Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His two newest books are The Bubble and Beyond and Finance Capitalism and its Discontents. His upcoming book is titled Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Here he’s interviewed by Sharmini Peries, Executive Producer of The Real News Network.
And here’s the transcript:
SHARMINI PERIES: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
On Wednesday this week, the S&P 500 took a dive and then partially recovered itself in what stock market watchers call a selloff scare.
To talk about what is behind the volatility is our regular guest, Michael Hudson. Michael Hudson is distinguished research professor of economics at the University of Missouri-Kansas City. His latest books are The Bubble and Beyond and Finance Capitalism and Its Discontents.
Thank you so much for joining us, Michael.
MICHAEL HUDSON: It’s good to be back.
PERIES: Michael, if you heard stock market reporting yesterday or saw The New York Times’ business section today, you would have thought we were in another stock market plunge. What’s behind this fluctuation?
HUDSON: The markets are confused, because there are two sets of forces at work, one positive and one negative. The positive thing for the 1% is that we’re going into a serious depression – austerity in the United States, austerity in Europe. For the last six years, since 2008, almost all of the gains have been going only to the 1 percent. They’ve kept the debts on the book. It’s creating large unemployment.
So the 1% in Europe and America are saying, this the best opportunity we’ve had in a century. Here is a chance to do what we call “reform.” A century ago, reform meant increasing wage levels, increasing living standards and taxing the rentiers. But now, neoliberal reform means, in Europe, breaking the labor unions, lowering wages, and putting the squeeze on labor. All that is supposed to be good for profits.
PERIES: But, Michael, just last week the Bureau of Labor Statistics in the U. S. announced that unemployment is the lowest it has been in a very long time. Why? This is contrary to what you’re saying.
HUDSON: It’s true that the unemployment rate among people searching for jobs is low, but there’s been a large movement out of the market for a number of reasons. Number one: Fewer people are even looking for work. They’ve given up. Number two: Many of the jobs that are being created are very low-wage jobs at the low end of the spectrum, or they’re part-time jobs. If you work for part time at all, you’re not considered unemployed. If you’ve given up looking for work, you’re not considered to be unemployed.
So even though the minimum wage has been raised in Massachusetts and out West,when the minimum wage level is raised, that means the families that have been living on food stamps while they’ve been working at McDonald’s or at other low-wage companies don’t qualify anymore. So there’s been very little change in the actual family budgets.
The markets were expected to sort of somehow take off with higher profits as ifthere is a business cycle recovery. But it’s become apparent that we’re really not in a business cycle anymore. We’re at the end of a long 50-year cycle since World War II, where the debts have been rising so much that all of a sudden, the economy can’t be financed by debt anymore. And if the economy isn’t financed by debt, that means that markets can’t grow. All of a sudden, what was fueling the growth and consumer demand that was increasing profits has come to an end. This is especially apparent in Europe. So, basically, what people thought was supposed to be good news – no more room for debt to grow – turns out to be quite bad news.
PERIES: Michael, when the World Bank and, actually, the IMF adjusted the global growth rates last week, which has been a trend – you know, they’ve done it consecutively for a number of years now where their long-term projections just aren’t turning out the way they had planned and projected. Why is that happening?
HUDSON: Well, they had thought when the World Bank and other people had forecast a trend, they’d take past growth rates as they were up to 2008 as normal and as if they could just continue automatically. But what was fueling all of this growth was debt, largely to inflate real estate prices. Bank credit creation, and government spending running a deficit was part of thistrend.
For economies to grow at the past trend rate, they would need credit and also income growth. The credit either can come from governments running a budget deficit and pumping money into the economy, or it can come from bank lending. But at the IMF meetings last week, it was clear that as far as Europe is concerned, the banks have not recovered yet. They are not lending. And American banks are not lending. There has not been any lending in Europe or in the United States for new capital investment. And it’s capital investment that builds factories and makes new means of production that employ labor.
This source of employment that was fueling the global economy since World War II is coming to an end. The only capital investment that’s occurring really is in the BRICS countries, not in America and not in Europe. So the kind of employment that occurred in the past has not been occurring since 2008. What we have is living on the corpse of the economy that was left in 2008. It’s basically an economic shrinkage process. There’s no infrastructure spending. The infrastructure’s aging. There’s little new corporate industrial investment. That’s stopped. There’s simply services trade in the military.
PERIES: Michael, only thing that held up yesterday were some of the transportation stocks. Why is that? And also explained to me–you wrote to me saying 91 percent of the S&P 500 earnings are spent on stock buybacks and dividends. What does that mean?
HUDSON: Well, in 2008 the Federal Reserve here and the central bank in Europe lowered interest rates way down to almost nothing. It’s one-tenth of a percent in the United States. That means that banks can borrow cheaply from the Fed to make loans. What they’ve been lending for is for corporate takeovers and for stock buybacks. In the stock market in the last year, one-third of all of the stock transactions in the United States were corporate buybacks. The S&P 500 have used, I think, 54 percent of their earnings to buy back their own stock, and they’ve been using another 40 percent or so to pay dividends. Now, that has left only 9 percent of earnings of the S&P 500available for new investment. Never before has this ratio been so low.
In textbook theory, most companies use their earnings to reinvest and expand. They try to earn more by investing more to produce more to make more profits to keep on growing. But that hasn’t been occurring. They’ve been using their earnings basically to give stock options to the managers. The manager says, “Okay, I’m paid according to how much I can increase the price of the stock. I’m not going to use my corporate earnings of IBM or General Motors or whatever to build more plant. Instead, I’m going to use it to push up the stock so I’m going to get more out of my stock option.”
You have activist stockholders such as Carl Icahn pressuring Apple and other companies to actually borrow – not borrow to invest as the textbooks say, but to buy back their own shares. So you have companies that are actually going into debt to buy their own stock.
The problem is that the low interest rates that in theory are supposed to make it more profitable for companies to invest and employ more labor and grow, are having the opposite effect in practice. Low interest rates are creating a new stock market bubble, which is why the stock market has gone up so much since 2008. But this rising stock market bubble has only been reflected in the price of the stock. It’s stocks going up without any new capital investment, without any new hiring, and, in fact, with downsizing and outsourcing. So they’ve turned the traditional textbook model of economic recovery inside out. Earnings per share are rising mainly because fewer shares are left after the buybacks!
Gradually, investors and hedge funds are realizing that this isn’t your textbook kind of recovery. It’s a recovery that’s only occurring in the FIRE sector: finance, insurance, and real estate. It’s not occurring in the economy at large. If earnings on Wall Street are not recycled in the economy at large, then markets are going to shrink, there’s not going to be much of a rental income for commercial space, and with shrinking markets you’re not going to have companies earning more profit on investment, even if they’re holding down wages.
PERIES: Michael, does this have anything to do with the murmurs out there that the interest rates might actually increase?
HUDSON: There was a fear that the Federal Reserve was going to stop quantitative easing. They’ve been saying, look, we can’t hold down interest rates forever. And at the IMF meetings last week, the Europeans said that they worry that these low interest rates are spurring a financial bubble.
But if interest rates go up, that means that all of a sudden all this borrowed money that’s gone into stocks is going to disappear. People are going to say, okay, we can’t make money borrowing to buy stocks, we can’t make money borrowing for real estate, so we’re going to pay back the bank loans. We’re going to stop gambling.
All this was exacerbated by the U. S. New Cold War against Russia. Essentially the United States went to Europe and said, let’s you and Russia fight. So Europe imposed sanctions, and Russia imposed reverse sanctions. The European economy is shrinking and the euro is going down. The Eurozone is turning into a dead zone, and the Europeans are moving their money into the United States. That’s pushing up the dollar.
If the Federal Reserve were to raise interest rates at this point, this would not only slow, bring down the stock market and bring down the bond market; it also would bring so much money into the dollar – because Europe cannot raise its interest rates – that this would price American goods out of world markets. That would shrink the market for U.S. industrial exports all the more. So the United States has painted itself into a corner where it really can’t increase interest rates. Even though investors worry that the Fed is going to raise them, the Fed knows that it can’t raise interest rates without crashing the market down.
PERIES: Michael, thank you so much for joining us.
HUDSON: It’s always good to be here.
PERIES: And thank you for joining us on The Real News Network.
Lambert here: Sounds like a controlled flight into terrain, to me. Remind me why these guys are in the cockpit, and people like Hudson are flying coach?