Michael Hudson: From the Bubble Economy to Debt Deflation and Privatization

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

The Federal Reserve’s QE3 has flooded the stock and bond markets with low-interest liquidity that makes it profitable for speculators to borrow cheap and make arbitrage gains buying stocks and bonds yielding higher dividends or interest. In principle, one could borrow at 0.15 percent (one sixth of one percent) and buy up stocks, bonds and real estate throughout the world, collecting the yield differential as arbitrage. Nearly all the $800 billion of QE2 went abroad, mainly to the BRICS for high-yielding bonds (headed by Brazil’s 11% and Australia’s 5+%), with the currency inflow for this carry trade providing a foreign-exchange bonus as well.

This financial engineering is not your typical bubble. The key to the post-2000 bubble was real estate. It is true that the past year and a half has seen some recovery in property prices for residential and commercial property. But something remarkable has occurred. So in this new debt-strapped low-interest environment, Hedge funds and buyout funds are doing something that has not been seen in nearly a century: They are buying up property for all cash, starting with the inventory of foreclosed properties that banks are selling off at distress prices.

Ever since World War II, the operating principle of real estate investors is never to use their own money – or at least, to use as little of their own as possible. Debt leveraging leaves the rental income paid to the banks as interest. The absentee owner is after the capital gain at the end of the bubble’s rainbow. That is what a bubble economy is all about. But the only way that investors can obtain current returns above today’s miniscule rates is to buy assets directly for cash.

In a bubble economy, falling interest rates (e.g., from 1980 to today) almost guarantee capital gains. But today’s near-zero interest rates cannot fall any further. They can only rise, threatening capital losses. That is what is panicking today’s bond and stock markets as the Fed talks about ending QE3’s near-zero interest rate regime. So there is little incentive for bond buying. Once interest rates rise, we are in an “anti-bubble” economy. Instead of capital gains driving “wealth creation” Alan Greenspan style, we have asset-price deflation.

In the Bubble Economy, families became convinced that the way to build up their wealth was to borrow as much as they could to buy the most expensive home they could, and ride the wave of asset-price inflation. But since 2008, consumers have paid down about $5 trillion of personal debt. This has meant using their wages and other income to pay down mortgages, student debt, auto debt, credit-card debt and other bank loans. This leaves only about a quarter of the typical family’s paychecks to spend on goods and services after paying the Finance, Insurance and Real Estate (FIRE) sector and the taxes shifted onto wage earners and consumers. The outlook looks dim for corporate sales and hence earnings. So instead of debt-leveraged inflation of asset prices, we have debt deflation of the overall economy.

To put this in perspective, from 1945 until interest rates rose to their peak in 1980, there was an almost steady 35-year downturn in bond prices. The Bubble Economy was fueled by interest rates being rolled back down to their 1945 levels and even lower. Credit flowed into the financial markets to buy stocks, peaking in the dot.com bubble in 2000, and then to inflate the 2001-2008 real estate bubble.

So we are now in is the Bubble Economy’s legacy. We can think of this as Phase 2: repayment time, along with foreclosure time. That is what happens in debt deflation. The Obama Administration has broken its 2008 campaign promises to Congress and to voters to write down mortgage debt to the ability to pay or to market prices reflecting realistic rental values. The debt legacy has been kept in place, not written down.

Carrying this debt overhead has caused a fiscal crisis. The financial and real estate bubble helped keep state and local finances solvent by providing capital gains taxes. These are now gone – and properties in default or foreclosure are not paying taxes. And whereas public pension funds assumed an 8+% rate of return, they now are making less than 1%. This has left pensions underfunded, and prompted some municipalities to engage in desperate gambles on derivatives. But the Wall Street casino always wins, and most cities have lost heavily to the investment banking sharpies advising them.

In place of a new bubble, financial elites are demanding privatization sell-offs from debt-strapped governments. Pressure is being brought to bear on Detroit to sell off its most valuable paintings and statues from its art museums. The idea is to sell their artworks for tycoons to buy as trophies, with the money being used to pay bondholders.

The same dynamic is occurring in Europe. The European Union and European Central Bank are demanding that Greece sell off its prime tourist land, ports, transport systems and other assets in the public domain – perhaps even the Parthenon. So we are seeing a neo-rentier grab for basic infrastructure as part of the overall asset stripping.

This is a different kind of inflation than one finds from strictly financial bubbles. It is creating a new neo-feudal rentier class eager to buy roads to turn into toll roads, to buy parking-meter rights (as in Chicago’s notorious deal), to buy prisons, schools and other basic infrastructure. The aim is to build financial charges and tollbooth rents into the prices charged for access to these essential, hitherto public services. Prices are rising not because costs and wages are rising, but because of monopoly rents and other rent-extraction activities.

This post-bubble environment of debt-strapped austerity is empowering the financial sector to become an oligarchy much like landlords in the 19th century. It is making its gains not by lending money – as the economy is now “loaned up” – but by direct ownership and charging economic rent. So we are in the “economic collapse” stage of the financialized bubble economy. Coping with this legacy and financial power grab will be the great political fight for the remainder of the 21st century.

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  1. wunsacon


    “A language is a dialect with an army and navy.”
    – Max Weinreich

    “A reserve currency is issued by banks with tanks.”
    – wunsacon

  2. killben

    If people cannot revolt then this is what they have to live with… Charlie “Suck it up and cope” Munger

    1. nonclassical

      …as Poly-Sci students, 70’s-80’s, learned-was done by “Chicago Boys”, south and central America then-described by Perkins, “Confessions of An Economim Hit Man”, and as Naomi Klein described later-“Shock Doctrine-Rise of Disaster Capitalism”…

      Ameri”K”ans haven’t learned the lesson…

      Wish our wonderful Hudson would address ways largest corporations have transferred “assets” off books (becoming “non-taxable”), by paper debt vehicles…making assets appear as “loans-debt”…largely through banking “secrecy jurisdictions”…

  3. Hugh

    To recap the stages of prolonged bubble blowing:

    1. Repeated rounds of debt-leveraged inflation of asset prices stage
    2. Followed by debt deflation of the overall economy stage
    3. Followed by the Great Buy Up stage
    4. Followed by what has been called variously the Tar and Feathers, Torches and Pitchforks, Guillotine, and Lamp Post stage

    1. psychohistorian

      I think the plutocrats believe that things will be different this time and they can hold off stage 4 forever.

      From another perspective, the great property buy up could be seen as a flee from all currencies before the Big Adjustment (soon to come).

    1. Yves Smith Post author

      I assume Hudson means the Fed funds rate:


      Buying liquid securities with overnight funds is risky but common. Buying real estate with overnight funds is a completely different kettle of fish.

      I have been told many of the supposed cash buyers of residential real estate have been using “warehouse lines” which are credit lines used to purchase assets to be sold. I’m told that the usual terms stipulate that the assets are expected to be sold in 18 to 24 months. I’ve never seen one of these agreements, so I’m not familiar with either how precisely the collateral is described or how strictly the expected liquidation of particular assets is overseen and enforced.

      1. Moneta

        Private equity funds might be making cash purchases but the source of those PE funds might well come from leverage.

        i.e. Company issues debt to fund pension plan that decides to invest 5% in a PE fund.

  4. Chris Cook

    I don’t agree with Michael’s analysis.

    Banks are cutting back their lending because their balance sheets are already works of fantasy based upon extend and pretend, and they have a systemic solvency problem.

    To the extent banks still do lend to give speculators leverage, they certainly do not do so at 0.15% pa.

    In my view what is happening is that the immense liquidity that flowed into and inflated correlated bubbles in gold, metals and commodity prices has now finally wised up to the fact that when 99% of people are illiquid, insolvent or both, then the inflation they fear is simply not going to happen.

    In fact, as the bubbles deflate, we my well see deflation in commodity prices: the fall in the gold price may be seen as a belwether.

    So all that formerly inflation hedging money is now flowing in search of yield into stocks and particularly into buy to let property.

    This is not ‘active’ speculator money in search of transaction profit and motivated by greed. It is passive investor money looking to avoid loss and make some – indeed ANY – real return, and the motivation is fear.

    Unusual for me to disagree with Michael, but there we go.

    1. Moneta

      Here in Canada, banks don’t need to make business loans. Investors have been falling over eachother to buy any kind of bond issue whatever the quality is.

      The banks can make good underwriting money on these issues without having to analyze the businesses and not having to carry the risk on their balance sheet. Also, they were probably able to securitize all kinds or dubious loans over the last few years thanks to zirp and investors moving up the yield curve, unwilling to accept that maybe they will never retire.

      But hey… there is no bubble in bonds. Move along, nothing to see there. LOL!

    2. michael hudson

      Well, indeed Chris and I usually are in agreement. And we still are.
      Of course we’re in a debt deflation for the economy at large. That is the theme that I’ve been pressing all along. If people have to use their income to pay down debts, they have less to spend on goods and services.
      I was asked to write this article for World Economic Review on “Do we have a bubble,” in a thousand words. My point is that the bubble is OVER, and we are now in the post-bubble stage. It is indeed deflationary — except that the Fed is providing banks with money to gamble their way out of negative equity by lending cheap credit to engage in arbitrage.
      We’re in the equivalent of Foreclosure Time: privatization of public domain under pressure from bondholders and central bank, and distress sale of homes in negative equity to all-cash hedge funds.

      1. R Foreman

        > and properties in default or foreclosure are not paying taxes

        Do banks, hedge funds, and PE firms not pay taxes on these properties they are buying with all cash? It just seems weird that there is a strong need to sell off public assets to pay creditors.

        1. nonclassical

          ..no, they don’t pay taxes-read Shaxton’s, “Treasure Islands”, Naylor’s, “Hot Money”, “The Devil’s Derivatives”, and see how corporate factions have transferred “assets” over into “paper debt”…

          again, I wish M. Hudson would address this FINANCIALIZATION of economy…

    3. charles sereno

      Chis Cook, do you think that commodity prices may show a greater divergence than in the past? It hardly seems possible that oil prices, eg, will fall below $90 in the foreseeable future in spite of the rosy production predictions.

    4. jake chase

      I don’t recall ever disagreeing with Mr. Hudson, but I do wish his books were a bit less expensive, particularly since they should be read by everyone who can read.

    5. washunate

      Chris, in case you come back to this thread, I’m curious about your comment.

      The dollar prices of many assets are way too high, particularly those held disproportionately by the wealthy. The way that markets would deal with this problem is by decreasing the dollar price of these items (stocks, real estate, oil, executive compensation, etc.) IOW, deflation.

      But our politicians are almost entirely in support of wealth concentration. So the response of public policy is to prevent markets from dealing with the problem (bailouts, loan guarantees, ZIRP/QE, etc.) IOW, inflation.

      Would you disagree with this broad summary?

  5. Moneta

    The US houses less than 5% of the world’s population yet consumes more than 25% of the world’s resources.

    Americans don’t seem to realize that continued growth based on materialism and infrastructure means a consumption of more resources than 40 years ago when the global population was half what it is today.

    This means it expects the rest of the world to consume even less resources per capita than it has over the last few decades so America can continue its materialism.

    As long as the average American does not get this, he will suffer because he will be pushing his government to overconsume resources, therefore squeezing households further while these households maintain a material lifestyle they can not support.

    Americans need to shrink their material lives and the hits taken over the last few years are nothing compared to the adjustments that need to occur over the next few decades.

    1. F. Beard

      I don’t buy your pessimism. Nano-technology and meta-materials enable us to do more and more with less and less material. Plus matter can be endlessly recycled given enough energy (And then there’s the asteroid belt). And there is sufficient thorium to provide energy for centuries if not thousands of years. And when fusion is perfected, mankind’s energy problems are over.

      No, mankind’s problems are moral and ethical. The money system, for example, is based on usury for stolen purchasing power. It has worked to create wealth but ill-distribution of that wealth is built-in. Moreover, usury REQUIRES exponential growth just to pay the compound interest.

      1. Moneta

        I’m a pessimist to those who cling to materialism. I am every optimistic for those who have structured their lives around community and less around materialism.

        The planet can be full of energy but its will depend on our technology and the structure of our markets. For example, the Brits suffered en masse during industrialization… until it started to exploit outside markets and brought back materials.

        Anyone who reads up on the environmental destruction that has occurred globally over the last 40 years will get the sense that the level of materialism in North America can not go on forever; without squeezing the rest of the world’s consumption that’s for sure.

        1. F. Beard

          For example, the Brits suffered en masse during industrialization… until it started to exploit outside markets and brought back materials. Moneta

          But the Brits did well en masse before industrialization, did they not? So the problem was not lack of resources or markets but ill-distribution of resources and purchasing power.

          And that is a result of the money system whereby some are allowed to steal or at best “borrow” without true permission the purchasing power of everyone else.

          1. Moneta

            The US middle class might be suffering but it is still the “1%” of the world.

            The rest of the planet wants the American middle class to share as much as the American middle class wants the 1% to share. Something tells me the US middle class will be forced into sharing.

            Our world is currently set up to consume in an American sort of way. The US has been exporting its business models, devoid of externalities to the entire planet. Any country that tries to avoid it gets crushed.

            I do believe that there are plenty of resources to go around but on a US materialist model.

            It takes a generation to change a business model. However, those with most of the wealth are over 50 so the business model is not going to change very quickly. They are doing everything to maintain the status quo. Secondly, with zirp there is no incentive to plan long term. Therefore, everything is still in motion to export the current business model, an energy intensive way of life to the entire planet.

            And I believe there are not enough resources for everyone using that materialist model.

            1. Moneta

              I do believe that there are plenty of resources to go around but on a US materialist model
              I do believe that there are plenty of resources to go around but NOT on a US materialist model

              1. F. Beard

                That’s presumptuous of you to say. Obviously we should not waste, but when the Lord fed the 5,000 and 4,000, the crowds ate their fill (and carried away as much as they could too?) as evidenced by the leftovers.

                Man, of course, does not live by bread alone*, but there’s nothing wrong with material prosperity per se.

                * Bible search of “bread alone”

              1. Moneta

                If you include the infrastructure and the social structures the middle class gets to enjoy, it is still in the richest in the world.

                1. rps

                  “If you include the infrastructure and the social structures the middle class gets to enjoy, it is still in the richest in the world”

                  Wrong again. Many assumptions once again. US infrastructure has been falling down for decades. Public transportation sans the large blue cities is miserable to nonexistent, I know, I tried it in Cleveland, Memphis and Charleston. Consider it one way to keep the poor and immigrants in their ghettos. Universal healthcare doesn’t exist; one healthcare crisis bankrupts a family for a lifetime and this happens on a daily basis. Social Security at the earliest is disbursed at 62yrs that penalizes via percentages for taking it “early.” Ask all those baby boomers fired in the last go-around who must wait for 12+ years until they receive SS. What do you do in the mean time??? Penalty for dipping into the IRA before 59.5yrs of age. Medicare you say?, sure but not until you’re 65; good luck with that. Medicaid? The states have been hacking away at that requiring the poorest of the poor to make copayments for doctors and medications. Try living on $690 dollars per-month for rent, clothing, food and necessities if your diagnosed with a chronic illness and unable to work. Food stamps/Link card you say? Illinois pays $81 per-month…you do the math. College & post education is not free my friend but calculated debt-slavery of our young beginning at the age of 18yrs. I could go on….

                  I recently met a young world traveler from the UK. He was astonished beyond belief at the poverty in the USA.

                  Poverty is the norm in the USA. The rich and super-rich thieves with hidden assets are not the norm for the average citizen

                  1. Moneta

                    I guess convergence between emerging markets and US is happening faster than I proposed.

                    I’m Canadian and everyday I wonder why I got to be so lucky. If it lasts, good for me but if it does not, I would not be surprised.

                    There are a lot of people out there who work harder than we do and will do what it takes to get their share.

                    I don’t understand how North Americans can believe this world imbalance can last forever.

      2. Moneta

        When I was a child, we did not heat our pools in October. My mom was part of the 1% in the 50s and their tennis court was in gravel and they needed to empty their pool every three weeks for lack of a filtration system. Today, despite the hits, a huge chunk of the middle class still lives like many of the 1% 60 years ago.

        Things have gotten more energy efficient but we are still consuming way more than we used to. IMO, we are slowly going to be forced out of excess consumerism. Governments are going to suck up energy to repair a lot of infra that probably needs to disappear. Of course, this will steal resources away from the individual. Planned economies have a knack of doing this. And let’s face it, the US is now in many ways a planned economy.

        And I don’t believe this energy will be harvested in time to save the 40+ because old people don’t like change. Everything is being done to keep the status quo. My prediction is that households’ lifestyle will slowly erode.

        Yes, I’m optimistic the new technology will come to market but when most of today’s population is pushing daisies.

        1. F. Beard

          Consumerism is built-in to the money model too – that need for exponential growth to pay the usury.

          Let’s not blame the victims, huh? Unless you think theft and usury from one’s fellow countrymen are trifles?

                1. F. Beard

                  True. If our money system was not designed in Hell, then surely Satan is envious of whoever did design it.

                  So, if we are all or nearly all victims then can’t this problem be solved?

                  1. Moneta

                    When the fox does not have enough rabbits to eat, does it blame Satan or all the other foxes because there are too many of them eating its lunch?

                    1. F. Beard

                      Therefore My people go into exile for their lack of knowledge; And their honorable men are famished, And their multitude is parched with thirst. Isaiah 5:13

                      The Bible forbids theft, usury from one’s fellow countrymen and oppression of the poor yet our money system is based on all three!

                      But hey, if the right to commit sodomy in public* is more important to Progressives than a just money system then continue to ignore Scripture and suffer the consequences.

                      * “A single witness shall not rise up against a man on account of any iniquity or any sin which he has committed; on the evidence of two or three witnesses a matter shall be confirmed.” Deuteronomy 19:15

                    2. Mark Pawelek

                      The difference between foxes and capitalism is that capitals tend to eat each other as they grow; ‘foxes’ get bigger but there are fewer of them. Still, their appetite does, indeed, appear to exceed the supply of food (aka rent). Foxes are however, clever. More and more of what we take as our world can be used to generate rent for them.

                    3. Moneta

                      We are always stealing from someone else no matter what we do.

                      When the conditions are right, populations rise until they reach a peak and then they drop. Instead of seeing this coming, we’ll blame everyone and everything. If conditions were better, we’d possibly be even closer to the peak. But they are what they should be because if not, the world would be a different place.

                      It’s the same rules for all species. For some reason, humans think the laws of nature don’t apply to them. Our brains give us enough foresight and control to put us at the top of the food chain but not enough to protect us from ourselves.

                    4. nonclassical

                      ummmnn…the fox population recedes…”blame” is a human attribute-game…
                      today in form of scapegoating those who had nothing to do with economic disaster-cause of your consternation-aim at CAUSE…

        2. Dr. Insula

          Well, I live in America, and am tired of the, “Americans consume x %,” arguments. Alot of people actually “consume,” very little, we walk/bike to work, eat frugally and grow what we can, re-use or repurpose everything we can, use solar energy to dry clothes (no expensive solar cells required!), so how do we reduce that consumption? So because someone in rural China does not “consume,” internet services, that means we should not? This will not help, since the internet “consumption,” is what makes it possible for us to telecommute whenever possible. Or should I consume less than 2 Litres of water? Less than 500 mg of salt?

          1. Moneta

            Your frugality does not change the fact that the US is a energy consuming monster of a machine.

            Your situation actually proves my point. I assume you consider your quality of life much better than many others who consume much more energy and resources.

            Therefore, consumerism could shrink quite a bit without ruining quality of life. And my argument is that Americans are slowly going to get forced into a more materially frugal lifestyle.

  6. Moneta

    Americans are losing purchasing power because it got too big relative to their level of productivity in the world.

    1. from Mexico

      But what is neoliberalism, other than a plan of deindustrialization and the lowering of productive capacity? Productive capital goes down and financial capital goes up. Procuction goes down and rents go up. It’s called neoliberalism.

      1. Moneta

        Maybe neoliberalism is the natural evolution of a system that uses too much energy and resources and has become too complex for human minds to manage.

        1. F. Beard

          Why would an honest system require much management?

          And how can a money system that REQUIRES government privileges be honest?

      2. nonclassical

        ..yes, from Mejico..but also Moneta avoids historical aspect of Netherlands, Britain, Spain, (as Kevin Phillips describes) who moved from manufacturing based economies to “paper debt”…and all subsequently failed, within 80 years or less…M. Hudson’s point, I believe??

        1. Moneta

          It’s amazing to see how people in successful countries become completely disconnected from the intrinsic value of traded goods and services over time. As barter becomes a faint memory, money is seen as wealth and not as a debt.

          People truly believe that printing more increases wealth when in fact, it makes people lazy, shrinking productivity over time.

            1. skippy

              DNA – Society – is the greatest expression of common stock and not belief feed fetish forms of exchange.

              skippy… although Montana is a a productivity slave… self inflicted imo.

    2. rps

      “Check your assumptions. In fact, check your assumptions at the door” L. Bujold

      Americans incomes have stagnated since the 1970’s Productivity is up 99% and incomes have fallen of everyday Joe and Jane six pack.

      Bill Moyers & Co will enlighten your assumptions: “Surviving the New American Economy,” Forty years of concentrated efforts have gone to lowering wages, whether it was breaking unions or creating laws that allowed you to make more money overseas than you might have otherwise,” says Garson.


      1. Moneta

        I guess it depends on how you measure productivity.

        The US is probably the most efficient printer of money globally. Many of the most productive sectors of the economy are those that are destroying the whole.

        And many of the sectors that seem really bad are those that prop up the rest. Think railroads in the 1800s.

        1. rps

          “Begin challenging your own assumptions. Your assumptions are your windows on the world. Scrub them off every once in awhile, or the light won’t come in.” A. Alda

          1. Moneta

            BTW, I am typically a devil’s advocate. I test many ideas to get a feeling for the psychology out there.

            So you’d be surprised how clean my windows are literally and metaphorically.

      2. nonclassical

        …or, “Min ur hatz goan inn…”….(J.Joyce-Finnegan’s Wake)…”Wype ur butz goan oud”…(Lipoleum’s Museyroom)

  7. TomDor

    Bravo again Michael Hudson!!

    It has always been and, always will be about the ultimate control of the things all people need – Land. One cannot live or exist without a place on this planet. The other needs are increasingly coming under the control of those who wish to monopolize them – food, water, shelter, access to markets.

    As a large part of the [population uses more of their wealth creating activities to service debt – less is available for basic human needs – land, food, water, shelter et al.

    It has always been about a place on this planet (tyrants, kings, lords, landlords etc have used this to maintain power)to live. Until, we as a species learn; charging our children more than they can afford for what existed before our species existed (and will still be around after we are gone)is immoral… it will always be.

    Debt overhang (un-repayable and un-forgiven debt) is the limb upon which the noose is hung – step-on-up for the short fall.

  8. jerry

    Great analysis, although the first half of this – the shift from debt bubbles to deflation – seems more like a positive from a long-term perspective. The consumer can gradually pay down and free himself from debt bondage and prices will return to a more reasonable level.

    However, the extent of the tollbooth economy and rent-seeking by the financial sector seems a bit overdone (not to say that it is not a factor). Borrowing costs in the Eurozone have dropped significantly, and the austerity push seems to have subsided a bit both there and here in the USA.

    We are in the midst of an odd sort of political and economic void, where one dominant ideology or course of action has yet to assert itself; as Michael mentions, the 30 year bond-rally (and accompanying neoliberalism) is drawing to a close. I have great hopes that the time for the MMT school is at hand, and that a strong progressive politician can step into the fray to pull it all together, starting with a New New Deal.

    1. Moneta

      The New Deal will come when many more countries hit rock bottom like Greece, Cyprus, etc… when they have no bargaining chips left.

      1. F. Beard

        The New Deal further propped up the banking model with a new government privilege – government deposit insurance. And has even that proved sufficient? And before you say “Glass-Steagall” the urban riots of the 1960s were likely caused by “redlining”* as much as anything else – long before the repeal of “Glass-Steagall.”

        * While a riot may be initially sparked by a specific event, scholars, commentators and commissions have sought to identify the deeper reasons and have identified a number of urban conditions that may underline urban riots. These urban conditions are often associated with urban decay more generally and may include: discrimination, poverty, high unemployment, poor schools, poor healthcare, housing inadequacy and police brutality and bias.[1] from http://en.wikipedia.org/wiki/Urban_riots

        1. nonclassical


          I agree with you most often-but obviously, you were not “there”-60’s-70’s-80’s,
          when “Chicago Boys” were implementing south, central ameri”K”a, on the “way” here-now…

          and you weren’t in the streets=some here were…

    2. F. Beard

      – the shift from debt bubbles to deflation – seems more like a positive from a long-term perspective. jerry

      Neither the boom NOR the bust are ethical – a point the silly gold-loving Austrians fail to recognize. Instead, the boom-bust cycle is like a barbed weapon that wounds going in and wounds if one is silly enough to try to pull it out.

  9. unperson

    an interesting take, and mostly correct, but there are some unaccounted for factors.

    The main thing to understand is that the federal govt was from the start designed so that the majority could not control it. The fed govt was designed to exploit factions in the populace and actually create factions by enlarging the population in voting districts. And to show how this tactic works, and the USA has gotten larger and more racially and culturally diverse, it has been harder and harder for the majority to control the fed govt. Monetary policy, immigration, taxation, healthcare, all these important subjects have gone in directions not desired by the majority.

    And now we have The Big Squeeze.

    But the people still have the individual states. Smaller and more united than the federal nation as a whole. How could the people take back control at the federal level and thereby break the corporate hold via the Big Squeeze?

    Local governments are in control of housing standards, codes, etc. The majority could strike back by lowering housing codes and building standards and beating the corporations that way. By allowing cheap houses to be built by just one person, the youth of america could strike back and beat the corporations.

    In decades past the males of america often built their own homes. My dad built 2 houses and a multi-business commerial building basically by himself. Back then the corporations had not yet shut down that avenue of wealth creation and debt avoidance.

    The people could take back control of housing standard once there are enough non-home owners to win the vote at the local level. There are no federal legal questions in this arena, and so therefore the unelected ivy-league grad federal judges (who are essentially corporate puppets) have no say in this matter.

    Look for low standard, lax-code housing to become a thing in the next 10 years, starting in the small, mostly white states and spreading from there.

      1. unperson

        the houses my dad built did not look like that, and in fact they are still being used today. All of them, even though they were built back in the 60s. No debt. Just cash.

        1. F. Beard

          My father built our house and it survived direct and near direct hits from Camille and Katrina, respectively. Only our neighbor across the street (on higher ground) was not leveled by Katrina.

        2. nonclassical

          …we did the same…ended all debt by the time bushitters allowed credit card lobbyists to re-write bankruptcy “laws”…

          those around us knew this meant millions of ameri”K”ans were going bankrupt..

    1. Susan the other

      Interesting optimism. I like the part about self-sufficiency and state control of housing. It could open up opportunities for small scale permaculture and community coops, etc. I don’t think local building codes will ever relax, given the mess they have inherited and are trying to clean up and keep under some level of control. What Prof. Hudson says about the privatization grab we are in now and until the end of the century indicates that the old capitalists have no where to go but scavenging, whereas real people can spontaneously lead the way. Capitalists never lead the way, they just jump in front of the parade and pretend like they know where they are going.

      1. Susan the other

        Also consider the renaissance in pre-fabs, much like the 1930s and 40s. An opportunity for local construction companies who understand the building code and facilitate individual owner-builders. With the latest in efficient use of energy and blah blah.

      2. jake chase

        IMHO, the primary casualty of this debt deflation will be family formation. The last thing a person needs while trying to climb out of a hole is baggage. The new family will be two grandparents, four parents, three grandchildren born after 2000. They will own one home and have nine part time jobs in retail, or perhaps one or two real jobs in construction. If lucky they will have no student debt and no mortgage, and their biggest expense will be health insurance, although two ought to qualify for Medicare. They will share the use of two fifteen year old Japanese cars and one wardrobe, baggy on some, skin tight on others. They will all become excellent cooks, although all of them will eat alone and standing up, and they will be among the luckiest in the New American economy, because they will have high speed internet and digital cable with seasonal sports packages.

  10. black dog

    “But since 2008, consumers have paid down about $5 trillion of personal debt.”


    “Aggregate consumer debt declined in the first quarter, by $110 billion, resuming the longer-term downward trend.
    As of March 31, 2013, total consumer indebtedness was $11.23 trillion, 1.0% lower than its level in the fourth quarter of
    2012. Overall consumer debt remains considerably below its peak of $12.68 trillion in 2008Q3.”


    1. black dog

      and i should add – how much of “paid down” of the $1.45 trillion actually “written down”?

      same source –

      “Delinquency rates continue to show improvements across the board in 2013Q1. As of March 31, 8.1% of outstanding debt was in some stage of delinquency, compared with 8.6% in 2012Q4. About $909 billion of debt is delinquent, with $678 billion seriously delinquent (at least 90 days late or “severely derogatory””

      1. nonclassical

        Hudson was addressing personal debt…for government debt view first ever FED audit-where $$$$ went (always follow $$$$), and how TARP became QE 1,2,3..

        1. black dog

          “Hudson was addressing personal debt”

          uh, yeah … that is what the federal reserve report covers – household debt.

  11. charles sereno

    Michael Hudson has confirmed my prediction! The idea of selling the Parthenon has been broached. Perhaps it could even be dismantled and carted away. The likely buyer? Germany, of course. Re-assembled at the Pergamon in Berlin, it would be renamed the Merkel Marbles, perhaps later augmented by the Elgin Marbles.

  12. Hugh

    Another way to look at this is that our kleptocratic classes will loot (via debt-levered bubbles) to a crash and then loot the crash (buy up primary assets in a deflationary environment because government has made them, not us, whole).

    1. F. Beard

      If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809) from http://www.themoneymasters.com/the-money-masters/famous-quotations-on-banking/

      Certainly the Fed being able to create, even temporarily, but often PERMANENTLY United States fiat is an abomination.

      And for what? Common stock is an ETHICAL form of endogenous money creation so what possible excuse is there for what in essence is a government-backed counterfeiting cartel?

  13. allcoppeout

    Always difficult not to agree with Michael Hudson and all I can think of here is that there may be another economy beyond the peculiar and stupid one he accurately describes.
    New Scientist has it that renewables account for 20% of current power generation and is rising steeply to about 30% by 2018. Technology in various aspects of this may be at a tipping point, and are on my lay reading.
    I no longer see the issues in front of us as about economics, but its replacement by genuine democracy and a scientific world-view. The main difficulty is producing something rational from the irrational. How do we get to the state I suggest from pitch-forks and burning torches (not to say witches and broomsticks)?

  14. allcoppedout

    The Egyptians, of course, elected a religious tyranny, and we all stand under the threat of electing the wrong kind of democracy – one that cannot be captured by the shadow power. Critical Theory often regards science as a kind of half-learning and fear it may be as totalising as the worst religion.
    Property inheritance and the role of property in economic rent needs overhaul, as does “growth”. We seem very scared of debating the future we want. I suspect the rich are not in it.

    1. Moneta

      The problem is that you have to convince a lot of people that there are not enough waterfront properties for everyone, especially those who work the hardest.

  15. Craazyman

    Maybe Greece could make another Parthenon just like the
    Real one and give to them. It would be brand new and never used so it should be worth even more than The old one. How could anybody complain about that,

    That alone might solve the problem. But let’s say they still wanted one that,looked used. Greece could just put some stains and crumbles on it, sorts of like making a photo look old in photoshop.

    I have otherwise completed my theory of money but can’t write italldown ow since idont haveakeyboard, only an ipad screen keybaord. I am more convinced than ever that money is an imagination wave function that exists primarily in a state of probability and is only actualized in observation, and like imagination it is dimensionless and formless. Nobody who writes about in the financial press has a clue what they are talking about nor do any of the economists or central bankers. Not one of them does. they are like a master looking at a slave and seeing only the possibility of the slave and not the possibility of the human, they are in a blind state of non knowing. However that doesn’t mean everything is possible. There are limits and boundaries but they relate to social structures and not to quantities of imagination such as debt or money. I wouldn’t say it’s easy, but it isn’t hard the way they think it is. It is hard in ways they don’t perceive orunderstand

    1. jake chase

      The theory of money is quite simple. You turn it over to a Wizard adept at talking nonsense with a straight face. The Wizard’s job is to make certain no large bank creditor ever loses a dime, regardless of management’s reckless disregard of known risk. You also make certain that except for political gangsters, nobody outside the banking cartel without collateral can get his hands on any money without either peddling his time or speculating in rigged markets or signing up for non-dischargeable consumer and student loans.

      The bank money supports speculation in real assets, commodities, corporate shares. The corporations are systematically looted by their executives through obscene bonuses and stock option giveaways.This results in an unlimited bonanza at the top and penury at the bottom which keeps those in the middle hopping.

      When the political borrowers default, which they always do since the money is largely wasted, the defaulting counties, cities, states sell off public treasures to connected insiders at rock bottom prices.

      As for inflation, price index gymnastics define it out of existence.

      You don’t even need calculus to understand all this.

  16. Eric377

    So why hasn’t Obama done something more dramatic on mortgage debt? I think the reason is that the problem was simply too small to justify the intense resentment an effective program would likely have created. With most mortgages being non-recourse, default actually works well without too much public involvement. I know there is a fervent wish out there for public funds to kill off negative equity, but not going to happen I think.

  17. washunate

    “Prices are rising not because costs and wages are rising, but because of monopoly rents and other rent-extraction activities.”

    It is absolutely critical to understand this. Inflation is a problem, and wages are not the trigger.

    Wealth concentration has reached such dangerous extremes that it is destroying our system.

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