending as profit making companies, but are no longer allowed to create our money supply through their loan making activity.

        Thus, The NEED Act nationalizes the money system, not the banking system. Banking is absolutely not a proper function of government, but providing the nation’s money supply is a key function of government. No one else can do it properly. Talk of nationalizing the banking business really acts like a poison pill to block real reform. Same for talk of the states going into the banking business keeping the fractional reserve system in place, and allowing the banks to continue creating what we use for money! That would reform nothing and actually endorses the fractional reserve system! It is a farcical diversion, misleading some good people away from real monetary reform at the only time reform is possible – during a crisis. All serious Monetary reformers understand that banks can not be allowed to create our money supply.

        Despite prejudice against government, most people are surprised to learn that history shows government has a far superior record in controlling the money system than private controllers have. And yes that includes the continental currency, the Greenbacks and even the German Hyperinflation; which by the way took place under a completely privatized German central bank, with all governmental influence removed! These facts, though not taught in your econ classes, are discussed at length in my book “The Lost Science of Money” (by Stephen Zarlenga which can be purchased at http://old.monetary.org/lostscienceofmoney.html about which Michael Hudson wrote: “The history of money is critical to understanding the greatest problem the third millennium will face. Stephen Zarlenga’s “Lost Science of Money” book provides the needed background for seeing the basic structural issues at work.”)

        Perhaps you will consider Prof. Kaoru Yamaguchi’s Systems Dynamics study of the American Monetary Act? He examined it with the most advanced computer systemology and found that:

        It pays off the national debt

        It provides the funds for infrastructure (solving the unemployment problem)

        It does this without causing inflation. You can read his results at http://www.monetary.org


        And, endorsed by

        James K. Galbraith to the Subcommittee on Crime, Senate Judiciary Committee, May 4, 2010.


        How the Economists Facilitated the Crisis and How HR 6550* Solves it

      2. Cahal

        He has repeated his solutions for a long time. They are fairly simple:

        – Shift the tax burden off labour and capital and onto land.

        – Let banks fail, prosecute for fraud.

        – Reform banks, have CBs fund deficits.

        Obviously these things aren’t happening any time soon.

  2. Bill G

    Deficit spending is only tolerable if we can reasonably expect to manage the resulting debt load. Right now we do that by keeping interest rates artificially low facilitated by the reserve status of the dollar. Our current debt load is unsustainable at normal interest rates. How long the world will allow us to continue this is uncertain. Further, our current low interest rate policy discourages behaviors we need to encourage (like thrift and saving) and encourages behaviors that are not so healthy (over consumption, gluttony, etc.). We have shot our deficit wad already and need to find another solution.

    1. YankeeFrank

      The solution is to cancel or hugely haircut the debts of all Americans with net worth below $250k, pour massive amounts of money into infrastructure, medicare for all, rebuilding our manufacturing sectors, re-establishing the Xerox Parcs and Bell Labs type institutions, and get everyone working (jobs guarantee) and building a green sustainable future. Just dumping money into the economy as fiscal stimulus without a huge plan like the above will not cycle the money through our economy — most will go to pay down debts and to China. With a plan, and I’m talking at least $5 trillion, better at $8-10 trillion, the US can succeed. If we can create $13 trillion for the banks we can create $10 trillion for the rest of us. Oh yeah, and prosecute the shit out of the bankster assholes, put ’em in the hoosegow for a decade or more, bar them from ever working in finance again, and establish state banks to fund state endeavors, and reinvest the interest back into the local economy… revoke the corrupt banks’ power to create money, period. Make them partnerships again, and wall them off from the real economy with 12 foot thick steel. Oh, and tax speculative gains, investment gains, real estate, natural resource extraction, radio, internet and television bandwidth, and make the top tax rate 70%. Did I miss anything? Oh yeah, and take control of the payments systems, and any other essential economic system infrastructure, by military force if necessary.

      We will immediately baloon our debt but by reestablishing a strong economy with a repaired virtuous money cycle, demand will surge, the economy will grow and that $10 trillion will be paid off by 2025 or so. Oh yeah, and just print the money, no more selling debt to “finance” anything the government does. That’s just a way for the financial services industry to suck vitality out of the real economy for doing absolutely nothing.

      That’s all folks.

      1. Observer

        Yes, but don’t hold your breath. The political will to do the right thing does not exist at present, at least in the US, nor will it in the forseeable future, given that our political system is a duality and neither party has a vested interest in changing the status quo. We may be headed for more than just one lost decade.

      2. chris

        Well, there’s stupidity.

        Ballooning the debt has not worked for Japan whose currency is just as sovereign as the U.S. dollar. Their economy has not recovered its Asian Tiger status since into debt overload. The U.S. dollar would devalue against other currencies.

        1. ScottS

          Japan’s debt went to service prop up zombie banks, not New Deal-type spending. What the grandparent post suggests is the diametric opposite of what Japan did.

        2. Joe


          Japanese debt overload? srsly?

          May I remind you that their interest rates are zero and have been for two decades. Consequently their carrying cost of said load is also zero.

    2. Benedict@Large

      Sorry, but that’s pure neoliberalism. In a fiat currency, the issuer has ZERO need to borrow anything to finance its spending. Further, since it is merely borrowing back its own IOUs and is therefore incurring no new current liabilties via the borrowing transaction, it isn’t even proper to call what it is doing “borrowing”. (It is a debt swap or asset swap depending on who is recording the transaction.)

      Given then that there is no need (or even ability) to borrow, interest payments are actually optional. As such, the interest rate is also meaningless, since interest need not even be incurred.

      Note also that this is accounting, not economics, so if you don’t understand, ask a CPA, not an economist.

      So why do we conduct this sham borrowing? Because rich people who are afraid to invest their money still want to earn money on it. In other words, the US government “borrows” as a gift to the wealthly in appreciation for their not paying taxes.

      1. F. Beard

        So why do we conduct this sham borrowing? Because rich people who are afraid to invest their money still want to earn money on it. In other words, the US government “borrows” as a gift to the wealthly in appreciation for their not paying taxes. Benedict@Large

        Bingo! Maximum +Karma!

      2. Bill G.

        It’s true that the US can simply create as many $$ as they want at any time they want at the cost of dollar devaluation compared to other currencies. Payment of interest tends to support the exchange rate value of the dollar and the rate should rise or sink depending on the relative strength of the dollar to other currencies (among other things). As such, expectations of a strong dollar should support lower interest rates than expectations of a weak dollar. So tell me, how can the weak (and weakening) dollar command such crap rates as it does today?? Are other currenciew that much crappier or is the Fed buying all the government debt or ????

        1. steelhead23

          I believe the answer you are fishing for it that the U.S. dollar is strong and U.S. sovereign debt interest rates low because the dollar is the global reserve currency and U.S. debt is denominated in dollars, which it can print on a whim.

          Beware however, the reserve currency status of bucky is changeable. The principal support for this status used to be the strength of the U.S. economy and its financial system. That support is declining and as far as I can see, the dominant reason for bucky’s dominance is the wonderful gift of OPEC selling oil only in dollars, and the strength of the U.S. military. We are Rome, 100 AD.

  3. anon

    The audio of the original interview is available on the site of Bonnie Faulkner’s radio program “Guns and Butter” which airs on KPFA 94.1 FM Berkeley:

    Hudson, who really is one of the great voices today, also appeared on Guns and Butter in 2010, talking about “Europe’s Financial Class War Against Labor, Industry and Government.” That prescient interview is also worth a listen:

    There are other interviews with him in the Guns and Butter archives, as well.

  4. bmeisen

    Thanks for the long treatment of German social policy. I find little to disagree with.

    He claims that Germans tend to put down 20-30% on a home. My experience is that people here should pay much more. Buy early, buy once and buy only when you’ve got most of the money saved. Actual practice may be closer to his figures. 0 down, 5% down, even 10% down? Unthinkable. Also buyers over 50 years old can expect trouble.

    REgarding rental markets, I don’t know what he means by coop-organizations. There is a lot of quasi state-subsidized rental property and a legal framework that gives tenants more rights than in the US. Rents are much lower than in the US and in many attractive markets it is cheaper to rent than to buy.

    The German housing market shows bubbles in attractive western GErman cities like Frankfurt, München, Hamburg, where 1500 ft2 can go for 1 million +. How much is related to overall uncertainty and the flight of capital to safe markets is hard to tell.

  5. Bill

    As much as I’d love to include expletives to enhance this post . I have one idea only – Call the Damn Euro TBTF banks bluff . Let em go belly up , then try for treason . Financial terrorism . Why is this hard for the Gov’ts to see , or the peoples of all countries to see . Go after the banks jugglers !!!!!!!!!!!!!!!!!!!!!!!!!!!!

  6. Richard Kline

    So Michael Hudson: “The supposed contrast between “bad” central banks and “good” commercial banks is a lobbying effort seeking to monopolize credit creation in the hands of commercial banks, by promoting a travesty of how central banks are supposed to act . . . The reality is that commercial banks have fueled an enormous asset-price inflation in recent years . . . Unlike the United States and England whose central banks were founded to monetize the government debt so that they wouldn’t have to pay interest, the EU’s Maastricht and Lisbon Treaties rule that the European Central Bank must be independent from the government – which means in practice, acting on behalf of the commercial banking monopoly. They must avoid creating “inflationary” credit (any money at all that takes business away from the commercial banks) by not buying government debt. The ECB is to serve the commercial banks only. It can create money to bail them out, for them to give away, to lend out, to pay dividends or to pay their own salaries and bonuses. But it cannot fund government operations. It must starve the governments to make them entirely dependent on commercial banks.”

    That is an excellent capsulization of a structural-capitalist reality in Europe which has been under-emphasized, and I greatly appreciate your concise presentation here. There are historical issues with the problematic creation of money by public authorities in Europe not touched on here which make the background somewhat more complex. For the present circumstance, though, that’s where Europe is: private, self-interested oligarchs, _and they alone_ re allowed to greate ‘money.’ Using that privilege, they have lost their shirts in real estate and excessive lending to weak public authorities. Having blocked governments from controling the money supply, the bankers are now threatening to ‘strike’ if tax revenues aren’t promised to them to make them whole.

    On another note, Bill Black’s representation of the securitization racket in the US and Britain as ‘control fraud’ is a truly concise and cogent descriptive. I’ve heard him mention it before, but we now really see what he meant with the mass forging of documents. I’ll remember the usage going forward, and I thank you for raising that characterization here again.

  7. anon

    this reads like a cut and paste

    who is it that’s referring to Hudson in the 3rd person toward the end of the article?

  8. anon

    There’s absolutely no difference in how banks create money under a gold standard. Loans create deposits either way.

    The central bank reacts differently to money supply increase; that’s all.

  9. Nonanonymous

    I also meant to add that reducing principal on upside down mortgages rewards poor decision making. Reducing principal on all MBS by a certain percentage is more equitable.

    Or reducing principal on debt is still better than 100% default.

  10. Shankara

    UMKC needs to bottle and sell water. Michael Hudson, Bill Black, and Randy Wray…I’ll have whatever they’re drinking.

    1. CaitlinO

      Me, too, if having whatever they’re drinking would give me their incredible insight and analytic prowess.

  11. chris

    Is any financial investment safe?

    Of course, the appearance of a flight to the “safe haven” of U.S. Treasuries would have nothing to do with hundreds of trillions in interest rate swaps being manipulated on computer screens to make it appear that real world investors are happily buying U.S.T’s to get a return of less than the inflation rate (manipulated so that retirees get no COLA), would it?

  12. jacksmith


    ( http://my.firedoglake.com/iflizwerequeen/2011/05/16/how-about-a-little-truth-about-what-the-majority-want-for-health-care/ )

    ( Gov. Peter Shumlin: Real Healthcare reform — http://www.youtube.com/watch?v=8yFUbkVCsZ4 )

    ( Health Care Budget Deficit Calculator — http://www.cepr.net/calculators/hc/hc-calculator.html )

    ( Briefing: Dean Baker on Boosting the Economy by Saving Healthcare http://t.co/fmVz8nM )


    As you all know. Had congress passed a single-payer or government-run robust Public Option CHOICE! available to everyone on day one, our economy and jobs would have taken off like a rocket. And still will. Single-payer would be best. But a government-run robust Public Option CHOICE! that can lead to a single-payer system is the least you can accept. It’s not about competing with for-profit healthcare and for-profit health insurance. It’s about replacing it with Universal Healthcare Assurance. Everyone knows this now.

    The message from the midterm elections was clear. The American people want real healthcare reform. They want that individual mandate requiring them to buy private health insurance abolished. And they want a government-run robust public option CHOICE! available to everyone on day one. And they want it now.

    They want Drug re-importation, and abolishment, or strong restrictions on patents for biologic and prescription drugs. And government controlled and negotiated drug and medical cost. They want back control of their healthcare system from the Medical Industrial Complex. And they want it NOW!


    For-profit health insurance is extremely unethical, and morally repugnant. It’s as morally repugnant as slavery was. And few if any decent Americans are going to allow them-self to be compelled to support such an unethical and immoral crime against humanity.

    This is a matter of National and Global security. There can be NO MORE EXCUSES.

    Further, we want that corrupt, undemocratic filibuster abolished. Whats the point of an election if one corrupt member of congress can block the will of the people, and any legislation the majority wants. And do it in secret. Give me a break people.

    Also, unemployment healthcare benefits are critically needed. But they should be provided through the Medicare program at cost, less the 65% government premium subsidy provided now to private for profit health insurance.

    Congress should stop wasting hundreds of millions of dollars of taxpayer money on private for profit health insurance subsidies. Subsidies that cost the taxpayer 10x as much or more than Medicare does. Private for profit health insurance plans cost more. But provide dangerous and poorer quality patient care.



    This is what the American people are shouting at you. Both parties have just enough power now to do what the American people want. GET! IT! DONE! NOW!

    If congress does not abolish the individual mandate. And establish a government-run public option CHOICE! before the end of 2011. EVERY! member of congress up for reelection in 2012 will face strong progressive pro public option, and anti-individual mandate replacement candidates.

    Strong progressive pro “PUBLIC OPTION” CHOICE! and anti-individual mandate volunteer candidates should begin now. And start the process of replacing any and all members of congress that obstruct, or fail to add a government-run robust PUBLIC OPTION CHOICE! before the end of 2011.

    We need two or three very strong progressive volunteer candidates for every member of congress that will be up for reelection in 2012. You should be fully prepared to politically EVISCERATE EVERY INCUMBENT that fails or obstructs “THE PUBLIC OPTION”. And you should be willing to step aside and support the strongest pro “PUBLIC OPTION” candidate if the need arises.

    ASSUME CONGRESS WILL FAIL and SELLOUT again. So start preparing now to CUT THEIR POLITICAL THROATS. You can always step aside if they succeed. But only if they succeed. We didn’t have much time to prepare before these past midterm elections. So the American people had to use a political shotgun approach. But by 2012 you will have a scalpel.

    Congress could have passed a robust government-run public option during it’s lame duck session. They knew what the American people wanted. They already had several bills on record. And the house had already passed a public option. Departing members could have left with a truly great accomplishment. And the rest of you could have solidified your job before the 2012 elections.

    President Obama, you promised the American people a strong public option available to everyone. And the American people overwhelmingly supported you for it. Maybe it just wasn’t possible before. But it is now.

    Knock heads. Threaten people. Or do whatever you have to. We will support you. But get us that robust public option CHOICE! available to everyone on day one before the end of 2011. Or We The People Of The United States will make the past midterm election look like a cake walk in 2012. And it will include you.

    We still have a healthcare crisis in America. With hundreds of thousands dieing needlessly every year in America. And a for profit medical industrial complex that threatens the security and health of the entire world. They have already attacked the world with H1N1 killing thousands, and injuring millions. And more attacks are planned for profit, and to feed their greed.

    Spread the word people.

    Progressives, prepare the American peoples scalpels. It’s time to remove some politically diseased tissues.

    God Bless You my fellow human beings. I’m proud to be one of you. You did good.

    See you on the battle field.


    jacksmith – WorkingClass :-)

    1. Aquifer

      Don’t waste your time and energy on a “public option” – the watered down version that was proposed and supported by too many “progressives” last time around wasn’t worth it’s weight in paper – that endeavor siphoned off the growing support for single payer, which, frankly (and cynically) I think it was designed to do, and came out of the same rationale of “take what the MSM tells you is the best you can get instead of what you really need” that produced our present sorry excuse for a government.

      Single payer – nothing less …

    2. Another Gordon

      On a rough calculation the extra that Americans pay for private health cover compared with what Europeans pay for (mainly) public cover funded from tax is about equal to the extra holiday Europeans get.

      In other words, health care ate Americans’ holidays.

      1. york

        That’s OK. Americans only get 2 weeks off per year if they’re exceptionally lucky, whereas Europeans get 5 weeks.

  13. Praedor

    At best it is ironic that too many Congresscriminals and other politicians are into gutting/cutting worker pensions, the safety net, while they themselves maintain their own VERY cushy medical coverage, their permanent and VERY cushy pension system.

    I want to see the robber barons in government (local and national) totally gut their own benefits and perks before they even get to mention the existence of any such for people who actually WORK for a living.

    Taxation: a flat tax of 50% on ALL non-labor income (interest, dividend, capital gains, lottery/inheritance-same thing-what have you). A Tobin tax on ALL financial and stock market transactions. Elimination of the income cap on social security taxes. Rendering private health insurance a niche market to deal with extraordinary medical care of last resort, EVERYONE else in single payer (rich and poor alike). Holding medical doctors to their medical oath that mentions NOT A WORD about “first, make loads of money”. Change laws of incorporation to include social responsibility BEFORE maximizing shareholder value. Ban profits from going out of country untaxed. If you make a profit/sell anything in country A, then you are liable first to pay taxes on profits in country A. No way out by headquartering in criminal scum countries like the Caymans or the UAE. If corporations are “people” then ALL the execs running that “person” are personally responsible for any and all damage done to the environment or people. People can go to jail, lose their shirts in lawsuits, etc. The actual people behind the corporation, those who make decisions or OK decisions have to be held PERSONALLY responsible for the results.

    Banks MUST provide loans to business and may NOT hoard/hold cash. If they are not providing loans to businesses and people then they have no purpose to existing and must dissolve. All states should have a N. Dakota style central state bank. Private banking must be a backwater operation.

    Those are starters.

    1. Praedor

      Oh, another thing. The MINIMUM interest legally allowed on savings or T-bills, etc, can be no lower than inflation. That is, the minimum interest rate on savings MUST keep up with inflation at a minimum. The old laws against ursery must come back.

      Finally, no political campaign donation, by an individual or corporate “person” can exceed $1000. Period. PAC spending on political advertising must be limited to be no more than that of the actual party they support in any given district/state and ALL such organizations MUST disclose precisely who paid (down to individuals and corporations) for the advertising.

  14. craazyman

    I am very supportive of Mr. Hudson’s overall political point of view, but I think he makes a logical error (or possibly in his case a rhetorical error because he’s too smart to make a simple logical error) that is quite common in economics.

    He writes: “If the government runs a deficit, it pumps spending power into the economy – either the goods-producing sector, or Wall Street balance sheets. But if the government runs a surplus, it sucks revenue out of the economy.”

    In fact, if the government runs a surplus it does suck base money out of the banking system, but it’s not clear that it sucks revenue out of the economy. Elsewhere, Mr. Hudson makes it clear that bank loans create deposits (which in turn create spending and revenue).

    Presumably, if somehow the government going from deficit to surplus fostered a jump in bank lending, then in fact revenue in the real economy might go up when the government ran a surplus. I’m not saying it automatically would go up. Of course it wouldn’t automatically do anything. But it’s not clear, ceteris paribus, that it wouldn’t go up.

    This is why economics is always 16 equations and 19 unknowns, no matter what your political point of view is.

    1. Tom Hickey

      Deficit expenditure increases non-government net financial assets, and taxation decreases non-government NFA. Tsy issuance neither increases nor decreases non-government NFA, but only shifts their composition from reserves to tsys, that is, alters the composition and term structure of government liabilities. Credit extension within the private sector neither increases nor decreases net financial assets, since the net is zero.

  15. Hugh

    I came late to this interview. It is a great exposition. It touches on the issues of kleptocracy, class war, and wealth inequality. And for that, kudos. We need more, much more, discussion of this type.

    It gives a very clear rationale for why Europe is not going to solve its problems with the current crew of bankers and politicians. Ditto for this country.

    I also wanted to say that I agree with crazyman’s point above.

  16. beowulf

    “the real estate bubble would have developed in any event, simply because of the exponential financial dynamics at work and the increasing tax favoritism for real estate – taxing labor and industry rather than land rent…
    you can bring mortgages in line with rental valuation, by asking what a home would rent for – and then capitalize the net rental revenue at, say, 5 percent interest.”

    Sad to say, the only govt agency that has any clue what Michael is talking about is the US Forest Service.
    Under a U.S. Forest Service permit program, the Allens paid about $130 per year to have their small summer retreat on public land. As decades passed, that price didn’t go up much. By the 1990s, they were still paying just $300 annually for a half-acre of real estate… Now, because a new Forest Service appraisal values Allen’s half-acre lot at $200,000 — cabin owners pay annual fees set at 5% of each lot’s appraised value — he faces a yearly charge of $10,000 for a place that can’t be used much of the year.

  17. falk burger

    As banks can create debt, they are printing money and fueling inflation, just like the gov. By producing cheap, inferior, watered-down products, the food industry is causing ill health and a “voluntary” flight to quality: more inflation. Crypto-flation, I call it.

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