Michael Hudson: Debt, Liberty and “Acts of God”

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Yves here. Michael Hudson recaps the logic of debt jubilees and other forms of debt relief, as practiced in ancient times, when borrowers through circumstances outside their control were unable to make good. Monarchs recognized the danger of letting creditors create a permanent underclass.

This is a short, high-level treatment and makes for an easy-to-digest introduction to Hudson’s research and ideas.

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

Western civilization distinguishes itself from its predecessors in the way it has responded to “acts of God” disrupting the means of support and leaving debts in their wake.

The great question always has been who will lose under such conditions. Will it be debtors and renters at the bottom of the economic scale, or creditors and landlords at the top? This age-old confrontation between creditors and debtors, landlords and tenants over how to deal with the unpaid debts and back rents is at the economic heart of today’s 2020 coronavirus pandemic that has left large and small businesses, farms, restaurants and neighborhood stores – along with their employees who have been laid off – unable to pay the rents, mortgages, other debt service and taxes that have accrued.

For thousands of years ancient economies operated on credit during the crop year, with payment falling due when the harvest was in – typically on the threshing floor. Normally this cycle provided a flow of crops and corvée labor to the palace and covered the cultivator’s spending during the crop year, with interest owed only when payment was late. But bad harvests, military conflict or simply the normal hardships of life occasionally prevented this buildup of debt from being paid, threatening citizens with bondage to their creditors or loss of their land rights.

Mesopotamian palaces had to decide who would bear the loss when drought, flooding, infestation, disease or military attack disrupted economic activity and prevented the settlement of debts, rents and taxes. Recognizing that this was an unavoidable fact of life, rulers proclaimed amnesties for taxes and the various debts that were incurred during the crop year. These acts saved smallholders from having to work off their debts by personal bondage and ultimately to lose their land.

Classical antiquity, and indeed subsequent Western civilization, rejected such Clean Slates to restore social balance. Since Roman times it has become normal for creditors to use social misfortune as an opportunity to gain property and income at the expense of families falling into debt. In the absence of kings or democratic civic regimes protecting debtor rights and liberty, pro-creditor laws obliged debtors to lose their land or other means of livelihood to foreclosing creditors, sell it under distress conditions and fall into bondage to work off their debts, becoming clients or quasi-serfs to their creditors without hope of recovering their former free status.

Giving priority to creditor claims leads to widespread bankruptcy. At first glance, it seems to violate our society’s ideas of fairness and distributive justice to insist on payment of debt and rent arrears, threatening to evict debtors from their homes and forfeit whatever property they have if they cannot pay the rent arrears and other charges without revenue having come in. Bankruptcy proceedings would force businesses and farms to forfeit what they have invested. It also would force U.S. cities and states to cope with plunging sales- and income-tax revenue by slashing social services and depleting their pension funds savings to pay bondholders.

But the West’s pro-creditor legal and financial philosophy has long blocked debt relief to renters, mortgagees and other debtors. Banks, landlords and insurance companies insist that writing down of debts and rents owed to them by wage-earners and small business is unthinkable. So something has to give: either the broad economic interest of most of the population, or the interest of the Finance, Insurance and Real Estate (FIRE) sector. Banks claim that non-payment of rent would cause debt defaults and wipe out bank capital. Insurance companies claim that to make their policy holders whole would bankrupt them. So the insurance companies, banks, landlords and bondholders insist that labor, industry and the government bear the cost of arrears that have built up during the economic slowdown, not themselves.[1]

Yet for thousands of years Near Eastern rulers restored viability for their economies by writing down debts in emergencies, and more or less regularly to relieve the normal creeping backlog of debts. These Clean Slates extended from Bronze Age Sumer and Babylonia in the 3rdmillennium BC down to classical antiquity through the Near East, including the neo-Assyrian, neo-Babylonian and Persian Empires.

Near Eastern Protection of Economic Resilience in the Face of Acts of God

For the palatial economies of Mesopotamia and its neighbors, resilience meant stabilization of fiscal revenue. Letting private creditors (often officials in the palace’s own bureaucracy) demand payment out of future production threatened to deprive rulers of crop surpluses and other taxes, and corvée labor or even service in the military. Individual creditors looked to their own advantage, not that of the overall economy.

To preserve the flow of rents, taxes and basic corvée labor duties and service in the military, Near Eastern rulers proclaimed Clean Slates that wiped out personal and agrarian debts. That restored normal economic relations – an idealized status quo ante – by rolling back the consequence of debts – bondage to creditors, and loss of land and its crop yield. From the palace’s point of view as tax collector and seller of many key goods and services, the alternative would have been for debtors to owe their crops, labor and even liberty to their creditors, not to the palace. So cancelling debts to restore normalcy was simply pragmatic, not utopian idealism as was once thought.

The pedigree for “act-of-God” rules specifying what obligations need not be paid when serious disruptions occur goes back to the laws of Hammurabi c. 1750 BC. Their aim was to restore economic normalcy after major disruptions. §48 of Hammurabi’s laws proclaim a debt and tax amnesty for cultivators if Adad the Storm God has flooded their fields, or if their crops fail as a result of pests or drought. Crops owed as rent or fiscal payments were freed from having to be paid. So were consumer debts run up during the crop year, including tabs at the local ale house and advances or loans from individual creditors. The ale woman likewise was freed from having to pay for the ale she had received from palace or temples for sale during the crop year.

Whoever leased an animal that died by an act of God was freed from liability to its owner (§266). A typical such amnesty occurred if the lamb, ox or ass was eaten by a lion, or if an epidemic broke out. Likewise, traveling merchants who were robbed while on commercial business were cleared of liability if they swore an oath that they were not responsible for the loss (§103).

It was realized that hardship was so inevitable that debts tended to accrue even under normal conditions. Every ruler of Hammurabi’s dynasty proclaimed a Clean Slate cancelling personal agrarian debts (but not normal commercial business loans) upon taking the throne, and when military or other disruptions occurred during their reign. Hammurabi did this on four occasions.[2]

In an epoch when labor was the scarcest resource, a precondition for survival was to prevent rising indebtedness from enabling creditors to use debt leverage to obtain the labor of debtors and appropriate their land. Early communities could not afford to let bondage become chronic, or creditors to become a wealthy class rivaling the power of palace rulers and seeking gains by impoverishing their debtors.

Yet that is precisely what is occurring as today’s economy polarizes between creditors and debtors.

_______

[1]Lawsuits are exploding over the role of insurance companies supposed to protect business from such interruptions. See Julia Jacobs, “Arts Groups Fight Their Insurers Over Coverage on Virus Losses,” The New York Times, May 6, 2020, reports that “insurance companies have issued a torrent of denials, prompting lawsuits across the country and legislative efforts on the state and federal levels to force insurers to make payments. The insurance industry has argued that … fulfilling all of these requests would bankrupt the industry.”

[2]I provide a detailed history of Clean Slate acts from the Bronze Age down through Biblical times and the Byzantine Empire in “… and forgive them their debts”(ISLET 2018).

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43 comments

  1. Fresh Cream

    This is a case of the law of the jungle-the strong eat the weak- vs the law of civilization-the strong protect the weak.

    Reply
  2. Astrid

    The historical overlook ignores the function of bankruptcy to create the clean slate. Sure, a few sentences are thrown in, but somehow completely overlooks entire types of bankruptcy that allow corporate and individual restructuring to occur and preserve underlying value.

    The whole debt jubilee ideas is just so unfair. Access to debt is by and large a privileged position in the modern world. The rich have access to huge amount of capital at minimal cost while the poor have to pay outrageous rates to buy a used car or pay for an emergency. To wipe the slate clean is overwhelmingly beneficial to the rich and connected, while the poor remains renters stuck in wage slavery. And the aftermath of a general debt jubilee means the poor will have even greater difficulty with accessing credit to buy housing, durable goods, and things that allow them to build wealth.

    There’s already a much better solution that actually stimulates the economy and redistributes wealth. Just give every natural person the same amount of money until the economy gets to where it needs to be. It can also be channeled through building public goods like free college education and universal free healthcare and public housing. For everything else, just let bankruptcies happen and clean out natural and unnatural persons addicted to debt. Then the natural person get their fresh start and the unnatural corporate persons can die a well deserved death.

    Reply
    1. Merf56

      You must be joking re bankruptcy.
      And you completely misunderstand what Hudson is talking about for our modern day ‘Little people’ debt issues. I suggest a far more thorough reading of Hudson.

      Reply
      1. rob

        “why do people say,” you ought to go read what the author REALLY means”.. as opposed to looking at what was said?
        I think what Astrid says is completely valid.
        What about what was said ,doesn’t reflect reality?
        There is unequal treatment… and how much money /credit you have… completely changes “what you can get away with”.
        Poor people don’t go bankrupt… they get evicted… they go homeless.. their cars are repossessed. They don’t have the money for a lawyer to file bankruptcy papers..
        Donald trump “goes bankrupt”.. and comes out smiling on the other side…

        Reply
      2. Bijou Smith

        If a debt jubilee clean-slate style was legislated it could be designed to eliminate any unfairness astrid is concerned about. If people know when the jubilee will occur, they will likely choose to invest rather than save. By investments you get real goods that are not subject to the clean slate wipe-out. That’s good for everyone. Private savers get to pick the “winners” they think worth investing in, that’s not always a bad thing either. Government spending always implicitly picks sides too.

        So critics, please take heed: a monetary clean slate does not wipe out your real assets. Strange this needs to be even mentioned. So it is not an abolishment of all wealth.

        Reply
    2. anon19

      Just give every natural person the same amount of money until the economy gets to where it needs to be. Astrid

      Yes, Steve Keen’s solution. But also, all government privileges for private credit creation should be abolished to eliminate perverse incentives to go into debt, which include the punishment of legitimate* saving.

      Also, an ongoing Citizen’s Dividend, to replace all fiat creation for private interests, is a way, in addition to saving, for all citizens to build equity for rainy days such as these.

      *as opposed to excess saving, i.e. fiat hoarding.

      Reply
    3. TomDority

      ‘Just give every natural person the same amount of money until the economy gets to where it needs to be’
      Astrid – a basic income has been discussed but, due to the structures in our tax system and in the operation of the so called ‘Free Market’ (a complete inversion of it’s original meaning) — I would think that income would immediately be taken away by the fire sector interests and be used to balloon up asset prices.
      The fact that the cost of living – food, rent, housing has gone up is not really a natural market force – (there is no natural market force or some magical invisible hand or some as yet undetermined phenomena to be discovered) – because the market is man made.
      In my view, the heaping on of debt fueled speculation combined with corruption’s many companions – co-joined political capture and tax favored status is driving the fundamental asset inflation which is making everything so damned expensive – everything that used to make living and doing business less expensive has been captured by creditors and their co-joined cohorts.
      Below is a comment from the mid 1920’s – don’t know who wrote it

      In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
      If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
      If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
      If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
      Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.

      Reply
    4. rob

      How to give everyone “some money”

      First pass”the need act”
      https://www.congress.gov/bill/112-thcongress/house-bill/2990/text
      Then, as the US gov’t would be able to create money debt free….
      They could distribute the money to Everyone…. and not just wall street to get that money into circulation…. and drive the economy….. not too much… not too little.

      The an idea like the one of digital greenbacks..
      https://www.forbes.com/sites/rhockett/2020/05/17/digital-greenbacks/#12f6140d3b88

      Reply
    5. The Historian

      I think you are missing who Hudson said the “clean slates” were for. They were not for the big creditors and rentiers, rather they were for the farmers and average people who had suffered some loss that made them unable to provide their payments to their creditors and rentiers. It would be as if today, those people who cannot work because of Covid-19 were forgiven their debts, so that when this pandemic was over, they could start out fresh. That would be so much more a help to Main Street’s economy than just giving money to the top corporations.

      I’m not against your ideas about free education and universal healthcare and I doubt Hudson is against those either, but there is much more to the economy that just education and healthcare – things like food production and the manufacturing of necessary items, and Hudson is looking at what has worked historically.

      Reply
      1. anon21

        Hudson’s plan does nothing for non-rich, non-debtors whom the current banking model has also cheated.

        So a traditional debt jubilee is unfair under the current system.

        Steve Keen’s a Modern Debt Jubilee does not have that problem though it should be combined with a moratorium on rent increases.

        Reply
        1. The Historian

          Ah, Americans! “If there is nothing in it for me, then I’m against it!”

          Haven’t we had enough of that kind of thinking? Is someone else getting a break from their debt REALLY going to hurt the rest of Americans? In fact, if it makes American’s Main Street economy stronger, doesn’t that actually help all Americans? I hear that kind of thinking all the time when I talk about forgiving student debt – as though somehow that debt is coming out of THEIR pockets when it is not.

          Too many Americans sound like temporarily distressed billionaires in their attitudes (it’s all about ME) instead of people who want all Americans to succeed.

          Reply
          1. anon22

            Justice is justice and Hudson’s plan would do nothing for rent slaves while giving houses to those who used what is, in essence, the public’s credit but for private gain to buy them.

            Also, rent slaves tend to be poorer than those who “own” their own homes so Hudson’s plan is a form of welfare for the richer rather than a promotion of the general welfare.

            In fact, if it makes American’s Main Street economy stronger, doesn’t that actually help all Americans?The Historian

            Our focus should be on citizens, i.e. people, not businesses since justice for people is what ultimately matters. What you are promoting is Main Street trickle-down.

            Reply
      2. rob

        Hudson was talking about “historical” examples.. that happened a long time ago. In economies that are unlike anything today… so I would not really take his examples at face value.
        I agree with the others that a debt jubilee would mostly go to those not deserving for they are the immortal “persons” around us…. we call corporations.
        The farmers already have crop insurance, subsidies for crops they don’t grow… and all sorts of agricultural incentives to keep them going… yet the system is screwing them… while it keeps them hanging on… for….. the speculators.. and the giant behemoths who control most aspects of modern day mega production.
        so debt forgiveness for actual farmers… sure.. cooperatives… sure… employee owned businesses… sure…

        But , IMO, it would be better to actually hand out cash to people… and again the route…
        Make the banking system lend out their own money.. no more creating money when they make loans. Take away the federal reserve system from them… and incorporate it into the treasury…. FOR REAL… and not just pretend , like it is now.
        The tendency to speculation won’t be there if only real people were just getting a basic income and not SOME actors getting giant streams of credit, from whatever fed facility they are down stream from, and using that to “manipulate markets” into and out of existence.
        Then let those hundreds of millions of real people , collectively “create” the “markets”… and we would see where the chips fall… at least then there would be a ” us” in this.. and not “them”.
        And really… “them” would still get some of what “we” will have to spend//// so capitalism still goes on.. and the “markets” will be more than just contrived fairy tales.riding on the shirt tails of big money.

        Reply
        1. Yves Smith Post author

          Please read posts before commenting. You are in moderation for previous violations.

          Hudson made clear that ancient debt jubilees did not include commercial loans.

          Reply
    6. JEHR

      Astrid, please re-read Hudson’s article. He has been studying this subject for years and knows what he is talking about. He deserves a closer read than what you gave him!

      Reply
    7. jsn

      “Access to debt is by and large a privileged position in the modern world.” While this statement is narrowly true, in the US it isn’t. Subprime debt, debt laddled onto those least able to pay it, was behind the largest financial collapse in US history (so far) just 12 years ago.

      “To wipe the slate clean is overwhelmingly beneficial to the rich and connected, while the poor remains renters stuck in wage slavery.” In a rentier economy, to eliminate the debts would be to eliminate income streams for the rich and connected, Jerome Powell and Josh Hawley are already worried about what it means to not bail out the poor. The Democrats can’t hear this from the left, maybe when it becomes Republican policy they will like it, that’s typically how they roll.

      “And the aftermath of a general debt jubilee means the poor will have even greater difficulty with accessing credit to buy housing, durable goods, and things that allow them to build wealth.” This is a studiously complete missreading of the point of the article: centralized State action to relieve debtors of financial burdens and social stigma, to restore their freedom because their freedom is the strength of the State or civilization.

      Finally, read the article, a few paragraphs, yes they include a few sentences too:

      “Giving priority to creditor claims leads to widespread bankruptcy. At first glance, it seems to violate our society’s ideas of fairness and distributive justice to insist on payment of debt and rent arrears, threatening to evict debtors from their homes and forfeit whatever property they have if they cannot pay the rent arrears and other charges without revenue having come in. Bankruptcy proceedings would force businesses and farms to forfeit what they have invested. It also would force U.S. cities and states to cope with plunging sales- and income-tax revenue by slashing social services and depleting their pension funds savings to pay bondholders.

      But the West’s pro-creditor legal and financial philosophy has long blocked debt relief to renters, mortgagees and other debtors. Banks, landlords and insurance companies insist that writing down of debts and rents owed to them by wage-earners and small business is unthinkable. So something has to give: either the broad economic interest of most of the population, or the interest of the Finance, Insurance and Real Estate (FIRE) sector. Banks claim that non-payment of rent would cause debt defaults and wipe out bank capital. Insurance companies claim that to make their policy holders whole would bankrupt them. So the insurance companies, banks, landlords and bondholders insist that labor, industry and the government bear the cost of arrears that have built up during the economic slowdown, not themselves.”

      Reply
      1. rob

        The 2008 collapse was not caused by poor people owing debt.
        It was caused by fraud and deceit at the level of the investor class, who CHOSE to run a rigged game, securitizing manure, and having rating agencies hand out a lot of undeserved ratings. The masses were fleeced. Wall street… screwed everyone. And still is.
        Placing blame on the little people is offensive. If the markets were not overly saturated with “phony” valuations and hundreds of trillions of dollars worth “bets” placed in stock market parlors(i.e. with each other)to pretend they “earned” the pay they took… while there isn’t 1/10th of the money in all the world to cover their “games”….
        it was because of those darn subprime loans….. give me a break. It was a rigged system, and the emperor had no clothes, and got caught in a snow storm…. now who’s fault was that?

        And in the US… what is not available to most people is “cheap” debt…
        Sure you want to max out your credit card… get a “loan” from a “finance company”.. how about 12%,16%,or 29% ;interest…..

        So anyone who thinks the system is any better now, and the ‘debt forgiveness” will go “to the little people”…
        JUST WOW….
        That is what is called “living in denial”.

        Reply
    8. GM

      The historical overlook ignores the function of bankruptcy to create the clean slate.

      Bankruptcy and a debt jubilee are very very different things in terms of their consequences for the debtors.

      Also, this is much bigger than the current situation.

      You need to have a constant well established and preferably impossible to overthrow mechanism for wiping out debts and establishing a clean slate that transfers back economic power from the few creditors back to the masses.

      Otherwise, because debts accumulate much faster than the real economy can grow, a larger and larger fraction of the economy becomes the property of a tiny creditor class. Which, first, drives everyone else into destitution, second weakens the state because the infrastructure and the military suffer from being deprived of the human resource needed to support them, and third, eventually results in private armies, civil wars, and everything falling apart.

      Also, in the long term, the real economy has to stop growing anyway because the planet is a finite sphere with finite resource; it also did not grow in ancient times when it was entirely agricultural, which is probably why it was much easier to appreciate the problem and the inescapable need to deal with it head on.

      Rome could do away with debt jubilees by growing at the expense of its neighbors. Once that process ended in the early second century, it had a choice — either it would resolve the internal contradictions or it would fall apart. But the oligarchy was too powerful so collapse it was.

      It is exactly the same problem right now — we have been growing at the expense of the fossil fuels the planet had accumulated and at the expense of the rest of life on this planet. This is coming to an end, so now the contradictions that were temporarily hidden for a while, are emerging with full force, and have to be dealt with. Will they be?

      In the absence of mechanisms for preventing oligarchies from forming, even the less controversial solutions such as letting bankruptcy sort out the mess are not really solutions. Because when the oligarchy captures all the power, it changes the laws and drives policy making. The result is things like people not being able to default on student loans and taxpayers bailing out creditors when bad loans blow up (which is a direct transfer of wealth from top to bottom).

      This is not a problem that can be solved with half measures.

      The Soviets solved it at the root — they just eliminated all internal debt through central planing and the government owning everything and employing everyone, meaning that there were no real debts to be defaulted on. Which, BTW, would have been a gigantic advantage in a situation such as the current one — their system would have had no problem pausing for however long was necessary to clear the virus.

      But that only solved the economic problem and only partially. Because the oligarchy formation problem still remained — it was understood even before the revolution that eventually the bureaucracy would morph into an oligarchy and would bring back capitalism so that it can enrich itself without limitations. Stalin thought he can solve that problem through purges and repression, and that indeed worked. As long as there was a Stalin. After that the prediction came true because there was no equivalent of an absolute monarch to do the purging anymore…

      The Mesopotamian system has been, as strange as it is, probably the most stable of all that have been tried. But the world has changed a lot since then…

      Reply
      1. eg

        Oligarchy formation is constant — from the rural userers of antiquity, to the FIRE elites of today. Hudson is trying to revive the memory of the original solution, buried as it has become under centuries of oligarchical propaganda.

        It’s a sorry, though unsurprising, state of affairs when even the NC commentary is infested with resistance to Hudson’s scholarship.

        Reply
  3. rick shapiro

    And iuris romana led directly to the serfdom and prolonged depression of the “dark ages”, as the church spread roman law throughout Europe. If Hayak had bothered to study history he would have found that the “road to serfdom” is (to borrow a locution from one of Hayak’s acolytes) always and everywhere a result of extreme laissez faire, particularly heritable debts. For modern incarnations of serfdom, look at India, Pakistan and Mali.

    Reply
    1. GM

      Less than a decade before Hayek put together that book, Stalin said the following:

      It is difficult for me to imagine what “personal liberty” is enjoyed by an unemployed person, who goes about hungry, and cannot find employment. Real liberty can exist only where exploitation has been abolished, where there is no oppression of some by others, where there is no unemployment and poverty, where a man is not haunted by the fear of being tomorrow deprived of work, of home and of bread. Only in such a society is real, and not paper, personal and every other liberty possible.

      Quite remarkable irony, isn’t it?

      Reply
  4. Norm

    Dr. Hudson spends much time in China. It would be interesting if he were to comment upon how debt and default were handled in China during its many different dynasties. For example, how did ancient Chinese policies compare with those of the ancient Middle East?

    Reply
    1. RBHoughton

      Yes, that should tie him up for several lifetimes and ensure he does not assemble a following in the world today. We can’t have these loose cannon revealing a way out of unfairness and inequality, eh?

      Reply
    2. GM

      I’ve asked myself that question too, it is not just Ancient Mesopotamia that developed a civilization. So how was it elsewhere?

      Not just China, how about the Indian subcontinent, Mesoamerica, etc.?

      Reply
  5. Sound of the Suburbs

    Debt looks like the solution to every problem when you use an economics that doesn’t consider debt.

    The economics of globalisation has always had an Achilles’ heel.
    In the US, the 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.
    Not considering private debt is the Achilles’ heel of neoclassical economics.

    In 2008 the Queen visited the revered economists of the LSE and said “If these things were so large, how come everyone missed it?”
    It’s that neoclassical economics they use Ma’am, it doesn’t consider debt.
    https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
    At 18 mins.
    It wasn’t even hard.

    Reply
    1. Sound of the Suburbs

      The neoliberal ideology was just a wrapper, hiding the dodgy, old 1920s neoclassical economics lurking underneath.
      The international elite swallowed it hook, line and sinker.

      Neoclassical economics, probably the worst economics in the world.
      (I bet they drink Karlsburg. – UK joke)

      The economics of globalisation has always had an Achilles’ heel.
      In the US, the 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.
      Not considering private debt is the Achilles’ heel of neoclassical economics.

      Policymakers run the economy on debt until they get a financial crisis.

      At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
      https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
      Policymakers run the economy on debt until they get a financial crisis.
      1929 – US
      1991 – Japan
      2008 – US, UK and Euro-zone
      The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart above.

      Reply
  6. Sound of the Suburbs

    The Great Depression is the best example of debt deflation.

    Richard Koo had studied the Great Depression and knew how to avoid this fate in Japan after their crash in 1991.
    Richard Koo used to be a central banker at the Federal Reserve Bank of New York and so understood the monetary system.

    Richard Koo shows the US money supply / banking system around the Great Depression (8.30 – 13 mins):
    https://www.youtube.com/watch?v=8YTyJzmiHGk

    1) 1929 before the crash – June 1929
    2) The Great depression before the New Deal – June 1933
    3) During the New Deal – June 1936

    The money supply ≈ public debt + private debt
    The “private debt” component was going down with banks going bust and deleveraging from a debt fuelled boom causing debt deflation (a shrinking money supply).
    It was the public borrowing and spending of the New Deal that helped the economy recover.
    The New Deal restored the money supply by increasing the “public debt” component of the money supply.
    Once the New Deal was working, they reduced Government borrowing and plunged the nation back into recession again. The enormous public spending and borrowing of WW2, eventually sorted things out.

    Richard Koo studied the Great Depression and this is why Japan maintained the money supply with Government borrowing and spending.
    The money supply ≈ public debt + private debt
    As they deleveraged after 1991, a “private debt” problem, became a “public debt” problem.

    Reply
  7. Susan the other

    In the beginning it had nothing to do with god. It was unquestioned cooperation. I’ll give you help and you can help me later. It was unspoken. It was spontaneous. Ever notice how careful wild animals are? And, by contrast, how foolish humans are? That’s gotta be because god is our scapegoat. Just suppose that it’s because over the millennia of civilization helping each other was standardized, formalized and abstracted into … money. When money accumulated it became wealth itself, replacing the value of a good society. It became money without social cooperation. It has even become a medium of exchange and trade. Contracts were substituted for cooperation. Leaving morality and caution out entirely. There’s really nothing moral about turning debt into an “asset” which can be collected by law or bought and sold for a profit. An asset that must be paid in full after a certain use, plus interest. Debt itself has become dissociated from society. So now what have we got? We’ve got a planet being destroyed not by god, but by humans. From now on in it’s gonna be devastation by “act of man”. Full tilt. And poetically, there will be few profits available to “service” debt. It’s time to legislate a few things, like good societies to meet the needs of people and planet alike. No speculating and no profiteering. And no debt transmogrified into assets. Our debt is to the planet now. And survival. End of sermon.

    Reply
  8. Sound of the Suburbs

    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.

    There were hardly and financial crises in the Keynesian era when these memories were still fresh.

    Neoclassical economics brought back with those old ways of thinking.
    People started thinking they were creating wealth by inflating asset prices again.
    Bank credit started to flow into inflating asset prices rather than activities that added to GDP.
    Financial crises were sure to follow,

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  9. deplorado

    >> or creditors to become a wealthy class rivaling the power of palace rulers and seeking gains by impoverishing their debtors.

    Does this make the case that a benevolent individual ruler (i.e. a monarch, or dictator, or tyrant) would have a natural interest in protecting balance between creditor-debtor so as not to have his power threatened?
    Is formal democracy then more vulnerable to allowing creditors to seize the power of state as there is no counterbalancing interest? It seems to me that what Prof. Hudson is saying could certainly be interpreted that way. I believe also originally the concept of a tyrant in ancient Greece was synonymous with just government (cant provide references right now).

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  10. CovertCalifornia

    Debt and contract amnesties did not only exist in ancient times. See Terry Boughton’s “Taming Democracy” about how the American Revolutionaries understood currency. The early state of Pennsylvania regularly issued relief, and the Federal Constitution limited states’ abilities to break these contracts due to acts of god. Boughton’s book is eye-opening also in terms of how money works.

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  11. Craig Dempsey

    Notice that Hudson is discussing the kind of debt that was paid on the threshing floor. These were debts of the working people. Commercial “silver” debts were not cancelled in a clean slate. Trying to write a concise report above Hudson did not fully spell this out. Take a look at the very first section of his book, beginning on page ix.

    The Overview beginning on page 1 addresses the issue of how “American” all this is. He traces the history of the Liberty Bell and the torch of the Statue of Liberty back to ancient clean slates. They ring and shine with freedom from onerous debt. Yes, the huddled masses were yearning to be free; free from debt! On page 5 he quotes Hammurabi’s law epilogue, “…that the strong might not oppress the weak, that justice might be dealt to the orphan and widow…I write my precious words on my stele…To give justice to the oppressed.” And Hudson was just getting warmed up on why a certain would-be king took a whip to the moneychangers in the temple!

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    1. GM

      Hudson has a habit of writing not as clearly as he should be. I’ve read a lot of his writings, and as eye opening as the are, there are many frustrating moments where you see very clearly stated explanations followed by having to read between the lines.

      Which is very unfortunate, because this is such an extremely important subject and he is one of the very rare few that both understand these issues and are willing to go against the dominant orthodoxy.

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  12. k teh

    No new class, policy or ideology is going to fix economic degradation over generations destroying the work ethic. It’s a computer-controlled machine that systematically eliminates people from the economy and pays its owners in ones and zeros, to consume natural resources ever more efficiently. China was just the contract manufacturor. Nature is responding.

    The economic bridge is all about the multiplier effects of operational leverage. Why would anyone responsible for multiplier effects work for equal pay, and if an entire generation is pissed off at the corporations catering to it, why would anyone expect anything other than negative multiplier effects. When individual rights are removed, there are no rights, for anyone.

    There’s a reason why monetary expansion has been rotated geographically, to consume natural resources, and why the globalists cling to electronic money in virtual space – fintech. A debt jubilee doesn’t change the inbred behavior of consumerism.

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  13. GM

    Every ruler of Hammurabi’s dynasty proclaimed a Clean Slate cancelling personal agrarian debts (but not normal commercial business loans) upon taking the throne, and when military or other disruptions occurred during their reign. Hammurabi did this on four occasions.[2]

    One thing I have wondered is whether this also had an additional effect on political stability beyond the prevention of the establishment of an oligarchy — were the various powerful fractions in the palace less likely to stage a coup and dispose of the ruler than their equivalents were during later eras without debt cancellations given that they stood to lose the most from the looming debt jubilee when the next monarch took the throne?

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  14. k teh

    The corporation always pits one against the other, to consume not to produce, winning either way, on the assumption of numbers – interchangeable.

    But taxes paid on MMT income is yet another derivative, not real money.

    China did not build or supply Wuhan, but did expect to capitalize.

    Tribal Incorporation.

    Robots.

    Reply

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