Michael Hudson on Debt Deflation, the Rentier Economy, and the Coming Financial Cold War

Michael Hudson has sent us the transcript of his newly-released interview with Justin Ritchie on
February 26 with XE Podcast; You can also listen to the podcast here.

Justin Ritchie: In your book, you draw this metaphor of parasites and global finance? Could you explain what you mean by this?

Michael Hudson: The financial sector today is decoupled from industrialization. Its main interface with industry is to provide credit to corporate raiders. Their objective is asset stripping, They use earnings to repay financial backers (usually junk-bond holders), not to increase production. The effect is to suck income from the company and from the economy to pay financial elites.

These elites play the role today that landlords played under feudalism. They levy interest and financial fees that are like a tax, to support what the classical economists called “unproductive activity.” That is what I mean by “parasitic.”

If loans are not used to finance production and increase the economic surplus, then interest has to be paid out of other income. It is what economists call a zero-sum activity. Such interest is a “transfer payment,” because it that does not play a directly productive function. Credit may be a precondition for production to take place, but it is not a factor of production as such.

The situation is most notorious in the international sphere, especially in loans to governments that already are running trade and balance-of-payments deficits. Power tends to pass into the hands of lenders, so they lose control – and become less democratic.

To return to my use of the word parasite, any exploitation or “free lunch” implies a host. In this respect finance is a form of war, domestically as well as internationally.

At least in nature, “smart” parasites may perform helpful functions, such as helping their host find food. But as the host weakens, the parasite lays eggs, which hatch and devour thehost, killing it. That is what predatory finance is doing to today’s economies. It’s stripping assets, not permitting growth or even letting the economy replenish itself.

The most important aspect of parasitism that I emphasize is the need of parasites to control the host’s brain. In nature, a parasite first dulls the host’s awareness that it is being attacked. Then, the free luncher produces enzymes that control the host’s brain and make it think that it should protect the parasite – that the outsider is part of its own body, even like a baby to be specially protected.

The financial sector does something similar by pretending to be part of the industrial production-and-consumption economy. The National Income and Product Accounts treat the interest, profits and other revenue that Wall Street extracts – along with that of the rentier sectors it backs (real estate landlordship, natural resource extraction and monopolies) – as if these activities add to Gross Domestic Product. The reality is that they are a subtrahend, a transfer payment from the “real” economy to the Finance, Insurance and Real Estate Sector. I therefore focus on this FIRE sector as the main form of economic overhead that financialized economies have to carry.

What this means in the most general economic terms is that finance and property ownership claims are not “factors of production.” They are external to the production process. But they extract income from the “real” economy.

They also extract property ownership. In the sphere of public infrastructure – roads, bridges and so forth – finance is moving into the foreclosure phase. Creditors are trying to privatize what remains in the public domains of debtor economies. Buyers of these assets – usually on credit – build interest and high monopoly rents into the prices they charge.

JR: What is your vision for the next few decades of the global economy?

MH: The financial overhead has grown so large that paying interest, amortization and fees shrinks the economy. So we are in for years of debt deflation. That means that people have to pay so much debt service for mortgages, credit cards, student loans, bank loans and other obligations that they have less to spend on goods and services. So markets shrink. New investment and employment fall off, and the economy is falls into a downward spiral.

My book therefore devotes a chapter to describing how debt deflation works. The result is a slow crash. The economy just gets poorer and poorer. More debtors default, and their property is transferred to creditors. This happens not only with homeowners who fall into arrears, but also corporations and even governments. Ireland and Greece are examples of the kind of future in store for us.

Financialized economies tend to polarize between creditors and debtors. This is the dynamic that Thomas Piketty leaves out of his book, but his statistics show that all growth in income and nearly all growth in wealth or net worth has accrued to the One Percent, almost nothing for the 99 Percent.

Basically, you can think of the economy as the One Percent getting the 99 Percent increasingly into debt, and siphoning off as interest payments and other financial charges whatever labor or business earns. The more a family earns, for instance, the more it can borrow to buy a nicer home in a better neighborhood – on mortgage. The rising price of housing ends up being paid to the bank – and over the course of a 30-year mortgage, the banker receives more in interest than the seller gets.

Economic polarization is also occurring between creditor and debtor nations. This is splitting the eurozone between Germany, France and the Netherlands in the creditor camp, against Greece, Spain, Portugal, Ireland and Italy (the PIIGS) falling deeper into debt, unemployment and austerity – followed by emigration and capital flight.

This domestic and international polarization will continue until there is a political fight to resist the creditors. Debtors will seek to cancel their debts. Creditors will try to collect, and the more they succeed, the more they will impoverish the economy.


JR: Let’s talk about your history, why did you become an economist?

MH: I started out wanting to be a musician – a composer and conductor. I wasn’t very good at either, but I was a very good interpreter, thanks to working with Oswald Jonas in Chicago studying the musical theories of Heinrich Schenker. I got my sense of aesthetics from music theory, and also the idea of modulation from one key to another. It is dissonance that drives music forward, to resolve in a higher key or overtone.

When I was introduced to economics by the father of a schoolmate, I found it as aesthetic as music, in the sense of a self-transforming dynamic through history by challenge and response or resolution. I went to work for banks on Wall Street, and was fortunate enough to learn about how central mortgage lending and real estate were for the economy. Then, I became Chase Manhattan’s balance-of-payments economist in 1964, and got entranced with tracing how the surplus was buried in the statistics – who got it, and what they used it for. Mainly the banks got it, and used it to make new loans.

I viewed the economy as modulating from one phase to the next. A good interpretation would explain history. But the way the economy worked was nothing like what I was taught in school getting my PhD in economics at New York University. So I must say, I enjoyed contrasting reality with what I now call Junk Economics.

In mainstream textbooks there is no exploitation. Even fraudulent banks, landlords and monopolists are reported as “earning” whatever they take – as if they are contributing to GDP. So I found the economics discipline ripe for a revolution.

JR: What is the difference between how economics is taught vs. what you learned in your job?

For starters, when I studied economics in the 1960s there was still an emphasis on the history of economic thought, and also on economic history. That’s gone now.

One can easily see why. Adam Smith, John Stuart Mill and other classical economists sought to free their societies from the legacy of feudalism: landlordism and predatory finance, as well as from the monopolies that bondholders had demanded that governments create as a means of paying their war debts.

Back in the 1960s, just like today, university courses did not give any training in actual statistics. My work on Wall Street involved National Income and Product Accounts and the balance-of-payments statistics published by the Commerce Department every three months, as well as IMF and Federal Reserve statistics. Academic courses didn’t even make reference to accounting – so there was no conceptualization of “money,” for instance, in terms of the liabilities side of the balance sheet.

New York University’s money and banking course was a travesty. It was about helicopters dropping money down – to be spent on goods and services, increasing prices. There was no understanding that the Federal Reserve’s helicopter only flies over Wall Street, or that banks create money on its own computers. It was not even recognized that banks lend to customers mainly to buy real estate, or speculate in stocks and bonds, or raid companies.

Economics is taught like English literature. Teachers explain the principle of “suspension of disbelief.” Readers of novels are supposed to accept the author’s characters and setting. In economics, students are told to accept just-pretend parallel universe assumptions, and then treat economic theory as a purely logical exercise, without any reference to the world.

The switch from fiction to reality occurs by taking the policy conclusions of these unrealistic assumptions as if they do apply to the real world: austerity, trickle-down economics shifting taxes off the wealthy, and treating government spending as “deadweight” even when it is on infrastructure.

The most fictitious assumption is that Wall Street and the FIRE sector add to output, rather than extracting revenue from the rest of the economy.

JR: What did you learn in your work on the US oil industry?

MH: For starters, I learned how the oil industry became tax-exempt. Not only by the notorious depletion allowance, but by offshoring profits in “flags of convenience” countries, in Liberia and Panama. These are not real countries. They do not have their own currency, but use U.S. dollars. And they don’t have an income tax.

The international oil companies sold crude oil at low prices from the Near East or Venezuela to Panamanian or Liberian companies – telling the producing countries that oil was not that profitable. These shipping affiliates owned tankers, and charged very high prices to refineries and distributors in Europe or the Americas. The prices were so high that these refineries and other “downstream” operations marketing gas to consumers did not show a profit either. So they didn’t have to pay European or U.S. taxes. Panama and Liberia had no income tax. So the global revenue of the oil companies was tax-free.

I also learned the difference between a branch and an affiliate. Oil wells and oil fields are treated as “branches,” meaning that their statistics are consolidated with the head office in the United States. This enabled the companies to take a depletion allowance for emptying out oil fields abroad as well as in the United States.

My statistics showed that the average dollar invested by the U.S. oil industry was returned to the United States via balance-of-payments flows in just 18 months. (This was not a profit rate, but a balance-of-payments flow.) That finding helped the oil industry get exempted from President Lyndon Johnson’s “voluntary” balance-of-payments controls imposed in 1965 when the Vietnam War accounted for the entire U.S. payments deficit. Gold was flowering out to France, Germany and other countries running payments surpluses.

The balance-of-payments accounting format I designed for this study led me to go to work for an accounting firm, Arthur Andersen, to look at the overall U.S. balance of payments. I found that the entire deficit was military spending abroad, not foreign aid or trade.

Junk Economics?

JR: Why do you think there is a disconnect between academic economic theory and the way that international trade and finance really works?

MH: The aim of academic trade theory is to tell students, “Look at the model, not at how nations actually develop.” So of all the branches of economic theory, trade theory is the most wrongheaded.

For lead nations, the objective of free trade theory is to persuade other countries not to protect their own markets. That means not developing in the way that Britain did under its mercantilist policies thatmade it the first home of the Industrial Revolution. It means not protecting domestic industry, as the United States and Germany did in order to catch up with British industry in the 19th century and overtake it in the early 20th century.

Trade theorists start with a conclusion: either free trade or (in times past) protectionism. Free trade theory as expounded by Paul Samuelson and others starts by telling students to assume a parallel universe – one that doesn’t really exist. The conclusion they start with is that free trade makes everyone’s income distribution between capital and labor similar. And because the world has a common price for raw materials and dollar credit, as well as for machinery, the similar proportions turn out to mean equality. All the subsequent assumptions are designed to lead to this unrealistic conclusion.

But if you start with the real world instead of academic assumptions, you see that the world economy is polarizing. Academic trade theory can’t explain this. In fact, it denies that today’s reality can be happening at all!

A major reason why the world is polarizing is because of financial dynamics between creditor and debtor economies. But trade theory starts by assuming a world of barter. Finally, when the transition from trade theory to international finance is made, the assumption is that countries running trade deficits can “stabilize” by imposing austerity, by lowering wages, wiping out pension funds and joining the class war against labor.

All these assumptions were repudiated already in the 18th century, when Britain sought to build up its empire by pursuing mercantilist policies. The protectionist American School of Economics in the 19th century put forth the Economy of High Wages doctrine to counter free-trade theory. None of this historical background appears in today’s mainstream textbooks. (I provide a historical survey in Trade, Development and Foreign Debt, new ed., 2002. That book summarizes my course in international trade and finance that I taught at the New School from 1969 to 1972.

In the 1920s, free-trade theory was used to insist that Germany could pay reparations far beyond its ability to earn foreign exchange. Keynes, Harold Moulton and other economists controverted that theory. In fact, already in 1844, John Stuart Mill described how paying foreign debts lowered the exchange rate. When that happens, what is lowered is basically wages. So what passes for today’s mainstream trade theory is basically an argument for reducing wages and fighting a class war against labor.

You can see this quite clearly in the eurozone, above all in the austerity imposed on Greece. The austerity programs that the IMF imposed on Third World debtors from the 1960s onward. It looks like a dress rehearsal to provide a cover story for the same kind of “equilibrium economics” we may see in the United States.

JR: Can the US pay its debts permanently? Does the amount of federal debt, $18 or $19 trillion even matter? Should we pay down the national debt?

MH: It is mainly anti-labor austerity advocates who urge balancing the budget, and even to run surpluses to pay down the national debt. The effect must be austerity.

A false parallel is drawn with private saving. Of course individuals should get out of debt by saving what they can. But governments are different. Governments create money and spend it into the economy by running budget deficits. The paper currency in your pocket is technically a government debt. It appears on the liabilities side of the public balance sheet.

When President Clinton ran a budget surplus in the late 1990s, that sucked revenue out of the U.S. economy. When governments do not run deficits, the economy is obliged to rely on banks – which charge interest for providing credit. Governments can create money on their own computers just as well. They can do this without having to pay bondholders or banks.

That is the essence of Modern Monetary Theory (MMT). It is elaborated mainly at the University of Missouri at Kansas City (UMKC), especially by Randy Wray – who has just published a number of books on money – and Stephanie Kelton, whom Bernie Sanders appointed as head of the Senate Democratic Budget Committee.

If the government were to pay off its debts permanently, there would be no money – except for what banks create. That has never been the case in history, going all the way back to ancient Mesopotamia. All money is a government debt, accepted in payment of taxes

This government money creation does not mean that governments can pay foreign debts. The danger comes when debts are owed in a foreign currency. Governments areunable to tax foreigners. Paying foreign debts puts downward pressure on exchange rates. This leads to crises, which often end by relinquishing political control to the IMF and foreign banks. They demand “conditionalities” in the form of anti-labor legislation and privatization.

In cases where national economies cannot pay foreign debts out of current balance-of-payments revenue, debts should be written down, not paid off. If they are not written down, you have the kind of austerity that is tearing Greece apart today.

JR: You say that mainstream economic theory and academic study is pro-creditor? Why is this the case?

MH: Thorstein Veblen pointed out that vested interests are the main endowers and backers of the higher learning in America. Hardly by surprise, they promote a bankers’-eye view of the world. Imperialists promote a similar self-serving worldview.

Economic theory, like history, is written by the winners. In today’s world that means the financial sector. They depict banks as playing a productive role, as if loans are made to help borrowers earn the money to pay interest and still keep something for themselves. The pretense is that banks finance industrial capital formation, not asset stripping.

What else would you expect banks to promote? The classical distinction between productive and unproductive (that is, extractive) loans is not taught. The result has been to turn mainstream economics as a public-relations advertisement for the status quo, which meanwhile becomes more and more inequitable and polarizes the economy.

JR: What can be learned by studying the history of economic thought? What did Adam Smith and the people in his era and those which followed him understand that would be useful to us now?

MH: If you read Adam Smith and subsequent classical economists, you see that their main concern was to distinguish between productive and unproductive economic activity. They wanted to isolate unproductive rentier income, and unproductive spending and credit.

To do this, they developed the labor theory of value to distinguish value from price – with “economic rent” being the excess of price over socially necessary costs of production. They wanted to free industrial capitalism from the legacy of feudalism: tax-like ground rent paid to a hereditary landed aristocracy. They also opposed the monopolies that bondholders had insisted that governments create to sell off to pay the public debt. That was why the East India Company and the South Sea Company were created with their special privileges.

Smith and his followers are applauded as the founding fathers of “free market” economics. But they defined free markets in a diametrically opposite way from today’s self-proclaimed neoliberals. Smith and other classical economists urged markets free from economic rent.

These classical reformers realized that progressive taxation to stop favoring rentiers required a government strong enough to take on society’s most powerful and entrenched vested interests. The 19th-century drive for Parliamentary reform in Britain aimed at enabling the House of Commons to override the House of Lords and tax the landlords. (This rule finally passed in 1910 after a constitutional crisis.) Now there has been a fight by creditors to nullify democratic politics, most notoriously in Greece.

Today’s neoliberals define free markets as those free for rent-seekers and predatory bankers from government regulation and taxes.

No wonder the history of economic thought has been stripped away from the curriculum. Reading the great classical economists would show how the Enlightenment’s reform program has been inverted. The world is now racing down a road to the Counter-Enlightenment, a neo-rentier economy that is bringing economic growth to a halt.

JR: Why does economic thought minimize the role of debt? I.e. I read Paul Krugman and he says the total amount of debt isn’t a problem, for example you can’t find the internet bust in GDP or the 1987 crash

MH: When economists speak of money, they neglect that all money and credit is debt. That is the essence of bookkeeping and accounting. There are always two sides to the balance sheet. And one party’s money or savings is another party’s debt.

Mainstream economic models describe a world that operates on barter, not on credit. The basic characteristic of credit and debt is that it bears interest. Any rate of interest can be thought of as a doubling time. Already in Babylonia c. 1900 BC, scribes were taught to calculate compound interest, and how long it took a sum to double (5 years) quadruple (10 years) or multiply 64 times (30 years). Martin Luther called usury Cacus, the monster that absorbs everything. And in Volume III of Capital and also his Theories of Surplus Value, Marx collected the classical writings about how debts mount up at interest by purely mathematical laws, without regard for the economy’s ability to pay.

The problem with debt is not only interest. Shylock’s loan against a pound of flesh was a zero-interest loan. When crops fail, farmers cannot even pay the principal. They then may lose their land, which is their livelihood. Forfeiture is a key part of the credit/debt dynamic. But the motto of mainstream neoliberal economics is, “If the eye offends thee, pluck it out.” Discussing the unpayability of debt is offensive to creditors.

Anyone who sets out to calculate the ability pay quickly recognizes that the overall volume of debts cannot be paid. Keynes that made point in the 1920s regarding Germany’s inability to pay reparations.

Needless to say, banks and bondholders do not want to promote any arguments explaining the limits to how much can be paid without pushing economies into depression. That is what my Killing the Host is about. It is the direction in which the eurozone is now going, and the United States also is suffering debt deflation.

Turning to the second part of your question, Krugman and others say that debt doesn’t matter because “we owe it to ourselves.” But the “we” who owe it are the 99 Percent; the people who are “ourselves” are the One Percent. So the 99 Percent Owe the One Percent. And they owe more and more,thanks to the “magic of compound interest.”

Krugman has a blind spot when it comes to understanding money. In his famous debate with Steve Keen, he denied that banks create money or credit. He insists that commercial banks only lend out deposits. But Keen and the Modern Monetary Theory (MMT) school show that loans create deposits, not the other way around. When a banker writes a loan on his computer keyboard, he creates a deposit as the counterpart.

Endogenous money is easily created electronically. That privilege enables banks to charge interest. Governments could just as easily create money on their own computers. Neoliberal privatizers want to block governments from doing this, so that economies will have to rely on commercial banks for the money and credit they need to grow.

The mathematics of compound interest means that economies can only pay their debts by creating a financial bubble – more and more credit to bid up asset prices for real estate, stocks and bonds, enabling banks to make larger loans. Today’s economies are obliged to develop into Ponzi schemes to keep going – until they collapse in a crash.

The models of the macroeconomy to forecast the future and to develop policy at institutions like the IMF, often consider finance and banking as just another sector of industry, like construction or manufacturing. How do these institutions consider their model of the financial sector?

The IMF acts as the collection agent for global bondholders. Its projections begin by assuming that all debts can be paid, if economies will cut wages and wiping out pension funds so as to pay banks and bondholders.

As long as creditors remain in control, they are quite willing to sacrifice the 99 Percent to pay the One Percent. When IMF “stabilization” programs end up destabilizing their hapless victims, mainstream media blame the collapse on the debtor country for not shedding enough blood to impose even more austerity.

Economists often define their discipline as “the allocation of scarce resources among competing ends.” But when resources or money really become scarce, economists call it a crisis and say that it’s a question for politicians, not their own department. Economic models are only marginal – meaning, small changes, not structural.

The only trend that does grow inexorably is that of debt. The more it grows, the more it slows the “real” economy of production and consumption. So something must give: either the economy, or creditor claims. And that does indeed change the structure of the economy. It is a political as well as an economic change.

Regarding the second part of your question – how creditor institutions model the financial sector – when they look at prices they only consider wages and consumer prices, not asset prices. Yet most bank credit is tied to asset prices, because loans are made to buy homes or commercial real estate, stocks or bonds, not bread and butter.

Not looking at what is obviously important requires a great effort of tunnel vision. But as Upton Sinclair noted, there are some jobs – like being a central banker, or a New York Times editorial writer – that require the applicant not to understand the topic they are assigned to study. Hence, you have Paul Krugman on money and banking, the IMF on economic stabilization, and Rubinomics politicians on bailing out the banks instead of saving the economy.

If I can add a technical answer: The IMF does not recognize that the “budget problem” – squeezing domestic currency out of the economy by taxing wages and industry – is quite different from the “transfer problem” of converting this money into foreign exchange. That distinction was the essence of the German reparations debate in the 1920s. It is a focus of my history of theories of Trade, Development and Foreign Debt.

Drawing this distinction shows why austerity programs do not help countries pay their foreign debt, but tears them apart and induces emigration and capital flight.

Does the Financial Sector Add to GDP?

MH: The financial sector is a rentier sector – external to the “real” economy of production and consumption, and therefore a form of overhead. As overhead, it should be a subtrahend from GDP.

JR: In the way that oil industry funded junk science on global warming denial, Wall Street funds and endows junk economics and equilibrium thinking?

MH: Falling on your face is a state of equilibrium. So is death – and each moment of dying. Equilibrium is simply a cross section in time. Water levels 20 or 30 feet higher would be another form of equilibrium. But to the oil industry, “equilibrium” means their earnings continuing to grow at the present rate, year after year. This involves selling more and more oil, even if this raises sea levels and floods continents. That is simply ignored as not relevant to earnings. By the time that flooding occurs, today’s executives will have taken their bonuses and capital gains and retired.

That kind of short-termism is the essence of junk economics. It is tunnel-visioned.

What also makes economics junky is assuming that any “disturbance” sets in motion countervailing forces that return the economy to its “original” state – as if this were stable, not moving down the road to debt peonage and similar economic polarization.

The reality is what systems analysts call positive feedback: When an economy gets out of balance, especially as a result of financial predators, the feedback and self-reinforcing tendencies push it further and further out of balance.

My trade theory book traced the history of economists who recognize this. Once a class or economy falls into debt, the debt overhead tends to grow steadily until it stifles market demand and subjects the economy to debt deflation. Income is sucked upward to the creditors, who then foreclose on the assets of debtors. This shrinks tax revenue, forcing public budgets into deficit. And when governments are indebted, they becomemore subject to pressure to privatization of public enterprise. Assets are turned over to monopolists, who further shrink the economy by predatory rent seeking.

An economy going bankrupt such as Greece and having to sell off its land, gas rights, ports and public utilities is “in equilibrium” at any given moment that its working-age population is emigrating, people are losing their pensions and suffering.

When economists treat depressions merely as self-curing “business downturns,” they are really saying that no government action is required from “outside” “the market” to rectify matters and put the economy back on track to prosperity. So equilibrium thinking is basically anti-government libertarian theory.

But when banks are subjected to “equilibrium” by writing down debts in keeping with the ability of borrowers to pay, Wall Street’s pet politicians and economic journalists call this a crisis and insist that the banks and bondholders must be saved or there will be a crisis. This is not a solution. It makes the problem worse and worse.

There is an alternative, of course. That is to understand the dynamics at work transforming economic and social structures. That’s what classical economics was about.

The post-classical revolution was marginalist. That means that economists only look at small changes, not structural changes. That is another way of saying that reforms are not necessary – because reforms change structures, not merely redistribute a little bit of income as a bandage.

What used to be “political economy” gave way to just plain “economics” by World War I. As it became increasingly abstract and mathematical, students who studied the subject because they wanted to make the world better were driven out, into other disciplines. That was my experience teaching at the New School already nearly half a century ago. The discipline has become much more tunnel-visioned since then.

Present State of Financial World?

JR: We see around the world something like 25% of all national debt is now has a yield priced in negative interest rates? What does this mean? Do you see this continuing?

MH: On the one hand, negative interest rates reflect a flight to security by investors. They worry that the debts can’t be paid and that there are going to be defaults.

They also see that the United States and Europe are in a state of debt deflation, where people and businesses have to pay banks instead of spending their income on goods and services. So markets shrink, sales and profits fall, and the stock market turns down.

This decline was offset by the Federal Reserve and the European Central Bank trying to re-inflate the Bubble Economy by Quantitative Easing – providing reserves to the banks in exchange for their portfolio of mortgages and other loans. Otherwise, the banks would have had to sell these loans in “the market” at falling prices.

In the name of saving “the market,” the Fed and ECB therefore overruled the market. Today, over 80 percent of U.S. home mortgages are guaranteed by the Federal Housing Authority. Banks won’t make loans without the government picking up the risk of non-payment. So bankers just pretend to be free market. That’s for their victims.

The “flight to security” is a move out of the stock and bond markets into government debt. Stocks and bonds may go down in price, some companies may go bankrupt, but national governments can always print the money to pay their bondholders. Investors are mainly concerned about keeping whatthey have – security of principal. They are willing to be paid less income in exchange for preserving what they have taken.

Here’s the corner that the economy has backed itself into. The solution to most problems creates new problems – blowback or backlash, which often turn out to be even bigger problems. Negative interest rates mean that pension funds cannot invest in securities that yield enough for them to pay what they have promised their contributors. Insurance companies can’t earn the money to pay their policyholders. So something has to give.

There will be breaks in the chain of payments. But the way Wall Street administrators at the Treasury and Fed plan the crisis is for small savers to lose out to the large institutional investors. So the bottom line that I see is a slow crash.

JR: Could there be a more symbiotic relationship with global financial institutions? For money to have value, doesn’t it need a functioning economy, rather than an entirely financialized one?

MH: Money is debt. It is a claim on some debtor. Government money is a claim by its holder on the government, settled by the government accepting it as payment for tax debts.

Being a claim on a debtor, money does not necessarily need a functioning economy. It can be part of a foreclosure process, transferring property to creditors. A financialized economy tends to strip the economy of money, by sucking up to the creditor One Percent on top. That is what happened in Rome, and the result was the Dark Age.

JR: In 2007/2008 we had a subprime crash and since 2014 we’ve had a commodities crash where oil prices are low, is this because of what’s going on in emerging market economies? Are emerging market economies and China the next subprime?

The current U.S. and Eurozone depression isn’t because of China. It’s because of domestic debt deflation. Commodity prices and consumer spending are falling, mainly because consumers have to pay most of their wages to the FIRE sector for rent or mortgage payments, student loans, bank and credit card debt, plus over 15 percent FICA wage withholding for Social Security and Medicare (actually, to enable the government to cut taxes on the higher income brackets), as well income and sales taxes. After all this is paid, consumers don’t have that much left to spend on commodities. So of course commodity prices are crashing.

Oil is a special case. Saudi Arabia is trying to drive U.S. fracking rivals out of business, while also hurting Russia. This lowers gas prices for U.S. and Eurozone consumers, but not by enough to spur economic recovery.

JR: You’ve written that we’re entering a financial cold war – the IMF and the US have been very strict on debt repayment for loans from debtor nations, but in Ukraine they’ve made an exception regarding Russia, could you discuss your recent writing on that?

MH: U.S. diplomats radically changed IMF lending rules as part of their economic sanctions imposed on Russia as result of the coup d’état by the Right Sector, Svoboda and their neo-Nazi allies in Kiev. The ease with which the U.S. changed these rules to support the military coup shows how the IMF is simply a tool of President Obama’s New Cold War policy. The aim was to enable the IMF to keep lending to the military junta even though Ukraine is in default of its $3 billion debt to Russia, even though it refuses to negotiate payment, and even though IMF money has been used to fund kleptocrats such as Kolomoisky to field his own army against Russian speakers in Donbas. Ukraine has no foreseeable means of paying off the IMF and other creditors, given its destruction of its export industry in the East. My articles on this are on my website, michael-hudson.com.

JR: Today’s economy has some truly amazing technology from companies like Apple, but Apple is also example of financial engineering, you outline this in your book, what financial innovations have been associated with the story of Apple’s stock?

MH: The main financial innovation by Apple has been to set up a branch office in Ireland and pretend that the money it makes in the Untied States and elsewhere is made in Ireland – which has only a 15 percent income-tax rate.

The problem is that if Apple remits this income back to the United States, it will have to pay U.S. income tax. It wants to avoid this – unless Wall Street can convince politicians to declare a “tax holiday” would let tax avoiders bring all their foreign money back to the United States “tax free.” That would be a tax amnesty only for the very wealthy, not for the 99 Percent.

This tax angle explains why Apple, almost the wealthiest company in the world, has been urged by activist shareholders to borrow. Why should the richest company have to go into debt?

The answer is that Apple can borrow from U.S. banks at a low interest rate to pay dividends on its stock, instead of paying these dividends by bringing its income back home and paying the taxes that are due.

It would seem to be an anomaly to borrow from banks and pay dividends. But that is the “cannibalism” stage of modern finance capitalism, U.S.-style. For the stock market as a whole, some 92 percent of earnings recently were used to pay dividends or for stock buybacks.

JR: What is the eventual outcome of all theses corporate buybacks to pump up share prices?

MH: The problem with a company using its revenue simply to buy its own shares to support their price (and hence, enable CEOs to increase their salaries and bonuses, and make more capital gains on their stock options) is that the price fillip is temporary. Last year saw the largest volume of U.S. stock buybacks on record. But since January 1, the market has fallen by about 20 percent. The debts that companies took on to buy stocks remain in place; and the earnings that companies used to buy these stocks are now gone.

Corporations did not use their income to invest in long-term expansion. The financial time frame always has been short-term. Projects with long-term paybacks are cut back, because CEOs and financial managers simply want to take their money and run. That is the financial mentality.

JR: What is the outcome of all theses corporate buybacks to pump up share prices?

MH: When the dust settles, companies financialized in this way are left as debt-leveraged shells. CEOs then go to their labor unions and threaten to declare bankruptcy if the unions don’t scale back their pension demands. So there is a deliberate tactic to force companies into debt for short-term earnings and stock-price gains in the short term, and a more intensive class war against present and past employees and pensioners as a longer-term policy.

JR: Why do business schools endorse of financialization? Reversing short-termism?

strong>MH: The financial sector is the major endower of business schools. They have become training grounds for Chief Financial Officers. At Harvard, Prof. Jensen reasoned that managers should aim at serving stockholders, not the company as such. The result was an “incentive” system tying management bonuses to the stock price. So naturally, CFOs used corporate earnings for stock buybacks and dividend payouts that provided a short-term jump in the stock price.

The ideological foundation of today’s business schools is that economic control should be shifted out of government hands into those of financial managers – that is, Wall Street. That is their idea of free enterprise. Its inevitable tendency is to end in more centralized planning by Wall Street than in Washington.

The aim of this financial planning is quite different from that of governments. As I wrote in Killing the Host: “The euro and the ECB were designed in a way that blocks government money creation for any purpose other than to support the banks and bondholders. … The financial sector takes over the role of economic planner, putting its technicians in charge of monetary and fiscal policy without democratic voice or referendums over debt and tax policies.”

Financial planning always has been short-term. That is why planning should not be consigned to banks and bondholders. Their mentality is extractive, and that ends up hit-and-run. What passes for mainstream financial analysis is simply to add up how much is owed and demand payment, not help the economy grow. To financial managers, economic prosperity and unemployment is an “externality” – that is, not part of the equation that they are concerned with.


JR: The story of Greece in recent years is relevant to our discussion because the political party Syriza took over with ideas that were traditionally representing the left? Does the body of traditional left ideas have the ability to solve some of the challenges regarding financial warfare?

MH: The left and former Social Democratic or Labour parties have dome to focus on political and cultural issues, not the economic policy that led to their original creation. What is lacking is a focus on rent theory and financial analysis. Part of the explanation probably is covert U.S. funding and sponsorship of Blair-type neoliberals.

The eurozone threatened Greece with domestic destabilization if it did not surrender to the Troika’s demands. Syriza’s leaders worried that the ensuing turmoil would bring a right-wing neo-Nazi group such as Golden Dawn into power, or a military dictatorship as a client oligarchy for U.S. and German neoliberals.

So the political choice today is much like the 1930s, when the global economy also broke down. The choice is between nationalism and populism on the right, or socialism reviving what used to be left-wing politics.

JR: Could there be a debt write down? Isn’t someone’s debts another person’s savings, i.e. pension funds, 401k, retirement funds?

MH: The problem is indeed that one party’s debt finds its counterpart in some other party’s savings. Not paying debts therefore involves annulling some other party’s financial claims on the debtor. What happens to the savings on the other side of the savings/debt balance sheet?

The political question is, who will lose first?

The answer is, the least politically protected. The end game is “Big fish eat little fish.” Pension funds are in the front line of sacrifice, while government bondholders are the most secure. Greek pensions already have been written down, and the savings of U.S. pension funds, Social Security and other social programs are the first to be annulled.

The only way to achieve a fair debt cancellation is to write down the debts of the wealthiest, not the most needy. That is the opposite of how matters are being resolved today. That is why southern Europe is being radicalized over the debt issue.

JR: Will financialized economies implode? Leaving the non-financialized ones?

strong>MH: The One Percent who hold most of the economy’s savings are quite willing to plunge society into depression to collect on their savings claims. Their greed is why we are in an economic war much like Rome’s Conflict of the Orders that shaped the Republic, and its century of civil war between creditors and debtors, 133-29 BC.

Argentina has been imploding, just as Third World debtors were obliged to do when they accepted IMF austerity programs and “conditionalities” for loans to keep their currencies from depreciating. To avoid being forced to adopt such self-defeating and anti-democratic policies, it looks like countries will have to move out of the U.S. and Eurozone orbit into that of the BRICS. That is why today’s financial crisis is leading to a New Cold War. It is as much financial as it is military.

JR: How would you advise a politician to restore prosperity in the future?

strong>MH: The problem is who to give advice to. Most politicians today – at least in the United States – are proxies for their campaign contributors. President Obama is basically a lobbyist for his Wall Street in the Democratic Party’s Robert Rubin gang. That kind of demagogue wouldn’t pay any attention to policies that I or other economists would make. Their job is not to make the economy better, but to defend their campaign contributors among the One Percent at the economy’s expense.

But when I go to China or Russia, here’s what I advise (without much success so far, I admit):

First, tax land rent and other economic rent. Make it the tax base. Otherwise, this rental value will end up being pledged to banks as interest on credit borrowed to buy rent-yielding assets.

Second, make banks into public utilities. Credit creation is like land or air: a monopoly created by society. As organs of public policy they would not play the derivatives casino, or make corporate takeover loans to raiders, or falsify mortgage documents.

Third, do not privatize basic utilities. Public ownership enables basic services to be provided at cost, on a subsidized basis, or freely. That will make the economy more competitive. The cost of upgrading public infrastructure can be defrayed by basing the tax system on economic rent, not wages.

JR: Does it have to be this way?

strong>MH: The Eurozone die is cast. Countries must withdraw from the euro so that governments can create their own money once again, and resist creditor demands to carve up and privatize their public domain.

For the United States, I don’t see a concerted alternative to neoliberalism squeezing more and more interest and rent out of the economy, making the present slump even deeper in debt.

JR: How won’t debts be paid?

strong>MH: There are two ways not to pay debts: either by annulling or repudiating them, or by foreclosure when creditors take or demand property in lieu of monetary payment.

The first way not to pay is to default or proclaim a Clean Slate. The most successful example in modern times is the German Economic Miracle – the Allied Monetary Reform of 1948. That cancelled Germany’s internal debts except for wages owed by employers, and minimum working balances.

The United States Government has fought against creation of an international court to adjudicate the ability of national economies to pay debts. If such a court is not created, the global economy will fracture. That is occurring in what looks like a New Cold War pitting the United States and its NATO satellites against the BRICS (China, Russia, South Africa, Brazil and India) along with Iran and other debtors.

The US preferred policy is for countries to sell off whatever is in their public domain when they lack the money to pay their debts. This is the “foreclosure” stage.

Short of these two ways of not paying debts, economies are submitting to debt deflation. That strips income from producers and consumers, businesses and governments to pay creditors. As the debtor economy weakens, the debt arrears mount up – often at rising interest rates to reflect the risk of non-payment as creditors realize that there is no “business as usual’ way in which the debts can be paid.

Debtor countries may postpone the inevitable by borrowing from the IMF or U.S. Treasury to buy out bondholders. This saves the latter from taking a loss – leaving the debtor country with debts that are even harder to annul, because they are to foreign governments and international institutions. That is why it is a very bad policy for countries to move from owing money to private bondholders to owing the IMF or European Central Bank, whose demands are unforgiving.

In the long term, debts won’t be paid in the way that Rome’s debts were not paid. The money economy itself was stripped, and the empire fell into a prolonged Dark Age. That is the fate that will befall the West if it continues to support the “rights” of creditors over the right of nations and economies to survive.

JR: Thanks again for speaking with us.

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  1. Teddy

    Very interesting and very depressing at the same time. However, the claim (not very important for the interview, but still) that Panama and Liberia aren’t “real countries” struck me as arrogant. Does lack of monetary sovereignty mean not being a “real country”? Does it mean that Eurozone countries and others using euro as their currency are not a “real countries” too?

    And if it is indeed the case according to the MMT proponents, then I see one more interesting question: does voluntary abandonment of national currency by country’s residents mark loss of national sovereignty? For example, most South American countries do have their national currencies, yet US dollars are very popular there. The same could be said of socialist countries of Eastern Bloc (even though trade in foreign currencies was illegal and sometimes was considered a capital crime), modern North Korea, or just about any country where national currency was considered unreliable or experienced hyperinflation.

    1. Disturbed Voter

      The EU, except for GB and other non-Euro areas, are German colonies. This was inevitable as any German could tell you 100 years ago. Much of Latin America and the Caribbean are American colonies, just ask Chile. The abandonment of nationality, could eventually lead to the rule by the BIS, the bank of banks … whose first manager was from the Third Reich.

    2. Robert Coutinho

      Actually, in some ways, the answer to your question, “Does lack of monetary sovereignty mean not being a “real country”? Does it mean that Eurozone countries and others using euro as their currency are not a “real countries” too?” is:


      The Eurozone countries can no longer act independently from their fellow EZ members. They can no longer borrow with any sense of safety. Since net-importing EZ members can no longer allow a fiat currency to lower compared to a fellow EZ member who is a net-exporter; these countries (PIIGS) are in dire straits! When they joined the EZ, they did not listen to the financial analysts who warned them that they would be like US states, thus needing to always balance their budgets (plus or minus small, rainy-day funds). Now those EZ “states” that borrowed are saddled with unpayable debt.

      What is even worse: the EZ creditor nations insist that each EZ member is responsible for bailing our their own banks! Given that they are not allowed to print the money that would be required to do so, that task is simply impossible. Further insult-to-injury that has occurred is that private citizens within the EZ can use banks of other EZ nation-states. So the very wealthy can transfer their assets to institutions that will protect them from the taxes that would be needed to pay off the debts.

      Finally: since there is no EZ “taxing authority”, the money that has been generated does not have the inherent value needed (i.e. paying the issuer taxes).

  2. Tinky

    A brilliant overview. Should be required reading for every citizen, and, in a perfect world, every politician and candidate for high office would be compelled to address their economic policies/views in this context.

    Keep up the outstanding work, Michael!

    1. Webej

      Note that the actual interview includes quite a lot of material that the transcript does not, including examples, historical material, and more details. At times the transcript is close to the spoken text, at others there are significant gaps.

      1. Yves Smith Post author

        That was the official transcript, provided by Hudson. Having been interviewed, it’s common to give the interviewee in published interviews the opportunity to clean up what they said, as in eliminate verbal tics and repetitiveness, and sharpen the points made.

  3. equote

    Michael, if money (currency) is debt is the Baron correct:
    “Give me control over a nation’s currency and I care not who makes its laws.” as stated by Baron Rothschild

  4. Paul Handover

    Agree with Tinky that this is a brilliant overview. A masterpiece of laying out just where we as a modern society have got ourselves. I’m an optimist at heart but seeing a gentle way of getting the world into a safe, fair and prosperous future strikes me as a hope too far.

  5. ke

    No one “pays” taxes. Taxes are a feedback signal for monied behavior. I or worse we, everyone is responsible so no one is responsible, own natural resources and you will borrow from us to process those resources for us at a percentage we will dictate, with effective rates. Taxes measure behavior compliance.

    Money depends upon a powerless citizen. It seems like just yesterday the kids in San Diego and in ny before them were the masters of the technology world. Some powerless subgroup is always being offered temporary power to subjugate all the others.

    The average waitress is more intelligent than the ivory tower crowd, including Kansas city, which has its own problems with a collapsing promisory system.

    Discount by behavior. They need to get rid of cash to stop the discounting, noncompliance, and are crushing themselves in the process. How do you get participation.

  6. PWC, Raleigh

    Agree strongly that this transcript should be required reading, although it most definitely is *not* for the faint of heart.

    To read it all put succinctly in one place makes my blood turn to ice. Literally, shivering.

  7. Eck

    It’s not just the BRICS pushing reform. The whole international community is sorting this out. It’s not purely geopolitics either, though the US wishes it were. It’s contentious but it’s diplomacy, not war.



    The current consensus is subordinating debt to rights including economic and social rights. The principles would get their teeth from independent resolution of unsustainable or odious debts. The focus here is on international lending but the same approach can be applied in municipal law.

  8. Tom

    Very interesting. But also one dimensional. History and politics is not only about finance. To claim, Rome collapsed and the dark age came about because of rent seeking by the elites is preposterous. There are myriad explanations for Rome´s downfall and all of them are somewhat right and somewhat not. Regarding economics Hudson seems to relegate all cultural factors to the “black box”. But cultural factors play an enormous role. Take Germans obsession with saving and security vs the much more relaxed attitude of Brits. The most likely explanation is the fact that Britain experienced none of the cataclysms that Germany has experienced. Aka hyper inflation in the Twenties and half the population roofless at the end of the war.
    Or Greece. There the lesson learned of similar experiences (Greeks being driven out from Turkey) has been defiant nationalism and the beatification of the army. Witness the fact that despite the crisis of the last years Greece still has the highest military spending (as percentage of GDP) in the EU. In both cases we fear driven policy choices that are economically enormously important.

    1. Left in Wisconsin

      Germans and Brits have thought differently about money for a long time. Richard Biernacki wrote a brilliant book about this – The Fabrication of Labor – which shows that during the early industrialization period, working people in Britain thought in terms of piece rates while working people in Germany thought in terms of hourly rates. You can also see this in Marx vs. Adam Smith (not right v left but in how they conceptualize work and wages).

      Not at all to say that periods of depression don’t have long-lasting cultural impacts; they absolutely do.

      An interesting contemporary question is whether the neoclassical economic takeover is weakening these cultural traditions.

      1. clinical wasteman

        Please don’t read what follows as glib dismissal, Tom, and particular thanks L.I.W. for that reference — it echoes to an almost weird extent recent discussion with German Genossen/in about the relative status of wage labour in the official ideology of Germany and the UK: even now, prolonged sub-“professional” waged work is still “respectable” in Germany, whereas in much of the UK it’s more like something Mentors threaten schoolkids with: an extra-embarrassing type of “failure”. “Getting out of dependency” by becoming a finance/tech/creative “professional”/freelancer is relentlessly sold as the minimum adequate “achievement”, while normal/waged conditions are kept so bad that the pitch sounds convincing to many non-fools. Even UK government campaigns to encourage training as a plumber, electrician etc. focus on the “aspirational” goal of “self-employment”+mortgaged home “ownership”. (With the unsurprising result that the British equivalent of Mittelstand companies use huge amounts of notionally self-employed labour, i.e. self-employed for tax, health & safety, pension purposes etc but subject to full or enhanced workplace discipline, eg. GPS on plumbers’/electricians’ vehicles recording exactly how long each “contractor” spent on each job, with the slowest slated to be fired … from “self-employment”. Sorry can’t substantiate that last example with references, but it’s based on conversations with people actually doing those jobs.)
        Postponed point was though: yes, of course “cultural factors” are real, but because of their endless social/historical complexity they become truly scary when mapped neatly onto nation states (or sub/supra-national “ethnicities”) and used as the excuse for policy.
        “Culture” is the first resort of the supply-sider (“entitlement culture…”) and his/her pal the racist (“lazy immigrants never had to work back in the colonies…oh, wait…”) in lobbying to secure their rents by blaming those they bleed for their own bloodiness.
        Hudson — a polymath of culture to begin with himself, remember — seems to have it about right: of course two kinds of social factors — the qualitative/infinitely divisble/cultural and the (sort of-)quantifiable material/economic/political — determine each other, but (a.) the extent to which the latter influences the former should never be underestimated (and doesn’t require dumb reductionism), and (b.) only the latter is anywhere near “simple” enough to be accounted and legislated for without inviting unimagined social harm. By all means talk about culture, but that’s what “cultural production” (like, say: Zukofsky poetry, Sergio Corbucci films, grime/punk pirate radio…) is for. Political economy, i.e. mediated violence, is fit for physical problems at most. If some political miracle coerced most exploitation off the face of the earth, the “cultures” left standing probably wouldn’t look like they do now, but they might be able to look out for themselves.

  9. weinerdog43

    I’m 2/3rds through Hudson’s “Killing the Host” where he elaborates on all of the above points. Fascinating, yet ultimately stomach churning given what we are up against.

    So far, my tentative opinion is that the only way to “win” given how the deck is stacked against individual citizens (I refuse to use the word ‘consumer’) is not to play. In other words, avoid debt at all cost. This is pretty tough. But how does one protect one’s savings? Negative interest rates; bail ins; heavier taxes… none of these bode well for savers. I have come to the inevitable conclusion that one must avoid counter party risk. Trust breaks down quickly in a crash, even a slow moving one. Physical assets in your own possession look pretty good. Yes, a certain percentage of gold & silver looks very much like insurance to me. If someone has other ideas, I’m all ears.

    1. Tyler

      “Shutting down Trump rallies, as took place in Chicago, and blocking fracking sites are examples of the only form of direct democracy left. We must begin to mobilize around mass actions. We must, in large and small ways, disrupt the system.”

      Chris Hedges

      1. John

        Hillary = Obama = bill = Wall Street.
        So if she wins we get more of the same.
        Trump is a bit blurry, but consider:
        A) Formerly rep neocons are panicking at the thought of trump, are already speaking of supporting Hillary on account she has yet to see a war she doesn’t like. He actually told Aipac that he favored a balanced Mideast approach… What a heresy! Hardly seems a suitable warmonger.

        B) blankfein previously said either Hillary or bush would be acceptable. Now they are similarly panicking at the thought of uncontrollable trump… He might break the great taboo and jail a banker!

    2. Robert Coutinho

      Don’t be too sure about your gold and silver investments! Unless you actually possess the gold and/or silver, you don’t have it. All financial institutions that “hold” gold for their “customers” require that said customers allow them to use that gold as collateral for debts that the institutions create while “playing the market.” Thus: since possession is 9/10ths of the law, Goldman-Sachs raided the assets of a holding company in order to secure all the tangible stuff that that corporation had in its vaults. Why? Because G-S knew that in a bankruptcy filing, people who held a piece of paper showing that the gold was theirs, would be behind many of the others (including G-S) in claims on said gold.

      In other words, gold that is kept in a financial institutions vault has been pledged, further pledged and further-further pledged as collateral for what may end up being casino-style gambling. You get paid a small fee for “allowing” the financial institution to “use” your “assets”. There are a grand total of ZERO institutions that will hold your gold or silver without such a contract.

      1. weinerdog43

        Good points all. The poster boy for what you are describing is MF Global and Mr. Corzine. One would think that a broker would never co-mingle house assets with those of their clients, but one would be quite wrong.

        “The business model of Wall Street is fraud.”

  10. Jim Haygood

    “Corporations did not use their income to invest in long-term expansion. The financial time frame always has been short-term. Projects with long-term paybacks are cut back, because CEOs and financial managers simply want to take their money and run.” — MH

    In a debt deflation (which Hudson had just finished describing), slow liquidation instead of long-term investment at near-zero return can be the most sensible thing to do.

    On Planet Japan — to take a specific example — why would one invest in anything besides elder care homes, when the population is shrinking like an ice cream cone in the hot sun?

    1. Left in Wisconsin

      But isn’t the Japanese problem that the vast majority of their investment went into export industries which are now undercut by even lower cost Chinese exporters? Debt or no debt, the elephant in the room is serious global overcapacity, with very, very much of it in very low wage environments.

    2. Trent

      “On Planet Japan — to take a specific example — why would one invest in anything besides elder care homes, when the population is shrinking like an ice cream cone in the hot sun?”

      Could it be the population is decreasing due to the economic malaise? Perhaps the japanese are on to the authorities and see the same prospects that many people my age in america are seeing now (32). Terrible employment options, terrible chances of starting a family, terrible chances of ever owning a home due to prices being sky high. I think its just a rational response to not start a family when the future is so uncertain. Sometimes when you learn the game is stacked against you, you just pick up your pieces and go home (no family creation, no home purchases, no future)

      1. Jim Haygood

        Sure, the causation could run either way.

        Children are an investment in the future. Many are refusing to invest.

        It may be a rational response. Or an instinctive response.

  11. vegeholic

    MH’s description of the the tax-exempt nature of the oil business seems like a description of every multi-national company today. As Nicholas Shaxon lays out in exhaustive detail in Treasure Islands, the sole function of the accounting department of any respectable multi-national company is to coordinate product flows and prices among far flung subsidiaries so that income is only realized in tax havens (Panama, LIberia, City of London, Jersey, Cayman Islands, Ireland, Delaware, …). Elsewhere, when the final sale is made, the prices are arranged so there is no profit, so no taxes are paid. Even otherwise respectable companies, like Apple, end up with huge offshore bank accounts. Since none of this is a secret, why do we allow them to get away with it? Maybe at some point it was clever and creative, now it is just business as usual.

  12. Keith

    We need to recognise that mankind has fallen for the greatest confidence trick ever known.

    It’s called Neo-Liberalism.

    It pretended to be something new but has taken us back to the 1920s:

    High inequality, low social mobility, privately educated elite, Eton boys in positions of power, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase.

    They are trying to get us back to a 1920s welfare state.

    We have already had the inevitable Wall Street Crash 1929/2008.

    We have 21st technology so everything looks good, but all the ideas are old, very old.

    The de-regulation of banks made everything look great to start with as they create money out of nothing from debt (loans/mortgages).

    With ever easier credit, new money flowed into the system until 2008, with loads of new money coming into the system the only way was up and everything boomed.

    Now even the trillions Central Bankers pump in can barely keep the system alive as everything is now dragged down by the repayments on all the debt the bankers created in the boom.

    Society had moved forward until the 1970s; the prosperity of the majority rose, inequality went down and social mobility went up.

    Since 1979 , and Margaret Thatcher, we have been going backwards.

    1920s ideas have now taken us to the global recession of the 1930s.

    Today we have the first generation that is going to be worse off than its parents, the Neo-Liberal confidence trick exposed.

    There were problems in the 1970s but at least society was moving in the right direction.

    It is time to resurrect old ideas and improve them and abandon already failed very, very old ideas.

    Unfettered Capitalism is an idea that should have died in the 1930s, bought back to fail in exactly the same way for a second time

    Technology always moves forward so there is always a veneer of progress but don’t get fooled again.

    (Michael Hudson calls it “junk” economics – I call it the biggest confidence trick mankind has ever been exposed to).

  13. Jim in SC

    I think this is idiocy, but it is representative Lefty idiocy. Ultimately it’s politics, not economics. And straw man rhetoric.

    There just aren’t that many rentiers. And being a rentier is not necessarily the cakewalk that Michael Hudson describes. ZIRP has been good for people who make a substantial amount of their income from capital gains, but the consequence is that it will be bad in the future, as assets can only inflate so much. In our state, the combined municipal, federal, and local (property) taxes on rental income is over 50%, even on low levels of income, much less trusts.

    Americans are innumerate, and are immune to numerical arguments. Our educational system has failed.

    1. diptherio

      I think you are conflating small-time landlords with the big-time financiers whom Hudson is talking about. Obviously, someone who owns a couple of rental units is bound to be injured just like everyone else. It’s “the 1%” rentiers that Hudson argues are killing us. Don’t get it twisted.

      1. Jim in SC


        I don’t have the figures in front of me, but only about fifty thousand people in the US make over $100,000 a year from property, stock or bond income. And those figures are probably pre-ZIRP, so we’re really talking about very few people today. A significant minority of greater than $100,000 unearned incomes are probably retired municipal employees earning pensions in corrupt Blue States like California and Illinois.

        During the Gilded Age, it was an aspiration to make money without having to work., see Thorstein Veblen, ‘Theory of the Leisure Class.’ Today, as Larry Summers points out in his critique of Piketty, most great incomes today are earned incomes. You can argue that the game is rigged, and $100 million incomes cannot possibly reflect skill, but I think it’s a tougher argument. Despite what one reads in the Lefty press, wealth is not nearly as concentrated now as it was during the Gilded Age. John D. Rockefeller was worth about four times what Bill Gates is as a percentage of GDP. That there are more wealthy people today is an outcome that should be celebrated, not lamented.

        The wealth of the Forbes 400 would keep the US running for about six months, and that’s if it could be confiscated without destroying it, which is extremely unlikely. People like Michael Hudson complain about property, but don’t acknowledge that, without property, we have the Tragedy of the Commons.

        1. Alejandro

          You seem to have a knack for numeracy. Without appealing to the authority of Larry Summers, can you substantiate (links?) your numerical claims?

          May be wrong but it would seem that you may not have read Veblen…either way, can you clarify what you mean by “lefty”?

          1. Jim in SC

            I originally read this data about asset income from another government source, which I haven’t been able to relocate. However, one can get an idea, if you’re good with numbers, from Table 7 on pg. 38 and Figure 1 on pg. 39. (Caveat: this data is dated, as the paper is from 2004, and it only applies to male non-workers between ages 25-54. Nevertheless, given the decline in interest rates since 2004, I think the argument that there are few non-workers receiving significant asset income is even stronger today. You will have to adjust dollar values for inflation, but I think the BLS has a handy CPI tool on their website)


            I consider ‘lefty’ viewpoints to be those that promote increased government involvement in income redistribution.

            Veblen is so deep that we can both read him and not know we’ve read the same book.

            So as to not quote Larry Summers, let me ask you to do a thought experiment instead: if the rentiers are receiving so much passive income, where is it coming from? I can’t think of any asset class that has been doing well. This is the problem of all money management today: no one is making any money, and if they are, no one can identify the money makers before the fact. It’s a problem both for the very rich and those with more modest incomes. This is why I say people like Michael Hudson and Bernie Sanders are making arguments against straw men when they talk of the ‘rentier class’ and ‘millionaires and billionaires.’ Few people are getting much passive income. If the very richest are making money–and I think they are–and are not getting it from passive sources, then they must be working for their money.

        2. two beers

          …without property, we have the Tragedy of the Commons.


          The “tragedy of the commons” is a myth, a presumptive a priori fabrication derived from a reactive ideological imperative to privatize the public sphere rather than from actual anthropological or historical evidence.

          If you think that arguing from such propaganda would somehow be persuasive on this fact-based blog, you’ve lost your way.

        3. I Have Strange Dreams

          This comment was proudly sponsored by Koch Industries. Up next: why cigarette smoking is really good for you!

          PS, Jim in SC: does the SC stand for “Stoned Confusion”?

        4. Fiver

          ‘You can argue that the game is rigged, and $100 million incomes cannot possibly reflect skill, but I think it’s a tougher argument.’

          Who said it took no ‘skill’ to amass such a fortune? Surely it does. But the point of this piece is that there is no necessary system requirement for these particular sorts of short-term money-making skills in order to run a sound economy, and indeed these proven skills have rendered themselves counter-productive insofar as how much the financial sector as a whole now takes out of the economy on an annual basis – while madly writing derivatives on pretty much everything in the process that will one day turn into digital sludge. It’s only progress.

      2. Robert Coutinho

        You are missing the point of the article. It is not Bill Gates that the author is worried about. Bill’s money came from making things. It is Goldman-Sachs!

        Although the amount made by landlords and people living off of investments directly (of over $100,000) is not that high; the bonuses paid by the large financial firms are OUT OF CONTROL!

        THAT is where the rentier class is located. Their income is considered “earned income”, but it does not actually add significantly to the GDP. In fact the author directly addressed that point.

        “Does the Financial Sector Add to GDP?

        MH: The financial sector is a rentier sector – external to the “real” economy of production and consumption, and therefore a form of overhead. As overhead, it should be a subtrahend from GDP.”

        It is not that the people on Wall Street and in Dallas do not show up to work; it is that the work that many of them do is not contributing to society as a whole.

        For instance: we allow gambling when it is socially useful: we call it investment in stocks and bonds. The idea is that you make a bet on somebody being able to run a good corporation and you may get rewarded–let’s concentrate on the price of that stock though. Since this type of gambling can also be very destructive (see Stock Market crashes of 1907, 1929, 2008); we put regulations on it to prevent abuses. Anything done to manipulate the market is supposed to be illegal. Don’t believe me, believe the people who work(ed) in the field!

        Today, many of the large investment firms have computer algorithms designed to manipulate the market to squeeze gains out of it via high-speed trading. Where does this “profit” come from? What is created? Why is there a profit in this? The answer is that this is deliberate manipulation of the markets. That is, perhaps, just as dangerous as Bernie Madoff.

        1. Jim in SC

          In Michael Hudson’s first interchange with the interviewer he makes the point you’ve highlighted about the financial sector. In his second interchange he makes the point that I’ve highlighted about rentiers–the One Percent taking from the 99%. When he talks later about ‘tax-like ground rent paid to a hereditary landed aristocracy,’ he’s clearly talking about ‘rentiers’ such as I have understood it above. Much of the rest of the piece is about international trade, a subject I know little about.

          Kevin Erdmann has two nice essays from 2015 and 2013, respectively, in which he challenges the idea that finance is parasitic to the ‘productive economy.’ His blog is a recent discovery for me, and I’m quite impressed with the subtlety of his thinking, and his sensitivity to psychology and rhetorical overreach.


          1. Robert Coutinho

            I read the article. You may misunderstand what I was alluding to. Venture Capital (and the ability to sell such assets later) has social value. I stated that emphatically, “For instance: we allow gambling when it is socially useful…” As I said later, part of the problem that has occurred is that the situation is being manipulated. The manipulators are not adding social value, they are gaming the system and pulling money out that they have done nothing useful to earn. People who invest have earned their returns. Although the author might link such people in with the rentier class, he did not suggest they should not exist; he suggested that the entire genre should be listed as a (necessary) subtrahend to the GDP. In other words, it is an expense necessary in order to have corporations in the first place–but most of it should not be added to GDP, instead it should be subtracted from it.

            The rentier system is not flawed in design, it is flawed in application. For much of the mid-20th century, the system was highly regulated and (mostly) prevented from abusing its status. That changed beginning with R. Reagan’s administration and has gone down hill since then. At this point in our history (US), the financial world has bought and control the regulators and politicians who are supposed to be protecting us from those same people! That is a recipe for disaster!

            1. Yves Smith Post author

              I beg to differ regarding venture capital firms. The serial entrepreneurs I know despise the VC firms they worked with, and found that their approach was antithetical to building a durable business. All they cared about was the quick kill and they were constantly undermining the entrepreneurs’ efforts to build an organization with real skills. All they wanted was sizzle to sell to the corporate buyer or IPO investor. Similarly, an attorney I know who works with inventors with serious high tech (software, hardware, medical devices, biotech), tells all her clients to avoid VC like the plague, to get money anywhere else (vendors, suppliers, sale of rights, etc). If they must go to VC, she tried to get two VC firms in so the founders can play them off against each other.

            2. Jim in SC

              Robert: I can see that your first paragraph above is a reasonable view about the social value of venture capital and investment in general. However, your second paragraph indicates that you may not realize that there was barely a private venture capital industry in this country before Reagan. Arthur Rock and VenRock were an exception, of course, and the Mellon and Rockefeller families certainly funded a bunch of ventures, but there was at least a year in the ’70s when there were no IPOs. The essential problem was that tax rates were too high in relation to the risk of early investment. Reagan changed all that, and the rest is history.

              There would have been even less venture cap investment in the ’50s through the ’70s had it not been for the Small Business Investment Corporation program. Just as we wouldn’t have thirty year mortgages without government involvement, government was necessary to ensure at least some investment capital was flowing in a world of stratospheric tax rates.

              Naturally, these franchises mostly went to the politically well connected. I expect this situation to return (as some version of SBICs may return) if Bernie Sanders is able to make his revolution happen and tax rates rise sharply. Getting the blessing of the political class will make the process more moral, you know.

              I asked a speaker in my Venture Capital class twenty-five years ago why they mostly did leveraged buyouts instead of traditional venture capital, and he said that, of their first seventeen investments, all in traditional VC, they lost money on fifteen, and broke even on the remaining two. This is not a game for the faint of heart.

              To Yves’ point above: another lesson of that VC class came from a guy who launched a large and successful insurance company. He said he regretted giving up so much equity to the VCs. It’s better to get funded from other sources if you can.

  14. washunate

    I would echo others on this being a great read.

    Personally I’m not a fan of the phrase debt deflation, though, because that confuses the colloquial meaning of language. Debt has become such a problem precisely because housing, education, healthcare, transportation, legal rights, and other goods and services cost too much relative to median wages.

  15. rexbevans

    This transcript is the sort of thing that must be read and studied twice or even several times to be understood by a layman such as myself.
    I will definitely be purchasing Hudson’s new book “Killing The Host” ASAP.

  16. David

    The only way to achieve a fair debt cancellation is to write down the debts of the wealthiest, not the most needy. That is the opposite of how matters are being resolved today. That is why southern Europe is being radicalized over the debt issue.

    Is this correct? Should “most needy” and “wealthiest” be swapped? Didn’t the banks get relief and pensioners get cuts?

    1. Robert Coutinho

      I think he means the debts being held by them (not the debts they owe). So, in a sense, you are correct in your observation.

    2. Michael Hudson

      Right. I should have said, debts OWED to the wealthy, not to the most needy (as banks owe them debts — their bank deposits, and pensions)
      Thanks for catching this.

  17. Andrew Anderson

    The question then is how to reverse the process and start stripping the banks (redistributing their assets and/or reserves to the population), in a responsible, “rights respecting manner” that no conservative, libertarian, liberal or anyone else can legitimately object too.

    Here’s a suggestion then using the US as an example:

    1) Allow individual citizen, business, State and local government, etc. inherently risk-free accounts at the central bank. Then the entire population can deal with their Nation’s money, fiat, in an inherently risk-free, convenient form and not be limited to physical fiat, aka cash. This is, after all, only equal protection under the law. Who will dare object if framed this way?

    2) Announce the future abolition of government-provided deposit insurance by stages (eg. reduce amount insured by, say, 10% every 60 days, till 0% is insured.) Strongly encourage all citizens to get accounts at the central bank. Provide default individual accounts for all adult citizens. Who can legitimately object to this since 1) means government-provided deposit insurance will no longer be needed?

    3) Forbid the central bank from creating any more fiat except for the monetary sovereign. Use sovereign coins (eg. “the Trillion dollar coin option”) to load up the monetary sovereign’s account at the central bank with new fiat.

    4) Interest rates in fiat should start ramping up in anticipation of the abolition of deposit insurance. If they get too high then distribute fiat from the monetary sovereign’s account at the central bank equally to all adult citizen accounts at the central bank. Continue till interest rates in fiat drop sufficiently but not too much since we wish to make the banks pay a decent rate for the new reserves they might need. Refill the monetary sovereign’s account as necessary with sovereign coins.

    5) Begin the abolition of government-provided deposit insurance by reducing in it, in the case of the US, by, say, 10% from $250,000 per account to $225,000.

    6) Continue the staged abolition of government-provided deposit insurance over, say, 2 years till the amount insured is $0. Continue equal fiat distributions to all adult citizen accounts at the central bank as necessary to keep interest rates from becoming too high.

    7) Sit back and watch with amusement as the banks are forced* to borrow from the population the reserves needed to transfer formerly insured deposits to inherently risk-free accounts at the central bank?

    Some additional refinements might include capital controls to prevent foreigners from lending to US banks during the abolition process and the sale of private assets by the FED to keep interest rates reasonably high.

    So the banks end up deprivileged and all citizens get a nice chunk of new fiat to spend or lend as they see fit.

    Comments? Suggestions? Hisses of rage from bank lovers? :)

    *But what if the banks have enough reserves already? Coordinated asset sales by the central bank should take care of that.

  18. Jim

    Hudson have been on fire of late with his recent analysis–far beyond excellent.

    But there is a major contradiction in his use of the biological metaphor as an explanation for how the parasite (the predatory financial sector) controls the host, in this case, the industrial production and consumption economy or the brain..

    He argues that in nature a parasite dulls the host’s awareness that it is being attacked and then this same predatory financial system produces enzymes that control the host’s brain(analogous to mistaken free market ideological assumptions,)–which make it think that it should protect the parasite.

    He then goes on to more specifically argue that this financial sector does something similar “…by pretending to be part of the industrial production and consumption economy when in fact it is not a factor of production but primarily a kind of transfer payment from the “real economy” to the FIRE sector.

    But if the financial sector actually operated in such a totally deterministic manner it would be a waste of time to be writing about the issue since nothing could be done.

    Hudson needs to be sensitive to the the fact that the mind emerges from the brain but is not reducible to it. Consequently there may be historical circumstances where predatory finance is in charge (but as may be happening now) the human mind is capable of rejecting this host through acts of will not determined by biology but by choosing something different.

    Cultural selection is not natural selection–it is not predetermined by biology but by will, identity and choice which is the world of the mind and brain and not simply the brain.

    Is is this type of materialism (whether biological or economic) which the left must overcome.

  19. Roland

    Ricardo argued that wages cannot remain at a level below that needed to enable the current wage-earners to live and raise the next generation of wage-earners as replacements.

    That’s a good theory. But in history, we do find a number of striking examples of sub-Ricardian wages prevailing over the course of generations. The result, of course, is a declining demographic.

    Hudson mentions the Roman Empire. The rent-seeking depredations of the Empire’s ruling class pushed the overall intergenerational wage to sub-Ricardian levels. So we can now trace the course of land abandonment, town contraction, and eventually even town abandonment. The labouring classes simply could no longer afford to reproduce themselves while carrying the enormous expense of their ruling class.

    Most of the developed countries today now have negative demographics. The cost of raising a replacement generation is becoming broadly unsupportable because the one percent cost too much.

  20. Rob Carruthers

    Finance appears to be more akin to a parasitoid than a parasite. “A parasitoid is an organism that spends a significant portion of its life history attached to or within a single host organism in a relationship that is in essence parasitic; unlike a true parasite, however, it ultimately sterilises or kills, and sometimes consumes, the host.”

  21. Newtownian

    Excellent article.

    “The financial sector does something similar by pretending to be part of the industrial production-and-consumption economy. The National Income and Product Accounts treat the interest, profits and other revenue that Wall Street extracts – along with that of the rentier sectors it backs (real estate landlordship, natural resource extraction and monopolies) – as if these activities add to Gross Domestic Product. The reality is that they are a subtrahend, a transfer payment from the “real” economy to the Finance, Insurance and Real Estate Sector. ”

    Yet again I am fearful for my retirement because the above describes the vast majority of the funding basis of the Australian superannuation system.

    The latter was supposed to make us free but it has created the biggest boondoggle ever.

  22. Steve H.

    Hudson keeps getting better at making his message clear. That simplicity has provoked this poem of quotes:

    : “Wealth is passed down from generation to generation. You can’t get rid of wealth.” [Chris Rock]
    : “Wages aren’t wealth, by definition. Idiots!” [Lambert]
    : “People for whom people are things.” [Yves?]
    : “Real wealth – Entities and flows containing available energy (exergy) capable of depreciating according to the second Law; usable products and services; Examples: food, fuels, material concentrations, houses, organisms, information, land, labor, controls.” [Odum]
    : “Land is the foundation of the State. How could one give it away?” [Mo Tun]
    : “First, tax land rent and other economic rent. Make it the tax base. Otherwise, this rental value will end up being pledged to banks as interest on credit borrowed to buy rent-yielding assets.” [Hudson]
    : “The only way to achieve a fair debt cancellation is to write down the debts owed to the wealthy, not the most needy.” [Hudson]

    1. Steve H.

      – The most fictitious assumption is that Wall Street and the FIRE sector add to output, rather than extracting revenue from the rest of the economy.

      Readability, Average grade level = 14. This is so clear, lets try to get it to a 7th grade reading level.

      The biggest lie is that the money industries add to output, instead of sucking money from the rest of the economy. [Grade = 12]

      The biggest lie is that the money companies add to output, instead of sucking money from the rest of the economy. [Grade = 10.2]

      The biggest lie is that the money companies add to output, instead of sucking money from the rest of us. [Grade = 8.3]

      The biggest lie is that banks add to output, rather than sucking payment from the rest of us. [Grade = 6.2]

      Sources: readability-score.com and ‘Children’s Writers Word Book’ [Mogilner].

      (To be clear, this is an exercise and may differ from what Hudson means.)

  23. AL HANNA


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