Michael Hudson: America’s Deceptive 2012 Fiscal Cliff: Part I

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “The Bubble and Beyond.”

How today’s fiscal austerity is reminiscent of World War I’s economic misunderstandings

When World War I broke out in August 1914, economists on both sides forecast that hostilities could not last more than about six months. Wars had grown so expensive that governments quickly would run out of money. It seemed that if Germany could not defeat France by springtime, the Allied and Central Powers would run out of savings and reach what today is called a fiscal cliff and be forced to negotiate a peace agreement.

But the Great War dragged on for four destructive years. European governments did what the United States had done after the Civil War broke out in 1861 when the Treasury printed greenbacks. They paid for more fighting simply by printing their own money. Their economies did not buckle and there was no major inflation. That would happen only after the war ended, as a result of Germany trying to pay reparations in foreign currency. This is what caused its exchange rate to plunge, raising import prices and hence domestic prices. The culprit was not government spending on the war itself (much less on social programs).

But history is written by the victors, and the past generation has seen the banks and financial sector emerge victorious. Holding the bottom 99% in debt, the top 1% are now in the process of subsidizing a deceptive economic theory to persuade voters to pursue policies that benefit the financial sector at the expense of labor, industry, and democratic government as we know it.

Wall Street lobbyists blame unemployment and the loss of industrial competitiveness on government spending and budget deficits – especially on social programs – and labor’s demand to share in the economy’s rising productivity. The myth (perhaps we should call it junk economics) is that (1) governments should not run deficits (at least, not by printing their own money), because (2) public money creation and high taxes (at lest on the wealthy) cause prices to rise. The cure for economic malaise (which they themselves have caused), is said to be less public spending, along with more tax cuts for the wealthy, who euphemize themselves as “job creators.” Demanding budget surpluses, bank lobbyists insist that austerity can enable private-sector debts to be paid.

The reality is that when banks load the economy down with debt, this leaves less to spend on domestic goods and services while driving up housing prices (and hence the cost of living) with reckless credit creation on looser lending terms. Yet on top of this debt deflation, bank lobbyists urge fiscal deflation: budget surpluses rather than pump-priming deficits. The effect is to further reduce private-sector market demand, shrinking markets and employment. Governments fall deeper into distress, and are told to sell off land and natural resources, public enterprises, and other assets. This creates a lucrative market for bank loans to finance privatization on credit. This explains why financial lobbyists back the new buyers’ right to raise the prices they charge for basic needs, creating a united front to endorse rent extraction. The effect is to enrich the financial sector owned by the 1% in ways that indebt and privatize the economy at large – individuals, business and the government itself.

This policy was exposed as destructive in the late 1920s and early 1930s when John Maynard Keynes, Harold Moulton and a few others countered the claims of Jacques Rueff and Bertil Ohlin that debts of any magnitude could be paid if governments would impose deep enough austerity and suffering. This is the doctrine adopted by the International Monetary Fund to impose on Third World debtors since the 1960s, and by European neoliberals defending creditors imposing austerity on Ireland, Greece, Spain and Portugal.

This pro-austerity mythology aims to distract the public from asking why peacetime governments can’t simply print the money they need. Given the option of printing money instead of levying taxes, why do politicians only create new spending power for the purpose of waging war and destroying property, not to build or repair bridges, roads and other public infrastructure? Why should the government tax employees for future retirement payouts, but not Wall Street for similar user fees and financial insurance to build up a fund to pay for future bank over-lending crises? For that matter, why doesn’t the U.S. Government print the money to pay for Social Security and medical care, just as it created new debt for the $13 trillion post-2008 bank bailout? (I will return to this question below.)

The answer to these questions has little to do with markets, or with monetary and tax theory. Bankers claim that if they have to pay more user fees to pre-fund future bad-loan claims and deposit insurance to save the Treasury or taxpayers from being stuck with the bill, they will have to charge customers more – despite their current record profits, which seem to grab everything they can get. But they support a double standard when it comes to taxing labor.

Shifting the tax burden onto labor and industry is achieved most easily by cutting back public spending on the 99%. That is the root of the December 2012 showdown over whether to impose the anti-deficit policies proposed by the Bowles-Simpson commission of budget cutters whom President Obama appointed in 2010. Shedding crocodile tears over the government’s failure to balance the budget, banks insist that today’s 15.3% FICA wage withholding be raised – as if this will not raise the break-even cost of living and drain the consumer economy of purchasing power. Employers and their work force are told to save in advance for Social Security or other public programs. This is a disguised income tax on the bottom 99%, whose proceeds are used to reduce the budget deficit so that taxes can be cut on finance and the 1%. To paraphrase Leona Helmsley’s quip that “Only the little people pay taxes,” the post-2008 motto is that only the 99% have to suffer losses, not the 1% as debt deflation plunges real estate and stock market prices to inaugurate a Negative Equity economy while unemployment rates soar.

There is no more need to save in advance for Social Security than there is to save in advance to pay for war. Selling Treasury bonds to pay for retirees has the identical monetary and fiscal effect of selling newly printed securities. It is a charade – to shift the tax burden onto labor and industry. Governments need to provide the economy with money and credit to expand markets and employment. They do this by running budget deficits, and this can be done by creating their own money. That is what banks oppose, accusing it of leading to hyperinflation rather than help economies grow.

Their motivation for this wrong accusation is self-serving and their logic is deceptive. Bankers always have fought to block government from creating its own money – at least under normal peacetime conditions. For many centuries, government bonds were the largest and most secure investment for the financial elites that hold most savings. Investment bankers and brokers monopolized public finance, at substantial underwriting commissions. The market for stocks and corporate bonds was rife with fraud, dominated by insiders for the railroads and great trusts being organized by Wall Street, and the canal ventures organized by French and British stockbrokers.

However, there was little alternative to governments creating their own money when the costs of waging an international war far exceeded the volume of national savings or tax revenue available. This obvious need quieted the usual opposition mounted by bankers to limit the public monetary option. It shows that governments can do more under force majeur emergencies than under normal conditions. And the September 2008 financial crisis provided an opportunity for the U.S. and European governments to create new debt for bank bailouts. This turned out to be as expensive as waging a war. It was indeed a financial war. Banks already had captured the regulatory agencies to engage in reckless lending and a wave of fraud and corruption not seen since the 1920s. And now they were holding economies hostage to a break in the chain of payments if they were not bailed out for their speculative gambles, junk mortgages and fraudulent loan packaging.

Their first victory was to disable the ability – or at least the willingness – of the Treasury, Federal Reserve and Comptroller of the Currency to regulate the financial sector. Goldman Sachs, Citicorp and their fellow Wall Street giants hold veto power the appointment of key administrators at these agencies. They used this beachhead to weed out nominees who might not favor their interests, preferring ideological deregulators in the stripe of Alan Greenspan and Tim Geithner. As John Kenneth Galbraith quipped, a precondition for obtaining a central bank post is tunnel vision when it comes to understanding that governments can create their credit as readily as banks can. What is necessary is for one’s political loyalties to lie with the banks.

In the post-2008 financial wreckage it took only a series of computer keystrokes for the U.S. Government to create $13 trillion in debt to save banks from suffering losses on their reckless real estate loans (which computer models pretended would make banks so rich that they could pay their managers enormous salaries, bonuses and stock options), insurance bets gone bad (underpricing risk to win business to pay their managers enormous salaries and bonuses), arbitrage gambles and outright fraud (to give the illusion of earnings justifying enormous salaries, bonuses and stock options). The $800 billion Troubled Asset Relief Program (TARP) and $2 trillion of Federal Reserve “cash for trash” swaps enabled the banks to continue their remuneration of executives and bondholders with hardly a hiccup – while incomes and wealth plunged for the remaining 99% of Americans.

A new term, Casino Capitalism, was coined to describe the transformation that finance capitalism was undergoing in the post-1980 era of deregulation that opened the gates for banks to do what governments hitherto did in time of war: create money and new public debt simply by “printing it” – in this case, electronically on their computer keyboards.

Taking the insolvent Fannie Mae and Freddie Mac mortgage financing agencies onto the public balance sheet for $5.2 trillion accounted for over a third of the $13 trillion bailout. This saved their bondholders from having to suffer losses from the fraudulent appraisals on the junk mortgages with which Countrywide, Bank of America, Citibank and other “too big to fail” banks had stuck them. This enormous debt increase was done without raising taxes. In fact, the Bush administration cut taxes, giving the largest cuts to the highest income and wealth brackets who were its major campaign contributors. Special tax privileges were given to banks so that they could “earn their way out of debt” (and indeed, out of negative equity).[1] The Federal Reserve gave a free line of credit (Quantitative Easing) to the banking system at only 0.25% annual interest by 2011 – that is, one quarter of a percentage point, with no questions asked about the quality of the junk mortgages and other securities pledged as collateral at their full face value, which was far above market price.

This $13 trillion debt creation to save banks from having to suffer a loss was not accused of threatening economic stability. It enabled them to resume paying exorbitant salaries and bonuses, dividends to bondholders and also to pay counterparties on casino-capitalist arbitrage bets. These payments helped the 1% receive a reported 93% of the gains in income since 2008. The bailout thus polarized the economy, giving the financial sector more power over labor and consumers, industry and the government than has been the case since the late 19th-century Gilded Age. All this makes today’s financial war much like the aftermath of World War I and countless earlier wars. The effect is to impoverish the losers, appropriate hitherto public assets for the victors, and impose debt service and taxes much like levying tribute. “The financial crisis has been as economically devastating as a world war and may still be a burden on ‘our grandchildren,’” Bank of England official Andrew Haldane recently observed. “‘In terms of the loss of incomes and outputs, this is as bad as a world war.’ he said. The rise in government debt has prompted calls for austerity – on the part of those who did not receive the giveaway. ‘It would be astonishing if people weren’t asking big questions about where finance has gone wrong.’”[2]

But as long as the financial sector is winning its war against the economy at large, it prefers that people believe that There Is No Alternative. Having captured mainstream economics as well as government policy, finance seeks to deter students, voters and the media from questioning whether the financial system really needs to be organized in the way it is. Once such a line of questioning is pursued, people may realize that banking, pension and Social Security systems and public deficit financing do not have to be organized in the way they are. There are much better alternatives to today’s road to austerity and debt peonage.


[1] No such benefits were given to homeowners whose real estate fell into negative equity. For the few who received debt write-downs to current market value, the credit was treated as normal income and taxed!

[2] Philip Aldrick, “Loss of income caused by banks as bad as a ‘world war’, says BoE’s Andrew Haldane,” The Telegraph, December 3, 2012. Mr. Haldane is the Bank’s executive director for financial stability.

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About Lambert Strether

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


  1. Susan the other

    Impeach Obama and nationalize finance and regulate the Congress and President. No politicians should go unregulated.

  2. Generalfeldmarschall Von Hindenburg

    Austerity serves the interest of a vampiric and ultimately self destroying elite. So until there’s a major upheaval of the social order, don’t expect any change. More fascism, more austerity, torture, surveillance and propaganda.

  3. rob

    The war of our times.a class war that is leaving carnage of broken families and people.these are the carnage of the gutted and bankrupted businesses.The collateral damage.All the war style euphemisms.All the arbitrarily imposed poverty.These are “war crimes”…..
    And all that without the general population even knowing it is going on.They just know that what they have been working for for so long,isn’t panning out the way they wanted it to…The media is not silent;but worse.They are lying to the people to sell them a fraudulent bag of goods.
    The war on the people. And the people are losing. They are fighting the tanks of deception with sticks and stones.

    1. be'emet

      trickle down on Broadway

      OPOOP demanded our money to SPEND
      While all their intent was only to LEND

      doggerel rules!
      OPOOP = One Percent Of One Percent = .01%

    2. LeonovaBalletRusse

      rob: These are “war crimes”…..

      They were war crimes before, and they are war crimes now, and the same DNA is behind all of these war crimes and crimes against humanity. Of course, “It’s nothing personal” — it’s just about their “profits in perpetuity” no matter what it costs others. Their DNA Reich claim entitlement to all resources, all power, all glory, all control, all wealth, all the time. It’s just that simple. They and their gene pools past, present, and future, are psychotic. They are the enemy.

      And by their pharmaceutical “investments” in the “human body as its marketplace,” they have added to their psychotic ranks, making the world in Their Image.

  4. Brindle

    Michael Hudson is nearly always a good read.
    He gets to the crux of our present circumstance and in language the layperson like myself can understand.

  5. Glasshammer

    My Macro-Economics is rusty but…

    If you know one sector of the economy is running a deficit (in this case the public sector) then it would stand to reason that another sector is running a surplus.

    Is there a sector running a surplus inside the U.S.?

    Is there a surplus outside of the U.S. with one of our trading partners?

    1. Ben Johannson

      The foreign and private sectors are currently running a surplus against the government’s deficits.

      1. Glasshammer


        Thanks for the response.

        When I last checked the U.S. current account we were running a deficit. That would indicate that other countries (China, Japan, Germany, etc..) are running foreign account surpluses.

        This leaves me with only one answer to “Who is running a surplus?” and that answer is the private sector.

        1. Jose Guilherme

          The rest of the world and the U.S. Private sector are running a surplus.

          (G-T) = (S-I) + (M-X)

          Meaning that the Budget deficit equals net private sector savings plus the current account deficit (the surplus of the rest of the world versus the U.S.).

        2. reasoninrevolt

          It’s worth remembering that the domestic private sector consists of everything but the state (and obviously the external sector), so it includes household *and* corporate. While households may be in deficit, corporates are in surplus, and these, added together, produce a net private surplus.

          (I don’t have the figures to prove this, but I’m sure somebody could find them?)

  6. JohnB

    SHE IS Pissed, but oooh so correct…

    Alan Simpson, Senator from Wyoming , Co-Chair of the Deficit

    Commission, calls senior citizens the Greediest Generation as he

    compared “Social Security” to a Milk Cow with 310 million teats.

    Here’s a response in a letter from PATTY MYERS in Montana … I think

    she is a little ticked off! She also tells it like it is!

    “Hey Alan, let’s get a few things straight..

    1. As a career politician, you have been on the public dole for FIFTY YEARS.

    2. I have been paying Social Security taxes for 48 YEARS (since I was

    15 years old. I am now 63).

    3 My Social Security payments, and those of millions of other

    Americans, were safely tucked away in an interest bearing account for

    decades until you political pukes decided to raid the account and give

    OUR money to a bunch of zero ambition losers in return for votes, thus

    bankrupting the system and turning Social Security into a Ponzi scheme

    that would have made Bernie Madoff proud..

    4. Recently, just like Lucy & Charlie Brown, you and your ilk pulled

    the proverbial football away from millions of American seniors nearing

    retirement and moved the goalposts for full retirement from age 65 to

    age 67. NOW, you and your shill commission is proposing to move the

    goalposts YET AGAIN.

    5. I, and millions of other Americans, have been paying into Medicare

    from Day One, and now you morons propose to change the rules of the

    game. Why? Because you idiots mismanaged other parts of the economy to

    such an extent that you need to steal money from Medicare to pay the


    6. I, and millions of other Americans, have been paying income taxes

    our entire lives, and now you propose to increase our taxes yet again.

    Why? Because you incompetent bastards spent our money so profligately

    that you just kept on spending even after you ran out of money. Now,

    you come to the American taxpayers and say you need more to pay off

    YOUR debt. To add insult to injury, you label us “greedy” for calling

    “bullshit” on your incompetence. Well, Captain Bullshit, I have a few

    questions for YOU;

    1. How much money have you earned from the American taxpayers during

    your pathetic 50-year political career?

    2. At what age did you retire from your pathetic political career, and

    how much are you receiving in annual retirement benefits from the

    American taxpayers?

    3. How much do you pay for YOUR government provided health insurance?

    4. What cuts in YOUR retirement and healthcare benefits are you

    proposing in your disgusting deficit reduction proposal, or, as usual,

    have you exempted yourself and your political cronies?

    It is you, Captain Bullshit, and your political co-conspirators called

    Congress who are the”greedy” ones. It is you and your fellow nutcases

    who have bankrupted America and stolen the American dream from

    millions of loyal, patriotic taxpayers. And for what? Votes. That’s

    right, sir. You and yours have bankrupted America for the sole purpose

    of advancing your pathetic political careers. You know it, we know it,

    and you know that we know it. And you can take that to the bank, you

    miserable son of a bitch.

    If you like the way things are in America delete this. If you agree

    with what a fellow Montana citizen Patty Myers says, PASS IT ON!

      1. diptherio

        She must mean “ambition” with a positive valence, i.e. making the world a better place or something, not the negative ambition of screwing over as many for as much as (in)humanly possible.

      2. Hypothetical_Taxpayer

        Wrong again.

        By law, the SS Trust fund is loaned back to the USG. The transactions are accounted for with “special Treasuries” that pay interest and can only be redeemed directly with the Treasury at maturity.

        The “raided and lost it” meme is part of the anti SS propaganda out there. It supposed to make us mad that the gubmint lost our money – but unfortunately we just need to “get over it” and move on. Somewhere.

        1. Don Levit

          Hypothetical Taxpayer:
          I just want to get this straight. Are you suggesting that the SS trus fund invested the excess FICA taxes in special-issue Treasuries, and that this is the only financial transaction done with the surplus?
          Because I understand the trust fund being loaned to the Treasury to pay for current expenses, like battleships, and the special-Treasuries were issued as collateral for those loans.
          In other words, the SS trust fund was used to pay for battleships, etc., rather than left intact strictly for SS beneficiaries.
          Don Levit

          1. Min

            Don, do you think that the Social Security Trust Fund should just consist of stacks of dollar bills? Or as a checking account, earning no interest?

          2. Hypothetical_Taxpayer

            “I just want to get this straight.”

            c’mon. You just aren’t trying very hard.

            Say $1000 in surplus FICA goes to the trust fund

            By law, the treasury prints up a special treasury with face value of $1000 and a interest rate that is the going market rate for regular traded treasuries at that time. The terms of the bond is it can be redeemed for $1000 with the Treasury at maturity.

            They do the transaction. The treasury pays whatever bills came due that congress racked up. Or maybe pay off some old regular treasuries that came due.

            The SS Admin put the treasury somewere safe until it’s due and then they cash it in at the Treasury and send the cash to some SS recipient.

          1. Hypothetical_Taxpayer

            I did’t say. They did. The idea was that they would not try and run it like a pension fund and diverify among various investments (usually 50% of most pension funds goes to treasuries anyway), but put it all in USG securites.

            And they didn’t break that law! We gave ’em all the money. They are just trying to wriggle out of benefit payments.

            Also, the official SS expaination for all the bullets is that they have their own fraud investigators, whom carry firearms and the bullets are for target practice. But 177,000 rounds for target practice seems like a lot to me.

      1. Don Levit

        Actually, this is for Hypothetical Taxpayer. What do you mean when you wrote “we gave ’em all the money?” What money and to whom was it given?
        If the trust fund money was not loaned to the Treasury to pay for current expenses, why is the $2.7 trillion balance called intragovernmental debt?
        Don Levit

        1. Ben Wolf

          If the trust fund money was not loaned to the Treasury to pay for current expenses, why is the $2.7 trillion balance called intragovernmental debt?

          Because “debt” simply signifies a liability, i.e. that at maturity the government must redeem the bonds at the agreed rate. Liabilities are nothing more than an entry on one-half of a balance sheet.

          1. Don Levit

            Correct, it is a liability that will be paid off with new general revenues – the same way the government pays all expenses. In addition, it is labeled intragovernmental debt, for it is a liability to the Treasuruy and an asset to the SS trust fund.
            From a cash (budget) perspective, the liability represents cash when exercised. On the other hand, the asset represents a non-cash item.
            That is why intragovernmental transfers are excluded when calculating trust fund cash flow.
            See http://www.ssa.gov/OACT/ProgData/allOps.html.
            Don Levit
            Don Levit

    1. Eric377

      Point 3 is simply incorrect. It is true that some portion of the taxes paid were used to buy interest paying Treasury debt held in the Social Security Trust Fund. However the part about raiding it and giving it away is completely made up. The only outflow of resources from the Trust Fund has gone 100% into the Social Security program. It is true enough that forces are at work with a goal of slowing down the redemption of this debt, but so far no one has been so bold as to suggest that the proceeds of this debt simply be transferred to other purposes. Why make stuff up when the actual threat is serious enough?

      1. Don Levit

        What resources are flowing out of the trust funds? The only item flowing out of the trust funds are intragovernmental transfers. And these transfers occurred in response to the excess FICA taxes being spent by the Treasury to pay for current expenses. Intragovernmental transfers are not considered resources of the trust funds. In fact, they are considered as expenses, non-income, and actually add to the budget deficits, while “appearing” to look like a budget trust fund surplus.
        From a CBO paper entitled “The Impact of Trust Fund Programs on Federal Budget Surpluses and Deficits:”
        Page 2 “Even Social Security, largely supported by taxes on employees and employers, is credited with substantial amounts of intragovernmental ‘income,’ the largest being ‘interest’ accrued on its holdings of federal securities. But no public or outside entity pays that interest; it is a credit from the government’s general fund to the Social Security trust funds.”
        Page 3 “For the next 10 years, trust fund programs overall are projected to run a cumulative surplus of $3.4 trillion. However, with intragovernmental transfers excluded, the funds activities are expected to generate a cumulative 10-year deficit of $1.2 trillion.”
        Don Levit

    2. damian

      Simpson is the worst hypocrite of them all – all the opinions of the neo-liberals snake back to think tanks supported and paid for by Petersona and the Koch Brothers one way or another – all the BS on CNBC by Bartoromo and Kiernan are about propaganda not news – they are in the same promotion game with Peterson – there is no debt problem in the USA that a reduction in the defense department and CIA could solve with %500 billion a year – all debt would be repaid in less than 30 years – no country needs 700 foreign bases and an arms race with no one else to compete with

      solve that one budget line and reverse the terms of the WTO and all the problems are over

    3. hb

      she’s a little confused about one thing, though. the ‘interest-bearing account’ her SS money was tucked away in until the politicians supposedly went wild.

      nope, it’s always been the case that any surplus SS collections were borrowed by the feds & spent in exchange for federal securities.

      The social security trust fund *is* the ‘interest-bearing account’.

      the only thing that changed was that after the SS amendments of 1983, SS taxes were significantly in excess of what was needed to fund then-current retirees. which meant the feds got to borrow even *more* surplus SS money.

      but the ‘interest-bearing account’ didn’t disappear, it just got bigger.

      1. Ben Johannson

        nope, it’s always been the case that any surplus SS collections were borrowed by the feds & spent in exchange for federal securities.

        Social Security money is not “lent and spent”. The account holding SS dollars is debited and the account holding SS securities is credited so the Trust Fund can earn a percentage.

        Digits get changed in accounts, that’s it and that’s all.

  7. Mark P.

    This is a comprehensive, historically knowledgeable analysis, which needs to be spread to counter the idiot propaganda from the MSM. I look forward to Part 2.

    1. financial matters

      A good question, Veblen definitely had extraordinary insights in his area of interest..


      “”It was left to Veblen to deal with the rentiers’ increasingly dominant yet corrosive role, extracting their wealth by imposing overhead charges on the rest of society. The campaign for land taxation and even financial reform faded from popular discussion as socialists and other reformers became increasingly Marxist and focused on the industrial exploitation of labor.””

      “”Denial of the classical distinction between value and price (and hence, between earned and unearned income)””

      “”The timeless and decontextualized generalities drawn by the pro-rentier logic used circular reasoning to justify the status quo as being natural and in equilibrium. By definition, there was no rentier exploitation, even as economies were polarizing. Assuming that every income recipient is paid for a contribution to production implies that the existing distribution of property and mode of financing are optimum. There thus seems to be no need for reform or regulation, either socialist or protectionist.””

      “what makes today’s economics different is that it actually would help to look backward, to the epoch before the financial sector and its allied rentier interests hijacked the discipline. The most systematic analysis of this process was that of Veblen nearly a century ago. It remains sufficiently relevant that Marxists and more heterodox critics have incorporated his theorizing into their worldview.””

      1. LeonovaBalletRusse

        fm, re savvy of Veblen and Hudson: “Plus ca change, plus c’est la meme chose.”
        http://jessescrossroadscafe.blogspot.com/2012/12/strangers-among-us-fatal-allure-of.html — Text plus video, re psychopaths, especially corporate psychopaths in power among us through centuries of psychopathy, aided and abetted by “Pharmaceuticals” such as Prozac. For the fundamental importance of a “Pharmaceutized” population to the success of the Global Reich’s agenda, connect: Rockefeller Dynasty with IG Farben PetroChemAgriPharmaWar Cartel:

        //This article highlights the birth place of the “Brussels EU” on the drawing boards of the Nazi/IG Farben-coalition for a post-war Europe under their control./ . . . One of the strategic industries for which IG Farben sought global control was the pharmaceutical “investment business”. They knew that the pharmaceutical industry is not primarily a health industry, but an investment business that defines the human body as its marketplace. While presenting itself as the purveyor of health, the entire existence of this investment industry has been based on the continuation and expansion of diseases as multibillion dollar markets for patented drugs.// [& patented seeds, etc.]
        The Complete Works in Film of Stanley Kubrick–Kubrick knew first hand that *They* were/are psychopaths, and he showed us how they were psychopaths, over his film career, one film at a time. Stanley Kubrick may be a martyr.

        “THE PARALLAX VIEW” (1974) – Directed by Alan J. Pakula;
        “THE MANCHURIAN CANDIDATE (2004) – Directed by Jonathan Demme – starring Denzel Washington, Meryl Streep, Liev Schreiber [actually, The “Manchurian Global” Candidate – an updated national nightmare].

        CONNECT noses in profile of David Rockefeller, Meryl Streep, Tim Geithner.

        The Global Reich is a Genetic (Dynastic) Empire morphing through millennia. As ever, their lust for power, control, and wealth in every walk of life is insatiable: “Bis! Bis! Bis!”

          1. LeonovaBalletRusse

            NOTE two sound Comments found below the Jensen monologue in “Network” (1976) linked in Reply above:

            //neosoc 3 weeks ago
            /”State Capitalism” is a red herring. This is the natural evolution of capitalism, as a natural result of the internationalization of commerce and trade.
            Reply · in reply to rainer1980 (Show the comment)//

            //Vex T 3 weeks ago
            /Corporate admiralty maritime law is what Arthur Jensen was explaining to Howard in this scene. Know your inherent natural rights, identify the enemy corps or dead entities, understand their practices and deceptions, and instill the idea that non-compliance is defiance!//

    2. larry

      I think it useful to point out that the given link to Veblen’s critical review, appearing in the Political Science Quarterly in September 1920, is of Keynes’ Economic Consequences of the Peace (1919). It is not about Keynes’ monetary views or his later views expounded in the General Theory. As a ‘quick and dirty’ summary – Keynes thought Wilson was a moron and Veblen thought Keynes was politically naive.

  8. Eric L. Prentis

    The post by Michael Hudson on the fiscal cliff is peculiar, in a disjointed rambling way. Reminiscent of obfuscation, rather than illumination.

    The fiscal cliff analogy, I see, is the financial elite have led us—like “General” George Armstrong Custer led his troops, at the battle of the Little Bighorn—into certain economic doom. The following five main policies, implemented by the financial elite over the past four years, are now impossible to extricate ourselves from, without causing a depression: 1) ongoing Zero Interest Rate Policy (ZIRP); 2) continued Quantitative Easing, thereby monetizing the debt; 3) Federal budget deficits running at -$1 trillion dollars a year; 4) allowing fraud to go unpunished, with no needed structural reforms in place; and 5) an increasing $700 trillion dollar market in unregulated OTC derivatives, daisy chained around the world..

    Fiscal cliff discussions in the MSM, and also on the blogs, are designed by the financial elite, who own the MSM, to scare the public to rush, this year, into keeping these malignant policies in place.

    Obviously, the financial elite see a way out, FOR THEM. To learn what that is, please read my Economic Populist article, published on December 17, 2012, entitled, “WORLD-MARKET-STATE vs. DEMOCRACY: Why We Should Go Over the Fiscal Cliff.”


    1. The Rage

      Disagree on “QE”. That will end once debt in mortgages outpaces servicing. QE will not be needed then.

      All monetization of debt gets back to the debt owner relieving the debt at some point.

    2. Lambert Strether Post author

      1. It’s not useful to denigrate an author in broad brush terms (“obfuscation, rather than illumination”). If you want to attempt to defeat the author in detail, have at it, but a set of general observations doesn’t warrant the broad brush.

      2. I at least (I can’t speak for Yves on this) tend to deprecate links out from the blog along the lines of “Go here and read my blog, to understand” (not the same as a link out for evidence); at least a summary of the main ideas should be given. I think that if an idea is good enough to be fought out here, it should be fought out here, to educate the NC readership (and be tested by it).

  9. Glen

    I know Ben got the jump on naming the “Fiscal Cliff”, and I suppose that’s good enough for him(he seems to be telling Congress to act after all), but from my perspective, I’ve decided that a better name for our situation would be:

    Now Small Enough To Drown In A Bathtub

    The irony here is that Grover wanted to shrink government, but instead managed to create a totally subservient government which caters to the 0.1% with massive infusions of wealth and screws everybody else. So we really need to update his quote:

    Americans – Now Powerless Enough To Drown In A Bathtub

    1. Aquifer

      As somebody has said – the best way to keep folks from exercising their power is to convince them they have none. Subclauses are, of course, “TINA”, “can’t win/be done”, and variations on those themes. Once one is aware of this dynamic, it is amazing how often one can spot it in everyday discourse ….

  10. The Rage

    I am not sure the “fiscal cliff” could cause a recession. The only reason why this is a factor now is, the debt servicing is seeing the light at the end of the tunnel. Once that ends, so does the “recession” in general. Confidence will zoom through the system and the next credit bubble will begin.

    But they don’t want to risk it.

  11. kris

    I am a conservative right winger.
    NakeCap is the only bonafide left wing blog I read.

    Michael Hudson is one of my favorites.

  12. Matt

    Oh so all our government has to do is print our way out of this mess, only one problem with that is no economy has ever been successful with a fiat currency in the long run. Why so? Very simple, because politicians always wind up printing fiat currency into oblivion and currency collapse 100% of the time.
    The real problem with the US economy are the so called academics at the helm pushing left wing Keyensian economic voodoo down the throats of the ignorant working class, and as always they believe that THIS TIME they have it all figured out.
    Sorry but this country is doomed until idiots like the author of this article are replaced in our colleges and universities with people who have a real and common sense grasp of economics.

    1. skippy

      “Sorry but this country is doomed until idiots like the author of this article are replaced in our colleges and universities with people who have a real and common sense grasp of economics.” – Matt

      Real and common sense is not applicable by standard, as there is none inherent in economics. There is only social politics or how society should be structured.

      It is farcical to say… economics is empirical or applies any blind experiment control to deduce its opines, it just obfuscates the intended social control mechanisms. Gold, guns, stores of wealth go right out the window with out social cohesion.

      Skippy… So at the end of the day… what is the best form of coercion to apply, in this new event horizon (the world has never seen this global condition) and make it down the road a bit further… eh… go backwards?

    2. aj

      I would gladly concede this point to you, if we tried some Keynesian Economic Voodoo and it didn’t work out. As it is, the last time this has been tried was after the Great Depression. You might have read about it, it was called the New Deal. And IIRC it worked pretty good until the bankers convinced FDR he should put the breaks on.

      “[N]o economy has ever been successful with a fiat currency in the long run.” Source please. Also, where are all the successful economies currently being run without a fiat currency?

      1. aj

        As an aside, this argument always reminds me of Warren Mosler’s story about the carpenter. It goes like this.

        A carpenter is trying to cut a board to the correct length. He cuts a little bit off, but it’s not the right size, so he cuts a little more. It’s still not the right size so he cuts off a little bit more. After doing this several times he exclaims in frustration, “Dammit, no matter how much I cut off, it’s just not long enough.”

        1. Aquifer

          LOL! This is a variation of a phrase my Dad used to use – “I cut and i cut and I cut, and it was still too short!” Whenever i would quote him in what seemed to be an appropriate setting, folks look at me quizzically and say “Huh?”

          This is the first time i have seen/heard anyone else use it …

  13. Paul Tioxon

    Michael, you are writing in the great tradition of America’s intellectual champions, the Pragmatists, in particular, William James. Prior to the outbreak of WWI, James delivered an essay which parallels your observation that under the threat of war, all things fiscal are possible for the nation state, without the indebted of the private banking sector. “THE MORAL EQUIVALENT OF WAR”, delivered in 1906, took apart the driving force of war, as a necessary imperative to discipline an otherwise unambitious, child like and lazy society, drifting without meaning or purpose due to a lack of the virtues of character only acquired in bloody violence.

    In the essay, he proposed what looks remarkably like the New Deal, in its work programs. The moral equivalent to war was to conscript the young men into a leviathan of economic productivity, not for war material, guns, tanks and bombs but to fabricate sky scrapers, tunnels, farms, factories, decent housing, railroads and highways and on and on, a new social order built by the people and financed in the same way governments were so willing to throw open its treasury in the cause of bloodbaths.

    If the ensuing prosperity of the New Deal and the post WWII prosperity had a prophet, it was James and his crystal clear call for a MORAL EQUIVALENT OF WAR, to mobilize the entire nation to build a better world, not bomb it back to the stone age. The following link, is of more than historical curiosity, it is a cultural transmission from a movement that changed America and the world. This particular file is well annotated for students and has some wonderful illustrations and can be downloaded and printed. It will provide much of the necessary ammunition to argue in the war against war.


    1. aj

      I don’t have time to read this now, but it sounds really interesting. I look forward to reading it this evening. Thanks for the link.

    2. LeonovaBalletRusse

      Paul T: “virtues of character only acquired in bloody violence.”

      Well, that is the macho el dicko party line. Let’s see how many bloody soldiers can hack it at the barre, on the floor, under the lights at the Bolshoi or the Mariinsky.

    3. Aquifer

      Another James fan, I presume ….

      I remember reading this years ago and having a serious problem with:

      “…. a conscription of the whole youthful population to form for a certain number of years a part of the army enlisted against Nature, …. They would have paid their blood-tax, done their own part in the immemorial human warfare against nature; ….”

      It seemed to me, when i first read it some 70 years or so after it was written, that the war against Nature had rather gone quite too far already and needed to be ended, not expanded – one rather large blind spot he seemed to suffer from …

      However there are some other gems there. To whit:

      “I have no serious doubt that the ordinary prides and shames of social man, once developed to a certain intensity, are capable of organizing such a moral equivalent as I have sketched, or some other just as effective for preserving manliness of type. It is but a question of time, of skilful propogandism64, and of opinion-making men seizing historic opportunities.”

      “Some other just as effective” would be my choice – but his point is well taken and illustrates his profound insight into the nature of effective discourse thus:

      “Pacifists ought to enter more deeply into the aesthetical and ethical point of view of their opponents. Do that first in any controversy, says J. J. Chapman, then move the point, and your opponent will follow …”

      Bingo! – as i have suggested in other places – if you want someone to follow/agree with you, you oughtn’t stand on the other side and yell at him to come over – but cross to his side to see where he stands and why, then take his hand, or “move the point” as stated above ….

  14. JTFaraday

    The way I see it, down the road the financial sector will seek to get Americans to accept their bailouts and lack of prosecution and/or re-regulation by throwing the public a ill paid scut-work bone, that will get the peasants off the streets and more fully under their thumbs without altering in one iota the rules under which they– or anyone else in the corporate world– get to play.

    They will spin this as the New New Deal. That they haven’t done this to date is only a testament to how much Obama has allowed them to get away with– which is a lot more than even Hank Paulson ever thought they would.

    When the bankers do seek to normalize their corruption, once and for all, by buying off the public in a way that is as politically dis-enabling as anything any other totalitarian government could contrive, it’s clear to me that the MMT-ers at UMKC will be there to effect the next Great Betrayal.

    Bill Black and Michael Hudson, who work in different and more critical intellectual frameworks, will have to decide where they stand on this.

    I know where I stand on it. I’m not having it.

    1. JTFaraday

      That is to say, without altering the rules under which they get to play unless it’s for the worse.

      Which it will be, because it already is and because the moralistic overseers of workfare on the putatively “liberal” side of the national political divide are as bad as any conservative you will find today in the former slave states.

  15. steve from virginia

    There are two key figures in World War One financing: an American, William Gibbs McAdoo and the German Walter Rathenau.

    Prior to hostilities breaking out, much of Europe’s gold had been sent to the US … a form of capital flight. This gold became collateral for ‘investments’ in the US stock market. As war clouds gathered, there were the demands (from all European governments) for gold and repatriation of national stocks … Secretary Treasury McAdoo ordered the stock market be closed for four months in 1914 so that investors could not sell stocks and reclaim their gold. Had they been able to do so, the gold-backed dollar would have been depreciated rapidly, leading to a US recession.

    As it was, the US was able to maintain its economic footing and by doing do become the West’s wartime lender, replacing the (bankrupt) UK.


    The Europeans governments did not print, they borrowed, their war debts became a massive issue after the war ended, contributing to the Great Depression.

    Rathenau’s role was more complex and more far-reaching: during the first months of the war Germany faced three existential crises: a shortage of nitrates used in the making of explosives (due to the British blocked of nitre from S. America), a shortage of ammunition, particularly of machine gun cartridges … and a shortage of funds.

    Germany’s army exhausted what was to have been a year’s supply of ammunition in four weeks …

    Rathenau is no-doubt the most important figure of the 20th century … that nobody has ever heard of. His father was the Galt-ish inventor/industrialist Emil Rathenau, called ‘The Thomas Edison of Germany’, the founder of the firm AEG. Son Walter was both curious and personable, he became well known to the other industrialists for his acumen, eventually finding seats on the boards of many large German firms.

    Rathenau personal knowledge of firms’ industrial processes was extraordinary and useful to the German government.

    When the war began, Rathenau volunteered his services to the Kaiser and became Minister of Raw Materials (within the War Ministry), tasked with solving the shortages. The Haber-Bosch nitrogenation process was turned to making synthetic nitrates: the Germans shifted in an instant from a desperate shortage to an excess, Rathenau had little to do with this.

    In the areas of manufacture, Rathenau set out to re-organize German industry, having firms break down industrial processes and have each factory restrict itself to making small numbers of identical components in quantity. These were sent to larger shops for final assembly.

    When the war began, workshops made military goods such as artillery pieces by artisanal methods using highly skilled craftsmen. Pieces from different factories were all slightly different by design. After the reorganization, a single shop would forge the gun tube, another would fabricate the liner, another would rifle the liner, another would make the carriage, another would make the wheels, yet another the tires, another the sight another they elevation mechanism, etc. This would be applied to unified designs. The same process was applied to manufacture of ammunition.

    The horizontal linearization of process was applied to all arms manufacturing as well as to other military supplies. Men were replaced by women as factory workers and sent to the front. Critical factories were relocated to the countryside, others were duplicated so the loss or shutdown of a particular factory did not effect production.

    1. LeonovaBalletRusse

      Rathenau was a fine German Jew who spilled the beans on “The Big Club.” He wouldn’t be a “British” Imperial puppet the way Hitler was. He was above the Sabbatean High Priests and rabble who took orders from the Hasidic Court for the Queen/KingOfJerusalem and her Court Jesters of High Finance. So they murdered him in public. This is known as an “assassination.” It’s like what happened to Abe Lincoln and JFK. This is how these worthies “teach lessons.”

  16. LeonovaBalletRusse

    Hudson: “This creates a lucrative market for bank loans to finance privatization on credit.”

    After all, isn’t this the Global RACKET? from Reich III-IV? Bring RICO. Bring the Nuremberg Tribunal Redux. This is a “Conspiracy” to “Rule the World” by engaging in “Pre-emptive Wars” [for prime profit to insider dynasts]. These are War Crimes and Crimes Against Humanity. Bring the ropes, the guillotines, and finish the job.

  17. JenniferJ

    This is what the war on guns, and especially assault rifles is all about: the 1% are terrified of the 99% becoming aware of what’s going on and using guns to shoot the 1%.

    The American people must be disarmed before the total impoverishment of the nation can be carried out.

    1. nonclassical


      …in the latest “dark knight” charade, Bruce Wayne’s fortune is eviscerated, so he can become part of the “proletariat”, but still stand with the forces arrayed against some parallel world “french revolution”…propaganda at its’ finest..aimed at our youth…

  18. H.R. Marumaru


    Australia, ABC1, TV, Lateline, 8th October 2009

    Interview with Dr Lacy Hunt – speaking from Austin Texas [Dr]

    an internationally renowned economist with Hoisington Investment Management, joined Lateline to discuss Australia’s apparent rebound from the financial crisis.

    ….. Interviewer [Int.]: What is your outlook for the global equity markets which have been extraordinarily bullish recently?

    Dr: Well if one goes back and looks at the three debt deflations
    that we have excellent data on, the period in the US from 1874 to 1894, for the US from 1929 to 1941, and also in Japan for the last 20 years, in all 3 cases there were very excessive debt levels, in all 3 cases there was a decline in the price level, and in all 3 cases there was a negative risk premium.

    In other words the total return on treasury bonds exceeded the return on common stocks, and I think that will be the conditions. In debt deflations risk taking is not rewarding. Its… ah… over the long term risk taking has to be rewarding, but we can go for sometimes for 20 years, sometimes even longer than 20 years, in that the normal rules are turned upside down by the excessive indebtedness.

    TF: Sadly of course there’s no corporate memory or personal
    memory on all of this.

    Dr: No, and that’s one of the critical things that was brought to
    the attention of people that studied debt deflation. The critical work here was done by Yale Professor Irving Fisher, who wrote the famous paper, The Debt Deflation Theory Of The Great Depression. And he pointed out that we had a debt deflation period in the 1820’s and the 1830’s, with the financing of the canals, and the turnpikes, and the steamship lines.

    It ushered in a deflation that lasted almost until the Civil War. The next debt debacle was the financing of the railroads in the 1860’s and early 1870’s, that ushered in a two decade period of inflation, and then there was the period of the 1920’s to the early 1940’s. And one of the points that’s been made by Fisher as well as other people who extended Fisher’s work, is that noone is basically alive to remember the prior experience. …..

  19. Eli

    “Given the option of printing money instead of levying taxes, why do politicians only create new spending power for the purpose of waging war and destroying property, not to build or repair bridges, roads and other public infrastructure?”

    The answer to this is obvious. But what I fail to see is how two wrongs make a right. This whole 99% vs 1% talk has done a great job of bringing rampant corruption to light, but I feel as though all the solutions proposed are just flat out misguided. Rather than the question being why the Fed doesn’t print more money to solve our problems, shouldn’t the question be why the Fed prints more money at all? It doesn’t take a genius to realize that printed money doesn’t create real wealth. So how exactly does the proposal that we pay for expenses today on created wealth that society (the 99%) will be responsible for tomorrow make any sense? It’s simply taking our problems today and passing it on to the next generation after; the same lack of self-responsibility that got us here to begin with. Make no mistake about it, corporatism is at large fault for our economic woes. But all who point their fingers at others yet refuse to point one at themselves is just as big a part of the problem as anyone else.

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