Michael Hudson: Asset-Price Inflation and Rent Seeking

Yves here. Rather than trying to shoehorn a meaty and long Michael Hudson paper into WordPress, we thought it better to embed it for your reading and downloading pleasure. He is presenting this paper at a conference in October, but it was submitted yesterday. He was pretty sure it would be uploaded to the conference site pronto.

Michael first mentioned this effort with Dirk Bezemer a year ago, so it is instructive to see the time needed to put formal statistical piece together. Enjoy!

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year

00 Hudson_FMM Berlin Conference October2019__24september
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  1. Steve H.

    “What has occurred is an inversion of values about the proper aim of economies. Today, it is to get rich by means of a financialized rentier economy. From the point of view of rentiers and other investors, the production-and-consumption economy is the overhead. The costs of labor and capital are to be minimized by squeezing out more economic rent. By contrast, our approach treats the production-and-consumption sector as primary, and the FIRE sector and other rent extracting sectors as overhead.”

    “Each debt is a credit on the other side of the balance sheet, because behind each borrower is a lender.”

  2. xkeyscored

    I liked this bit. Seems to sum up where we’re at, with the parasitic Ponzi-style FIRE sector overshadowing any real economy:
    “in financialized economies, an asset’s price is determined by how much credit buyers can borrow to buy it. A home is worth as much as a bank will lend to a bidder, not limited by its cost of production.”
    Let’s hope we can change course in time. Thanks to Michael for another attempt to bring clarity to matters we’re not meant to discuss or even know about.

  3. Ignacio

    As an aside, I believe the rentier society is also a drag for any effort on the other big challenge we face (Yes, Cl.Ch.) Talking about the big owners of space for rent like Blackstone I have read stories about their reluctancy to keep them well maintained, not to mention refurbish, make any energy saving improvement, or investing in renewables. In my experience doing improvements in office buildings in which tennants are SMEs is quite difficult because you need everybody to agree, the owners do not pay electric bills except for common expenses included in the rent, and the tennants cannot do significant improvements without owner approval. In the EU, while big companies, that often own their buildings, are forced to undergo energy audits this is not the case for SMEs. In this sense SMEs become less competitive compared with larger companies.

    1. Susan the other`

      When it comes time for the rentier owners of shopping malls and other “assets” of the consumer society to take their losses they will have to deduct all that previous depreciation, which will diminish their losses. I can’t imagine that they ever thought it would come to this – the inequality of capital actually strangling them in the end.

      1. Susan the other`

        A really good way to offset that impending loss/tax would be to invest generously in labor projects for climate change mitigation – that is, hands on projects, primarily local, all over the country.

      2. cnchal

        The deductions for depreciation will have already happened, and it is the difference between the depreciated cost basis and what the mall sells for which determines whether there is a gain or loss subject to taxation. A loss can be carried forward into future taxation years to offset profits made in those years, just like Amazon and Uber have carry forward losses as far as the eye can see, and will never pay a penny of income tax.

        The mall owners don’t really care either. In the interim they have stripped millions from tenants and shoved it into their pockets, playing accounting games to reduce personal taxable income to a minimum.

  4. Tomonthebeach

    Outstanding article as usual. It is so readable, I plan to share with economically-naive friends who will grasp Hudson’s points in a heartbeat.

    I guess Detroit was an insufficient example for rentiers of how essential the middle class is to their well-being. No money to buy goods & services, means more businesses dying. The resulting unemployment means people cannot pay rents, which brings down real estate values precipitously and soon deflates the wealth of the rentier class – equities to follow. Barter might even replace money – emptying their Downton Abbey’s – again.

    Put simply, as Hudson’s figures depict, the economy is interdependent – almost a closed (zero-sum) system. Trumpian economics is pouring fuel on an already smoldering middle-class fire. It seems to me that 4 more years of Trump, and 2007 might look like a mere hiccup compared to 2024.

    Why aren’t professional associations bullying Treasury into using Hudsonian calculus to paint a realistic picture of the economy in which we live – and know that GDP does not depict? The mainstream press would gladly do articles reporting criticism of our useless government economic indicators.

    1. cnchal

      > Why aren’t professional associations bullying Treasury into using Hudsonian calculus to paint a realistic picture of the economy in which we live . . .

      We all know why. No profit in exposing reality.

      The main stream press is mostly a pack of self serving liars, venal to the core. They won’t touch this.

      1. Off The Street

        You can’t expect a person to say something when the value of his 401k or whatever depends on not saying it.
        Apologies to Sinclair.

  5. Jane

    While reading Mr. Hudson’s excellent piece on the disconnect between the real economy and the way that economy is measured I got to wondering where outsourcing and the ‘gig’ businesses fit into the circular flow diagram shown in Figure 7 (p. 18). Am I right in assuming they simply transfer ‘income’ to ‘financial investments’? If so, I would add another red arrow to represent the cost of technological progress, so ‘Income (wages + profits)’ becomes ‘Income (wages + wages -> profits + profits)’ to highlight the capture of monies that once were in the hands of the 90%. There is nothing new in this transfer but by burying it under ‘Income’ we effectively hide the high human cost it entails.

    What we are seeing now strikes me as being equivalent to the change from a command economy (controlled by monarchs and the aristocracy) to the industrial economy of the 18th and 19th centuries (controlled by the merchant class), ironically we have created a hyper-command economy controlled by oligarchs and, like the monarchs of old, governments today think they are still in control of the real economy. But are they?

  6. prx

    Am I misinterpreting Figure 2 or is there a mistake? Equities seem to be more volatile than bonds and land prices based on Figure 1, but their price changes are shown as having lower multiples relative to GDP in Figure 2.

  7. prx

    I am curious for more information behind this statement, as the chart does not seem to support the second assertion. It looks more like foreclosures have taken homes away from those who got houses during a period of loosening credit standards and homeownership levels are back to “normal:”

    Home ownership rates have fallen (Chart 5) as properties have been foreclosed by creditors and sold to new institutional investors such as Blackstone in the booming residential rental market.

    1. Arizona Slim

      Historically, or at least since the early 1960s, rates of US homeownership have fluctuated with a narrow range of around 62% to 65%. During the housing bubble years of the previous decade, the rate of homeownership went up to, ISTR, 67% or 68%.

      Nowadays, I’m pretty sure that the rate of homeownership is back to the historic range.

        1. Arizona Slim

          Thanks for the source, prx. Permit me to restate the historic range that I cited above:

          Per the FRED in prx’s link, it’s actually 63-66%.

          Accuracy is important. Yet another reason why Slim hearts Naked Capitalism.

    2. xkeyscored

      I’m not clear what you – prx – mean by the second assertion. Sure, the chart doesn’t say anything about why home ownership rates have fallen, but foreclosures and Blackstone etc seem a reasonable explanation, which I think I’ve heard before.
      While the chart does show they have fallen, it is a bit misleading as they’ve only fallen back to something like their long term value, and somewhere in the middle to upper range of that.

      1. prx

        Totally agree with your second paragraph. Foreclosures as a cause makes more sense than Blackstone to me because I’ve seen evidence of tightening lending standards. So, I’m asking what information there is to back up the assertion that big institutions buying rental properties is affecting the homeownership rate.

  8. Susan the other`

    It was a financial scheme to avoid taxes for capital gains from rentier income. Clearly. But what is not so clear is that the whole of late industrial capitalism, and early, is that it left an unpaid debt, accumulated over 300 plus years, to the environment. We ravaged the environment. So “taken together” bank credit, tax free depreciation revenue, stock buybacks and QE, are just the half of it. The half that skimmed the take. The other half is growth and production itself.

    1. Susan the other`

      and also too, the whole process couldn’t have happened without the looney mindset and rationalization for wealth at any cost that allowed us to first commoditize everything and then financialize the damn stuff.

  9. The Rev Kev

    When Hudson states “that much of its population is emotionally worse off than that of almost any other country in the world” I think that it may be worse for the American culture in that winning is seen to be such a motivating factor. I once heard a coach actually say that “second place is first loser”. If you are not “winning” then it must be your fault and that adds to the emotional pressure on Americans. There is little recognition that it may be the economy at fault and not a personal fault.
    After reading this paper, I do wonder where the concept of sustainability fits in. The present economy is many things but sustainable it is not. We are now at the point where parts of the economy is cannibalizing other parts. An example here is where private equity companies buy up solid companies and extract all wealth before abandoning it and their workers. What will be the endpoint of this eventually? My own guess is, based on history, a populist government that goes after the rentier class for all this wealth, even if they flee overseas.
    But the cost will be a loss of a Constitution government in the US.

  10. Sound of the Suburbs

    Michael Hudson got me into this line of thinking with “Killing the Host”.

    Economics, the time line:

    Classical economics – observations and deductions from the world of small state, unregulated capitalism around them

    Neoclassical economics – Where did that come from?

    Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics

    Neoclassical economics – Why is that back?

    We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.

    On bringing it back again, we had lost everything that had been learned in the 1930s, by which time it had already demonstrated its flaws.

    We also lost what had been learnt from neoclassical economics last outing in the 1920s, as well as what the Classical Economists knew.

    1929 and 2008 look so similar because they are; it’s the same economics and thinking.


    Richard Vague has analysed the data for 1929 and 2008 and they were even more similar than they initially appear.

    Real estate lending was actually the biggest problem in 1929.
    Margin lending was another factor in 2008.

    The FT had a time line of financial crises and there were lots before and after the Keynesian era but hardly any during the Keynesian era.

    What did they know then that we don’t know now?

    Free market, neoclassical economics is older than the GDP measure when they thought inflating asset prices created wealth. The old economics brought back the old belief that inflating asset prices creates wealth.

    Everyone forgot what real wealth creation was, even though they did work it out last time.

    They believed in the markets in the 1920s and after 1929 they had to reassess everything. They had placed their faith in the markets and this had proved to be a catastrophic mistake.

    This is why they stopped using the markets to judge the performance of the economy and came up with the GDP measure instead.

    In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised inflating asset prices doesn’t create real wealth, they came up with the GDP measure to track real wealth creation in the economy.

    The transfer of existing assets, like stocks and real estate, doesn’t create real wealth and therefore does not add to GDP. The real wealth creation in the economy is measured by GDP.

    Inflated asset prices aren’t real wealth, and this can disappear almost over-night, as it did in 1929 and 2008.

    Real wealth creation involves real work, producing new goods and services in the economy.

  11. Sound of the Suburbs

    The University of Chicago (free market headquarters) forgot what they used to know.

    Henry Simons was at the University of Chicago as he was a firm believer in free markets, but he had learned the lessons of the 1920s and 1930s.

    “Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.

    Irving Fisher was a neoclassical economist that believed in free markets and he knew this was a stable equilibrium. He became a laughing stock and worked out where he had gone wrong.

    What goes wrong with free markets?

    Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money, so that free market valuations could have some meaning.

    The real world and free market, neoclassical economics would then tie up.


    1929 – Inflating the US stock market with debt (margin lending)
    2008 – Inflating the US real estate market with debt (mortgage lending)

    Bankers inflating asset prices with the money they create from loans.


    1. Procopius

      Irving Fisher was also a wealthy man in 1929 and lost most of it. He never regained a position of wealth, but he did hold on to pretty comfortable positions for the rest of his life. To be fair, he learned a lot of lessons, which most economists did not, and he accepted a more realistic view of economics. There are several current famous economists that I would wish the same lessons in 2008, but none of them lost anything.

  12. Sound of the Suburbs

    Neoliberalism and the missing equation:

    Disposable income = wages – (taxes + the cost of living)

    They just can’t see the other term in the brackets with taxes.

    What are your yellow vests complaining about Macron?
    The other term in the brackets with taxes.

    What’s the problem millennials?
    The other term in the brackets with taxes.

    What’s the problem US corporations?
    The other term in the brackets with taxes.

    We have to cover the high US cost of living in wages reducing profit.
    We prefer to off-shore, to places where we can pay wages that people couldn’t live on in the US. This maximises profit.

    The high US cost of living makes it a high wage economy unable to compete in an open globalised world.

    US firms off-shore to where they can make a decent profit and then import back into the US adding to the trade deficit.

    Rent seeking was a problem only too familiar to the Classical Economists.

    “The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist

    Ricardo was part of the new capitalist class and the old landowning class were a huge problem with their rents that had to be paid both directly and through wages.

    What does our man on free trade, Ricardo, mean?

    Disposable income = wages – (taxes + the cost of living)

    Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.

    Employees get less disposable income after the landlords rent has gone.
    Employers have to cover the landlord’s rents in wages reducing profit.

    Ricardo is just talking about housing costs, employees all rented in those days.

    Low housing costs work best for employers and employees.

    Some rather important things went missing as classical economics transitioned to neoclassical economics.

  13. WeekendTrader

    There are a number of issues with this paper – all revolving around the fact that one person’s debt is another person’s asset.

  14. Sound of the Suburbs

    Executives getting share-based rewards soon realised share buybacks were just what they needed to pump up those rewards.

    Share buybacks were illegal, and were another of those 1930s regulations designed to prevent a repeat of 1929.

    Who has been powering the US stock market to 1929 levels again?
    CEOs doing share buy backs.

    That’s why they made share buybacks illegal to try and stop that happening again.

    A former US congressman has been looking at the data.

  15. Sound of the Suburbs

    Everyone has made the same mistakes and a couple of false beliefs lie behind these mistakes:

    1) Inflating asset prices creates wealth
    2) Bank are financial intermediaries

    What is really happening in real estate booms and busts?

    Bank loans create money and the repayment of debt to banks destroys money.


    In the real estate boom, new money pours into the economy from mortgage lending, fuelling a boom in the real economy, which feeds back into the real estate boom.

    The Japanese real estate boom of the 1980s was so excessive the people even commented on the “excess money”, and everyone enjoyed spending that excess money in the economy.

    In the real estate bust, debt repayments to banks destroy money and push the economy towards debt deflation (a shrinking money supply).

    Japan has been like this for thirty years as they pay back the debts from their 1980s excesses, it’s called a balance sheet recession.

    Bank loans effectively take future spending and bring it in today.
    Jam today, penury tomorrow.

    Using future spending power to inflate asset prices today is a mistake that comes from thinking inflating asset prices creates real wealth.

    GDP measures real wealth creation.

    The good times came from using bank credit to inflate asset prices, and the money creation involved flooded into economies around the world. Using bank credit in this way builds up claims on future prosperity and we are now in that impoverished future.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

    What Japan does in the 1980s; the US, the UK and Euro-zone do leading up to 2008 and China has done more recently. This is why we have been having such trouble with growth ever since.

    Richard Koo had studied what had happened in Japan and knew the same would happen in the West after 2008. He explains the processes at work in the Japanese economy since the 1990s, which are at now at work throughout the global economy.


    Debt repayments to banks destroy money, this is the problem.

    The debt built up in economies around the world acts like a drag anchor on growth.

    Japan did it first thirty years ago; you can see what happens by looking there.

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