Michael Hudson and Thomas Piketty Debate Inequality, Debt, and Reform

Yves here. I very much hope you will enjoy this extended discussion between Thomas Piketty and Micheal Hudson, introduced by David Graeber’s widow Nika and moderated by Lynn Parramore of the Institute for New Economic Thinking.

Steve Keen, who joins at the end, points out that it’s unusual for mainstream economists like Piketty, despite his long-standing work on inequality, to participate in talks with heterodox economists like Hudson.

If you watch the video, don’t be put off by the opening graphic sequence.

Nika: Hi, I’m Nika. I’m David’s wife. This is an event in the honor of the first anniversary of David Graeber’s passing, and then the spirits of his rejection of academic arrogance, and our urgent need to get out of the crisis we are in. We set up the Art Project, so welcome to the first one of the series.

Today, we are talking about “What is debt.” The next one will be about the nature of money. David was probably the most famous anthropologist of our times, and the best selling author. Even still, he had folder in his computer called “Nightmare,” in which he dumped all bills, bureaucratic papers, invoices, and papers of his academic achievements. He regards the idea of isolated individual as a myth.

What interested David much more was dialogue. He believed that it is only in dialogue in the clash of opinions, where answers are formed, and how human consciousness is born. We humans, according to David, are the product of our social relationship. That’s why it was so important for him to be involved in the situation in which people think and act collectively.

The David Graeber Foundation will follow the same path. We have several projects lined up from collective editing of his archives, to publishing The Anthology of The Fight Club, starting from the first debate between David Graeber and Peter Thiel. As Fight Club official cheerleader, I urge our fighters to be emotional, provocative, and bold, because the questions that we’ll discuss concern us all.

If enough of us will change the way we think about what debt means, then the social design of our society will change along with this. This is just that, as David described, a revolution is a change of common sense and the collective imagination. David argued that the main achievement of the Paris Commune, despite its defeat, was the transformation of the common sense in about how we live together.

Most of what we consider ordinary in our city’s public transportation, street lights, public schools, late hours, work days, and even what they’re not yet achieved – equal pay for women and men – originated in the Paris Commune. It was then considered to be social madness. The same can be said about Occupy, those 10 anniversary we celebrated now, just as we celebrate David’s life. Occupy, didn’t take over any territory.

It didn’t have leaders in government, but it did change the public discourse. It’s become important to talk about equality, poverty and debt. After occupy, we’ve all looked at the world differently. Speaking on that, the position of our fighters today are radically different. I want to express my immense gratitude to Thomas Piketty, who replied to my email, although we didn’t know each other, and agreed to participate in this debate.

I also want to think Michael Hudson, who came up with the many of the ideas that David Graeber built upon in his book, 5,000 Years of Debt. I really hope that this debate can radically change the way we think about the world, and what else could be more exciting. I pass to Lynn Parramore, whom I thank you for agreeing to moderate his discussion.

Lynn Parramore, Moderator: Well, it’s my great pleasure and it’s wonderful to welcome everyone from all over the world. We share some commonalities in our human experience, and one of them is that we tend to come into the world, most of us, under-capitalized for the experience. In a sense, most of us are united in debt, and that’s why it’s especially exciting to have two such brilliant thinkers help us unpack this difficult subject from the suitcase, where we like to push away into the back of the closet.

Today, I’m very delighted to welcome my friend, Michael Hudson. He is a distinguished professor of economics at the University of Missouri, Kansas City. He’s also a researcher at the Levy Institute at Bard. He’s a former Wall Street analyst and a frequent commenter on economic matters and his historical matters. He’s written extensively about debt.

As you just heard from Nika, his work was a great inspiration for David Graeber. He can also tell you more about the ancient Sumerians than you ever dreamed of knowing. Hopefully, we can get to hear a little bit about that today. Welcome Professor Hudson. Welcome also too Thomas [00:05:00] Piketty. He is the professor at the EHESS in the Paris School of Economics. He’s also the co-director of the World Inequality Lab.

You know him for going viral with his books telling us why most of us don’t have any money. Of course, there was his smash hit Capitalism in the Twenty-First Century. More recently, which you must get, if you haven’t read it, Capitalism and Ideology. [00:05:30] Welcome to you, Professor Piketty. We’ll start out having each of you tell us your thoughts about debt. Your position on the topic, and you’ll have about five minutes each. I think we’ll start with you Professor Hudson.

Michael Hudson: I thought we were going to let Tom go first. Otherwise, it’s going to be what I agree with that he wrote, to set up where I go from there. So let himsay what he wrote.

Moderator: That’s fine with me. Thomas, would you like to go first?

Thomas Piketty: Yes, whatever, it’s fine. Let me say a few words. First, let me thank you for organizing this. When I received Nika’s email, I felt very emotional because I remember very well the discussion we had with David Graeber back in 2013 in Paris, which was right after my book Capital in the Twenty-First Centurywas first published in French.

It was not yet available in English, so David had not read it, but I had read his book and that as The First 5,000 Years, and this was for me, this was really a very powerful reading. This made me think a lot, maybe this was not so visible in Capital in The Twenty-First Century, because I had written it actually before I could read David’s book, but, to me, this was really a major a major contribution. [00:07:00]

What about that? Let me simply say that in the future there will be again other debt consolidation, massive debt consolidation. There are long cycles about that which, of course, David talks about we go back to ancient history or to Sumerians times as Michael has been working on. You have this long-run cycle, but you also have more short-run history of debt consolidation and more medium-run history if you want.

I think it’s very important to remember that there are two modern episode which I find particularly striking in terms of getting debt back to zero, at least considering a big part of debt. The French Revolution, of course, is a very important example. This was a time when, basically, the political system did not manage to make pay those who should have paid for the public spending.

There was a flight toward debt because people who should have paid the tax managed somehow to escape. The solution was The French Revolution, the end of fiscal privileges of the aristocracy or consolidation of debt through partly through inflation, partly through taxation. That’s one modern episode. The also modern episode which I want to refer to is, of course, after World War II, after in 1945, 1950 most rich economies had public debt, which were enormous even bigger than today.

They made the choices, a political choice through, a very conflictual social movement, political fight. In the end, the choice was made collectively not to repay this debt. This happens in various ways – inflation in some cases, but some countries like Germany in particular, which is viewed today as very conservative in terms of economic doctrine and ideology and which, in many ways, is very conservative.

We’ll see after the election in a few days, but it’s still going to be quite conservative, probably, in any case. But in fact, after World War II developed, applied a solution to get rid of the debt of the past, through monetary reform, and through progressive taxation of very high wealth holders in order to, in effect, compensate the lower wealth holders for the loss of holdings that was implied by military reform.

In the end this was certainly not a perfect system, but as compared to all the ways of getting rid of past debt, it was certainly one of the most equitable or at least unequitable way to address the problem. I think we will have also episodes like this future, so nobody knows the form it will take, the kind of political mobilization. Occupy was an important episode. There are other social movement, tax reforms, if you think of the Yellow Vest movement in France a couple of years ago, which was a major tax revolt to get rid of what I think was a very unequal project to raise the carbon tax that fell basically on the poorest group in society.

There will be a need to address climate challenges, but also all sorts of social and developmental challenges. Societies will have to find ways of getting rid of their debt. Right now, we have this illusion that we can just take it, and the central bank offer and forget about it. I think it will be more conflictual and less peaceful than this, because it’s always a matter in the end of redefining a power relation between different social groups, so it cannot be completely peaceful. It involves a conflicting social interest.

It involves different groups of people with different agendas. In many ways, we are in a situation which is not, I think completely different from the one at the time of The French revolution. Those who should pay have somehow managed to design a legal system and the political system so that they can escape taxation. At the same time, middle class and lower class people are fed up of paying the bill for them. The solution is more and more debt.

At some point, something else will have to happen. I think it will have to be roughly the same solution as it was 200 years ago, which is the end of physical privileges of a small group in the population that has managed to escape taxation for too long. That’s the initial perspective on debt. Of course, I’d be very interested to hear Michael continue the discussion.

Moderator: Thank you. Michael, the floor is yours.

Michael Hudson: Well, I certainly appreciated the book that you published on the accumulation of wealth, and how it’s concentrated in the hands of the 1%. I think everybody knew intuitively that this was the case, but economists being who they are, they don’t really accept something until it’s all there in statistics. You did just a wonderful job in tying together all of these statistics, and showing how the degree to which wealth the 1% have concentrated wealth in every country.

You also made what I think is the most important point, where you said, “What’s caused this?” You came up with the broad answer that I agree with. You said that financial returns exceed the overall rate of growth, and if financial returns exceed the overall rate of growth, of course, you’re going to have the rich getting richer and richer. The reason where we have a different approach is, how do you explain all of this?

Well, when your book came out, a number of writers said, “Well, this is the Marx of the 20th century.” You showed that there was an abrupt turning point in 1980 and everything changed. I think the 1% looked at your statistics as a success story. They said, “Yes, we’re really doing better than everybody else.” The head of Goldman Sachs said, “That’s because we’re so productive” – at making money, that is.

I think the reason your book was praised so much in the West is that you didn’t come up with a threatening political solution. When they said, “This was the Marx book, the Marx of modern times.” That meant “Don’t read Marx, read this book.” I suspect that after you put all of this enormous good work into the statistics that you did on wealth and income, I think the publisher probably said, “Well, what are your solutions?”

Well, you just came up with the solution that you said in the book: to tax income and wealth. This is not a threatening solution because there’s no way that you’re going to tax wealth, as long as you have offshore banking centers to conceal wealth. As long as you have what the oil industry put in place a 100 years ago, the flags of convenience pretending to make their income abroad in zero-tax enclaves.

The fact is, the 1% don’t really make much income. Their ideal, if you’re a billionaire, you want to do what half of American corporations do: You don’t make [00:15:30] a penny of taxable income. That’s the problem. I want to go into what your book was notabout. I’m not criticizing you for not writing a different book, but it’s what Iwrite about: what is it that has created this wealth and income disparity, and why has it widened so much since 1980?

The most obvious reason is that interest rates reached a peak of 20% in 1980, and they’ve gone down ever since. In the late 1970s my old boss’s boss at Chase Manhattan, Paul Volcker said, “Let’s raise interest rates very high, because the 99% are getting too much income. Their wages are going up. Let’s raise interest to slow the economy, and that will prevent wages from going up.” He did, and that was a large reason why Carter lost the election to Ronald Reagan.

Interest rates went down from 20% to almost 0% today. The result was the largest bond market boom in history. Bonds went way up in price. The economy was flooded with bank credit, and most of this credit, apart from going into the bond market, went into real estate. There is a symbiosis between finance and real estate, and also between finance and raw materials like oil and gas and minerals extraction, natural resource rent, land rent, and also monopoly rent.

Most of the monopoly rent has come from the privatization that you had from Ronald Reagan, Margaret Thatcher, and the whole neoliberalism. If you look at how did this 1% get most of this wealth? Well, if you look at the Forbes list of the billionaires in almost every country, they got wealth in the old-fashioned way: from taking it from the public domain. In other words, privatization.

You have the largest privatization and transfer of wealth from the public sector to the private sector in history, and specifically selloffs to the financial sector. And all of a sudden, instead of infrastructure, public health, other basic needs being provided at subsidized rates to the population, you have a privatized owners financed by the banks, raising the prices they charge to whatever they can get, without any market borrowing power.

In the United States, the government is not even allowed to bargain with the pharmaceutical companies for the drug prices. There’s been a huge monopolization, a huge privatization, a huge flooding of the economy with credit, and one person’s credit is somebody else’s debt. You’ve described the 1% wealth in the form of savings, but I focus on the other side of the balance sheet. This 1% finds its counterpart in the debts of the 99%.

The 1% have got wealthy by indebting the 99% for housing that has soared in price, 20% just in the last year in the United States, and also for medical care, utilities and education. The economy has been forced increasingly into debt just to function without wages and living standards rising.

How can one solve this? Taxation will not be enough. The only way that you can actually reverse this concentration of wealth is to begin wiping out the debt. If you leave the debt in place of the 99%, then you’re going to leave the 1% savings all in place. These savings are largely tax-exempt. Basically, I think you’ve left out the government’s role in this wealth creation of the 1%. Finance has indeed grown faster than the economy, and finance and real estate have merged into the Finance, Insurance and Real Estate sector, the FIRE sector.

High finance has absorbed the oil industry, the mining industry, and it’s absorbed most of the government. Financial wealth has become the economy’s central planner. It’s not planned in Washington or Paris or London. It’s planned in Wall Street, the City of London and the Paris Bourse. The economy is being managed financially, and the object of financial management is to make capital gains.

As your statistics point out, capital gains are really what explains [00:20:30] the increase in wealth. You don’t get rich by saving out of earnings and income. Rent is for paying interest. Income is for paying interest. You get rich off the government subsidizing an enormous increase in the value of stocks and bonds by the central banks.

The reason that inequality is occurring is that the largest public utility of all, money creation and banking, is left in private hands. Privatized banking in the West is very different from what government banking is in say, China. Government banking would create credit for public uses, for what the economy needs to grow. In the United States and throughout the West, banks create credit to slowthe economy from growing, they make loans not to create new means of production and new factories. They make loans against property already in place – mainly to buy real estate already in place. Some 80% of bank loans in America and Europe are for real estate.

Banks make loans for corporate takeovers to buy other companies. They don’t make loans to build new factories, which is what government money creation in China would do. As long as you leave banking and credit in private hands, you’re going to have banks creating their product: debt. The more debt they create, the more debt service that borrowers, the 99%, have to pay the banks in order to obtain a house. or an education. or medical care, or just to break even.

The more money they pay the financial sector, the less they have to pay for goods and services. As the economy polarizes between the 1% and the 99%, the economy as a whole, shrinks, because more and more of its income is spent not on production and consumption, it’s spent just on debt service. My solution is to restore banking and credit to public hands to prevent the lending that simply finances asset-price inflation.

Second, you talked about taxing. Some taxes are more important than others. As long as the banks and the financial sector write the tax codes, as long as the government lawmakers are basically employees of the financial sector that finances their political campaigns, you’re not going to be able to tax them, or to close down the fictitious transfer pricing that corporations use to pretend not to make money except in artificial enclaves without an income tax.

You have to tax the source of the money that pays interest to the banks. That source is mainly economic rent. It’s primarily land rent. If you would tax on the increase in land values, if you’d have a land tax, which is what the whole 19th century was about – Adam Smith, John Stuart Mill and even Marx. You would not have this increased rent being paid to the financial sector to be monopolized by the 1%.

You’d have to change the way in which the tax code is based, away from earned income and wealth. But that is really not very practical in today’s political situation. You’d have to have a land tax and a natural resource tax to get rid of monopoly rent. You also have to return basic key infrastructure to the public domain, where it was before 1980, so that basic needs can be supplied at low prices, not creating monopoly rent for the 1%.

You have to realize that financiers use this wealth to take over the economy. This has to be reversed, because once you have wealth taking the form of financial claims and loans to other people as debt, you have compound interest. Any rate of interest is a doubling time, and compound interest is always going to grow faster than the economy’s real growth. The way to prevent this isn’t simply to lower the interest rate, which has been done today, to 0.1%. The only solution is to wipe out the overall debts that are stopping economic growth

These debts are the savings of the 1%. The good thing about canceling debts is, you cancel the savings of the 1%. As long as you leave these savings in place, there’s not going to be a solution.

Moderator: Thank you so much, Michael. Thomas, feel free to respond to this idea of canceling debt.

Thomas Piketty: Yes, I don’t feel we have any major disagreement about everything you just said, Michael. Let me say also regarding my book Capital in the 21st Century. It’s book that has lots of limitations. On many issues I’ve tried to make progress since then. This was written 10 years ago. I wrote Capital and Ideologymuch more recently, which I think addresses some of the shortcomings, but still this book has also a lot of limitation.

I’m trying to make progress all the time. I certainly don’t pretend that all the answers are in one book. That being said, I think many things that you’ve mentioned, again, I fully agree with that. As I said, the consolidation of debt is very important because, as you very well said, the part of the increase in private wealth at the top was really made through privatization of public assets and increased public debt.

There’s one statistic that I stress a lot. If you look at the net wealth of the public sector, the net wealth of the government – government assets minus government debt – it used to be in the 1970s that net public wealth was between 20% and 30% of total national wealth. Net private wealth was bigger, like 70% or 80%, but still, net public wealth was 20%, 30% in [00:27:00] Germany, in the US, in France, in Britain and in Japan.

That was a central part of everything that was to be owned in terms of marketable assets in society belonging to the public domain – say, around one quarter or between one quarter and one third. Today, three, four decades later, it is close to zero or actually negative in the US or the UK. In the sense that the public debt is bigger than the public assets, because many public assets were privatized while public debt increased.

In effect, there was transfer of public wealth to private wealth holders. That’s a very important evolution. The most extreme case, of course, will be Russia and post-communist countries, where you just transfer all the public wealth and you make oligarchs out of nothing. In fact, all countries have had these trajectories over the recent decade. That’s really an important part of the stories that I’ve been trying to tell.

Again, I don’t think we have any disagreement on this. At a even broader level, it’s all about power and political institutions. As you said, as long as the system of political finance and parties, companies, media and think tanks are largely controlled by large wealth holders, our collective ability to change the distribution of wealth and through taxation or debt consolidation, or whatever the method is, is going to be limited.

It’ll take a major political fight to challenge the political rules of the game and the political institutions to change this. The good news is that it has always been like this. Sometimes it has worked in the past, but it has worked. I mentioned the French Revolution. Of course, that’s a huge popular mobilization. Also in the 20th century, I mentioned after World War II, after World War I.

Well, let’s be clear, it’s only because there was a very powerful labor movement, a socialist movement, and a communist counter-model in the East, which in the end put pressure on the governing elite in the West. So they had to accept a number of decisions, which were limited in scope, but still which transformed the economic and social system in very substantial way as compared to the pre-World War I and 19th century economic system.

It’s only through this enormous political mobilization and collective organization – the same as in the past. Just one last point: You mentioned the case of China and I think the Chinese control model can contribute maybe in the future also to put pressure on the West to change. Also at this stage, the big difference with the Soviet control model is that the Soviet control model had a narrative and a proximity between socialist and communist patterns or labor movements. So in effect, the elite in the West felt threatened by this control model, and this contributed to reinforce, to some extent and until a certain point, the labor movement in the West – until the final fall of the Soviet Union.

Which of course impacted capitalist ideology, and everything we’ve seen since then. Regarding the Chinese model, you mentioned the fact that the banking system is working a bit more to the service of the real economy and infrastructure and investments, than the banking system in the West. By and large, the Chinese model looks more and more like a perfect digital dictatorship, and nobody really wants to [chuckles] copy this, apart from other government elite, who would like to keep their population quiet and restrict movement as efficiently as the Beijing regime is doing.

No collective movement in the world wants to look like this, so this also limits the pressure that this control model can put on the West. At the end of the day I think this can be one of the forces that still can induce change. For instance, when we talk about the taxation of multinational in 2021, which what has been decided by rich countries, it is very limited. They claim they have solved the problem of multinational taxation, but it’s a bit ridiculous how little they have done.

The minimum tax rate of 15% is ridiculously small. Also, rich countries are sharing between themselves the tax base, currently in tax havens. Countries in the Global South basically don’t get anything. I think that’s an area in which the pressure of the Chinese control model in the future may contribute to induce rich countries to have a bit more inclusive attitude toward the South.

If they don’t do it, China will [finance the investment and the infrastructure investment that is needed in Africa and in South Asia. At some point, fully Western countries will realize this, or they will just lose any capacity to influence the world. This is getting us very far from the initial discussion, but I hope this is still more or less relevant.

Moderator: Michael, feel free to respond.

Michael Hudson: Well, it would not surprise me if we ended up in agreement with what to do. I realize that you wrote your book about your topic, and I wrote my book about what to do about it. I just want to point out, where I think we do have a disagreement. My point is that compound interest is always going to grow faster than the economy’s real ability to grow. In the end, debts can’t be paid. Right now, you see a lot of third-world debts.

If Third World debtor countries have to pay their foreign debts as the world economy slows down, they’re going to be subjected to austerity, to the World Bank’s and IMF’s austerity program, and they’re going to be kept in poverty. Is that really right that they should be kept in poverty just to enrich the bondholders of the 1%? The 1% will say, “Yes, that’s why we’re the 1%, so that we can impoverish other people. That’s our liberty. Our liberty is the right to impoverish other people, and reduce them to dependency.”

That will happen if you do not write down the debts. It’s already happening in the United States with the student debt crisis. Students have to pay so much money, as they fall behind on their student debts that they can’t afford to take out mortgages to buy homes. You’re having the homeownership rates plunge in the United States. That’s the result of leaving debts in place.

The mortgage debts are causing shrinkage, so there is no way to get out of this economic polarization without a debt breakdown. But that’s something that is still too radical. When I was referring to what China’s doing, I’m referring to what it’s doing today and tomorrow about the real estate company, Evergrande. China has a choice: Is it going to leave Evergrande’s real estate debts in place, with Evergrande as a real estate company that’s 2% to 3% of the entire Chinese economy.

If it pays the foreign creditors and the domestic 1% of China, it’s going to impoverish the employees of Evergrande, it’s going to make housing prices more and more expensive in China. China’s had a debt-financed housing boom. If you leave the debts in place, then you’re going to impoverish China. Obviously, China is going to say, “We’re not going to put the creditors first, we’re not going to do what the West does.” The West advocates the sanctity of debt service, and says, “Debts that you owe are sacred. It’s worse sacrificing the economy, it’s worth plunging the economy into poverty in order to preserve the wealth of the 1%.”

I think China is going to make the opposite decision and say, “We’re not going to commit political suicide. It’s a socialist economy. When it comes to debt and credit, it has kept its banking in the public domain. The People’s Bank of China is the creditor, it can afford to write down the debt without having any political backlash, because it’s canceling debts owed to itself. That is the great advantage of keeping money and credit as a public utility.

As for private bondholders, China’s going to say, “Well, sorry, bondholders, you made loans to a company that was way over-leveraged. Already, the American bond rating companies have reduced their bond rating to junk. You knew what you were buying. If you continued to hold bonds that Fitch and other bond raters like Moody’s all said were junk, and you lose your money? Well, you took the risk, you got a high rate of interest, now you’re paying the price.” That’s how markets work.

That really is the argument. Obviously, what I’m suggesting is a radical step, just as you’re suggesting of taxing wealth would require the radical step of closing down offshore banking standards of simply negating it, if banks would erase all of the deposits they have from the offshore banking centers. In the Cayman Islands, Panama, Liberia and all the places that began to be set up by the mining companies, the [00:38:00] oil companies and those that were set up beginning in the 1960s, essentially, by the CIA to finance the Vietnam War by making America, like England, the home for criminal capital and flight capital.

All this flight capital and the kleptocracy that you mentioned in Russia, all this really should be wiped out. If you leave this capital, if you leave this 1% in place, the economy is going to be sacrificed and shrinking. Is it worth shrinking the economy just to leave the 1% in place? If you challenge them, that’s pretty radical. That’s really what I think Marx would say today.

Moderator: Thank you. I wanted to just pitch a question to you all before we turn it over to some questions from the audience. You’ve both mentioned, it’s not the elephant in the room, it’s the Tyrannosaurus Rex in the room. I think – Thomas, as you put it, those who should pay, design the system. You both have commented [00:39:00] on this enormous problem that we have.

Every time we have good ideas, ranging from just a tiny little tax on the rich, to the more radical ideas that Michael was suggesting, we run up against this Tyrannosaurus Rex. Where do you all see the most effective pressure points coming from right now, in terms of getting anything accomplished on debt? Where is the effective mobilization potentially coming from that you see developing now?

Thomas Piketty: Maybe, let me first say, we need regular debt consolidation. I don’t think at all this is radical or too radical. If anything, I think this is not radical enough, because I think in addition to debt consolidation, we need also to redistribute the assets, to redistribute wealth. When I’m talking about taxing wealth, it’s also redistributing wealth, giving wealth to people who don’t own anything. It’s not only concerning their debt, it’s also giving them positive ownership rights in companies, in housing. Yes, I think there’s really no disagreement on this.

Now, what about the pressures that will come? Well, two things. First, I think the real problem is the system of free capital flow. We have created an international legal system where, in effect, we have almost circularized right to accumulate wealth in a country using the public infrastructure, your education system, any system of a country.

You can push on a button, transfer your assets in another jurisdiction, and nobody knows where you are, nobody. There’s nothing natural in the system. It was made by your set of international treaties, a particular legal system. Individual countries have to get rid of that. Then, so in the case of Europe, you cannot wait to get rid of that. Individual countries have to say, “Okay, I’m not against the separation of investment and capital goods, but it has to come with government taxation, with government regulation, government rules. It cannot just be like this. You push on a button, we don’t know where you are. This has to go.”

Some proposals that was made by Bernie Sanders in the presidential campaign in the US, early last year, it seems like ages ago. But that was only 18 months ago. When he said, “If you want to escape my federal wealth tax, you can go away, but then you will have to pay your 40% exit tax. You will have to keep 40% of your assets in the US if you want to go ahead.” That’s clearly a big change as compared to free capital flow. But that’s the change we need to consider. How is this going to happen? Well, first, we need to realize that the free capital flows treaty agreement, which came a lot, actually, in fact, from Europe in the 1980s, but also from Washington, of course, it was a co-production. It’s up to individual countries to escape that.

Another source of change and pressure, I think, is climate change. It is going to put a strong pressure in the sense that, I think when people see more and more catastrophic climatic events, attitudes toward globalization and toward inequality in general can change very quickly, because at some point, people will not find it funny at all to have all these billionaires giving lessons using their private jets, doing space tourism, et cetera.

At some point, I think nobody’s going to find this funny at all, and that can be a very quick and fast complete change in attitude. Then, I think the Chinese control model with all its good and bad (very bad sometimes) aspects can also be a factor of change.

Moderator: Thank you. Michael, would you like to respond to that?

Michael Hudson: Yes, I don’t see a change within the existing system. I guess that makes me radical. Thomas did not mention the main point that he made in his book, which was, his number one suggestion was tax inherited wealth, because most wealth is inherited. That’s one of the things that he’s found. Absolutely right. Great idea.

Saint-Simon, the great French economist had this idea on the very first book he wrote around 1806. It made him very unpopular, and he soon realized that there was no way of doing that. From Saint-Simon on, to the entire 19th century of British political and French political economy, they all agreed, with Smith and the others, there’s the rentierlandlord class. The 1% in their day were the landlords.

You have to tax away the land rent and make that the public tax based, not taxes on consumer goods, not taxes on capital, because you want good capital investment, you want fortunes to be made in a good way that add to the economy’s productivity. You don’t want them to be made in a predatory way. The whole fight was to tax economic rent, and to recognize that most income is unearned.

When you talk about the income disparity, almost all this disparity is unearned income, it’s economic rent. Is not income that’s made by increasing production or increasing living standards. It’s just predatory rent-seeking from special privileges that the wealthy have gain from government.  But today it’s not the landlord class anymore as it was in the 19th century. It’s the financial class, the raw-materials class.

Without dealing with this structure, the economic system is going to shrink and shrink. We’ve seen this before. We saw it in Rome, the same polarization and concentration of wealth in the Roman Empire. Well, the last stage of that was feudalism. We’re back to what Rosa Luxemburg said, “The choice is between socialism and barbarism.” There’s no other way to do it. You can’t solve the problems within the existing system, because it’s controlled by the 1%.

Moderator: Thank you, Michael. I’d like to toss out a couple of questions from the audience now. We have a question about energy. One viewer asked, “Isn’t energy as much a source of value as land? Should we have progressive taxes on energy use as well/or instead of land value tax?”

Michael Hudson: First of all, land doesn’t have any cost-value, nor does energy have any. We’re talking about economic rent. The financial sectors uses part of its income to subsidize economic schools and universities to change the vocabulary. Our vocabulary is different from the realistic vocabulary that we had in the 19th century. Land doesn’t really have a value, nature creates it.

Value is created by people working and creating it. Nature provides the land, and the public sectors spending on infrastructure creates the rent of location, which increases land prices. Nature provides the oil. Economic rent is what we’re talking about. This economic rent of land, oil and minerals and monopolies belongs in the public domain, so that you don’t have to have an income tax or excise taxes and value-added taxes on labor and industry.

You should tax the rentierfree lunch, not labor in industry. That’s what a free market meant in the 19th century, and that meaning has been inverted. Today, a free market has the right for the rentiersto avoid taxes and shift the entire tax base on to labor and industry. They do this by twisting around and perverting the English language. They get rid of the analytic language that you need to even explain how most income and most wealth is unearthed.

Moderator: How about you, Thomas, do you think that we need to clarify how we talk about and define value?

Thomas Piketty: Well, in the case of energy, first we have to clarify the fact that there are some sources of energy which create negative value because of global climate change, and climate warming, also – a negative external effect of using some energy. We have to make some of the energy sources just illegal. We have to keep some of the oil in the ground. We have to stop looking for new oil and gas.

The solution to some of the energy questions we have is just to make illegal the use of certain energy and to move to other energy. That’s part of the answer. Now, if we have done that, and we deal with energy that don’t have much bigger negative impact on mankind than the positive productive impact, then redistribution of wealth must be about all forms of wealth.

Whether it’s rent, or energy, or financial assets or housing, we need to have a permanent circulation of wealth and power.. Taxation of wealth will be a permanent, progressive tax on net wealth, which, in effect, will wipe out all the biggest wealth right away – say up to 90% tax per year for millionaire. There will still be some people who own $100,000, some people who own $1 million or $2 million, but there will be a permanent circulation of wealth holdings within this limited wealth grabbers that will still exist. This should be for all forms of wealth, whether it’s land, or housing, or whatever is your region.

Moderator: Thank you. We seem to have quite a number of students in the audience today. We have a question about student debt, and what types of resistance students could make to change the social relationship [00:50:00] of debt that they get forced into. Do you have any suggestions or rhetorical points that students need to engage with in order to gain support for a debt jubilee on their debts?

Michael Hudson: I wish there were. I don’t see any because you have a President of the United States who wrote the law saying, “You’re not allowed to wipe out student debt as a result of bankruptcy.” Basically, the American philosophy is that the way to prevent an independent middle class from developing is to keep them so deeply indebted that they have to go to work and go into debt or forego a costly education, not be hired and starve.

They’re afraid of losing their jobs. They can’t afford to buy homes of their own. The purpose of student debt is to make them dependent. Under socialism and in Europe, China and the older countries, education was free. The whole idea was that it’s what you need in order to grow. But the finance-capitalist system is not industrial capitalism anymore. It is financial capitalism, and that’s very different.

You’ll use a basic need as a means of saying, “Your money, or your life. If you don’t pay us, then, you’ll have to forego your education.” The price of getting access to a labor force is to go so deeply into debt that you’re going to have to work for a living, and you’re going to have to work for what we pay you. There’s a class war on, and you’ve got to realize that.

There’s very little you can do simply as individual students, apart from stopping paying the debt and make the government throw 20 million of you in jail. They can’t do that. The only thing to do, I guess, would be a strike. But meanwhile, they’re going to try to go after your credit rating. They’re going to try to fight you. You have to back politicians who are willing to change this, and unfortunately, there’s no party that’s in favor of canceling student debt or any debt in the United States, because the political parties are subsidized by the banking in the financial sector. I don’t see a way out.

Moderator: Thomas?

Thomas Piketty: I agree with Michael that with this government and with this president in the US, it’s probably going to be difficult to get a lot going. But and I also agree that the entire political system in the US in a way is so corrupt by money and the way campaigns are financed, and the way media also are financed and are biased in the way they covers of different possible candidates.

This makes it very difficult. That being said, again, if we go back to 18 months ago, there were candidates in the democratic primary which together, Bernie Sanders, Elizabeth Warren, I mean they put don’t put them exactly together, of course, but they add the short share of the vote, and on the issue of student debt, I think different things could have happened with a different president and a different majority.

I think it’s important also to be helpful and to try to prepare what would be a more successful coalition, or more successful political campaign in the future. It’s important to always remember that, as Michael was saying, “The true source of economic prosperity is not financial capitalism. It is investment in education, investment in the real economy, in infrastructure.”

In the middle of the 20th century, in the 1950s, 1960s the US had a situation of economic dominance over the rest of the world. It was not through extreme financial inequality. You had a 90% income-tax rate after Roosevelt, but you had a big age educational advance. At that time you had 90% of a cohort will go to high school in the US in 1950s and 1960s.

At the same time, it was 20 or 30% in Germany or in France. This was this educational advance which made prosperity historically. We seem to have forgotten this in the US following since the 1980s, but so we have to manage to put this back on this agenda. But of course, that’s that’s not easy.

Moderator: Well, thank you very much to of our speakers today. I think you’ve helped open our minds and think about this topic a little more clearly, even though we’re still not exactly sure how to overcome these tremendous forces that are working against us to find solutions that, really, at the end of the day, I don’t think anything either one of you has said is truly radical in the sense of history.

As human beings, we have approached and confronted these problems before, and there have been good practical solutions that both of you have offered. I wanted to just turn the floor over to Professor Steve Keen now. Again, thank you everyone for participating in this conversation today.

Steve Keen: Thank you for our speakers and thank you for the audience as well. I’m sorry that there was only one hour. There have been over 70 questions asked, we’d be here for three hours trying to answer them. I want to particularly thank Thomas for being part of this debate, because one thing Michael and I’ve experienced so frequently is that we can’t get anybody in the establishment to join into discussion with us who are outside the establishment.

I really respect you and honor you for doing that. It also shows the tremendous contribution that David made by being somebody who can talk to everybody. Everybody enjoys talking to David. We hope we can maintain that through the idea of forthcoming debates, and we look forward to seeing you all there in the future installments, in The Fight Club. Thank you everybody. Thank you.

Thomas Piketty: Okay, thank you. Thanks a lot for the invitation.

Steve Keen: Bye.

Thomas Piketty: Bye-bye

Michael Hudson: Bye all.

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  1. Eclair

    Wow! Great discussion.

    Michael: ” …you have a President of the United States who wrote the law saying, “You’re not allowed to wipe out student debt as a result of bankruptcy.” Basically, the American philosophy is that the way to prevent an independent middle class from developing is to keep them so deeply indebted that they have to go to work and go into debt or forego a costly education, not be hired and starve.

    They’re afraid of losing their jobs. They can’t afford to buy homes of their own. The purpose of student debt is to make them dependent. Under socialism and in Europe, China and the older countries, education was free. The whole idea was that it’s what you need in order to grow. But the finance-capitalist system is not industrial capitalism anymore. It is financial capitalism, and that’s very different.

    You’ll use a basic need as a means of saying, “Your money, or your life. If you don’t pay us, then, you’ll have to forego your education.” The price of getting access to a labor force is to go so deeply into debt that you’re going to have to work for a living, and you’re going to have to work for what we pay you. There’s a class war on, and you’ve got to realize that.”

    Thomas: “Societies will have to find ways of getting rid of their debt. Right now, we have this illusion that we can just take it, and the central bank offer and forget about it. I think it will be more conflictual and less peaceful than this, because it’s always a matter in the end of redefining a power relation between different social groups, so it cannot be completely peaceful. It involves a conflicting social interest.

    It involves different groups of people with different agendas. In many ways, we are in a situation which is not, I think completely different from the one at the time of The French revolution. Those who should pay have somehow managed to design a legal system and the political system so that they can escape taxation. At the same time, middle class and lower class people are fed up of paying the bill for them. The solution is more and more debt.

    At some point, something else will have to happen. I think it will have to be roughly the same solution as it was 200 years ago, which is the end of physical privileges of a small group in the population that has managed to escape taxation for too long.”

    After a week of being subjected to the the whining, the hypocrisies, the outright lies, of our political and financial class, listening to Michael and Thomas gives me hope. Well, ‘hope’ in the sense that they define the problems we face in a totally dispassionate manner.

    Oh, and there’s climate change on top of all this.

    1. WhatdoIknow

      Being in the throes of a second french revolution is no substitute for hope. Its rather sobering and terrifying conclusion

      1. Michaelmas

        Being in the throes of a second french revolution is no substitute for hope. Its rather sobering and terrifying conclusion

        It is what it is. The word is where it is.

      2. Eclair

        “Hope” is not the best choice of words to describe the feeling, I admit. Rather, as Chris Hedges said in a recent interview, “hope” is a lost cause because what’s coming may be ugly, and no one (other than Lockheed Martin and its ilk) ‘hopes’ for chaos. Rather, we must have “faith;” faith that the good in us will attract the good in others. I like that.

    2. chuck roast

      The elephant in the room…wiping out debt and thus resuming a high rate of more equitable economic growth. Limits to growth are already becoming apparent. If Hudson’s future were to come to pass (assume a can opener) we may need to hire behavioral psychiatrists to keep people from having more than one kid and buying their third car. I don’t think for a moment that Feudalism was a good thing for the vast majority of the population in the medieval world. Nor do I think that it will be a good thing for the people on my small island when they have to go back to fishing an empty sea, but that is the future I see in any case.

    3. Kiweto

      In more corrupt economies, they call that buying a minor post in the government to extract one’s own rents from. Just because the sum is paid to more than one entity (university, administrators, professors, banks)d oesn’t mean the act is any different. The fact that there are no guaranteed incomes upon graduation is of even bigger benefit to the gatekeepers.

      A pig with lipstick on it is still a pig.
      this came up on a quick search – Corruption in China’s military begins with buying a job

  2. James Simpson

    As regards the Occupy movement:

    It didn’t have leaders in government, but it did change the public discourse. It’s become important to talk about equality, poverty and debt.

    So what did it achieve beyond being a talking shop mainly for the professional managerial class which had the time and money to hang out in parks and streets for days and weeks? Given that the following eleven years have been completely disastrous in every nation which had Occupy movements, I’m not convinced Occupy was much at all. One of its fundamental flaws was its refusal – like Extinction Rebellion – to even want to build a movement of the people to seize power from capitalists. Instead, it wanted to ‘speak truth to power’ as if begging those capitalists to be nicer has ever achieved anything.

    Solidarity and socialism, not self-indulgent anarchism, are still our only hopes.

    1. Yves Smith Post author

      Making Shit Up is a violation of site Policies.

      You have absolutely no idea what Occupy was about. I went to the encampment in NYC multiple times and one of our then site contributors, Andrew Dittmer, spent substantial time there. They were not populated by the PMC. Occupy was not about “speaking truth to power”. That is your projection. It was about consciousness-raising and mutual education. Did you miss that they refused to make demands?

      However, the PMC loathed Occupy and was all over Bloomberg to rout the hippies. I got similar reports from readers in Oakland and Yasha Levine in LA.

      And you expect a movement that lasted all of two months before it was crushed in a 17 city paramilitary crackdown to do the work you refuse to do, of achieving lasting societal change? What planet do you come from? The Occupy mode of operation, lengthy deliberations and consensus-based decisions, required large in-person gatherings. Denying them place to meet was a very effective way to snuff Occupy out.

      1. drumlin woodchuckles

        Before covid made meeting difficult, did Occupy-minded people start having micro-mini-meetups over time to explore and exchange information and perspectives and so forth? ( I gather the meetups you yourselves were having when you were in various towns and cities were an effort in that direction).

        If covid lifts and reduces enough to where meetups can be generally safe in general, might Occupy-minded people start doing them and even finding a way to transmit building knowledge and perspectives between the meeter-upper groups?

      2. v

        So why did so many @Occupy became disillusioned with that form of protest?
        The original poster is quite right that it was a blueprint for TPTB to train techniques of crowd management, civial counter-insurgency so to speak which we have also seen during the “Arab Spring” that year.

        1. Yves Smith Post author

          They did not “become disillusioned”. In NYC, the protestors had been routed from park to park until they wound up at Zuccotti Park, which due to its legal status, made it hard for the city to clear them out. In other cities, the “occupations” were similarly tenuous, and clearly unworkable once the Feds coordinated local responses across 17 cities to clear out the encampments and in many cases, incarcerated not just the participants but also the journalists. Yasha Levine was zip tied so hard and long he feared his hands were permanently damaged; it took three weeks for him to largely recover.

          The Occupy method of self-education, group discussion and decision-making and mutual aid depended on having somewhere to go that was reasonably accessible to people with no money, as in near public transportation. That was taken away.

    2. Susan the other

      One thing Occupy understood very well is that “seizing power” is – has always been – crazypants. By not being aggressive and reacting violently to the Wall Street foreign legion which cleared them out of public sight, the Occupiers planted seeds. They set the stage for people to begin to understand what had just happened. And they wisely avoided being labelled as trouble makers. Occupy was about as far from violence as an opposition movement can be and still live to be radical. We are still talking about it.

  3. Mikel

    T.P. keeps saying “debt consolidation”. I think debt consolidation has happened in the sense of a system that is well-versed in privatizing profits and socializing losses (“debt consolidation”).

    Graeber/Hudson talk about “debt jubilees”….not exactly the same thing as a “debt consolidation”, is it?

    1. Bart Hansen

      Perhaps consolidation in French means something more than merging or bringing together.

      The weight of debt now has been attached to virtually everything we buy and use, more like a burgeoning or expanding.

      1. Anon

        It sounded more like “consolation”… I also assumed he meant consolidation, and his pronunciation was just off… but perhaps he actually meant consolation… as in provide comfort/ease the debt. Only rock stars get to say “jubilee” in relation to debt, and keep their heads/livelihoods.

    2. Acacia

      Maybe he’s thinking of the same thing. After mentioning “debt consolidation” and referring to Hudson’s work on debt jubilees, Piketty mentions two modern episodes of “getting debt back to zero, at least considering a big part of debt”. His first example is the French Revolution, whose effect he describes as “the end of fiscal privileges of the aristocracy or consolidation of debt through partly through inflation, partly through taxation”. The second example is after World War II, when “the choice was made collectively not to repay this debt […], through monetary reform, and through progressive taxation of very high wealth holders in order to, in effect, compensate the lower wealth holders for the loss of holdings that was implied by military reform.”

      1. chris

        I continue to hope that we will back away from this abyss and not see a second French revolution. Or a second American Civil War. But as with the discussions about the jackpot that have been posted on here, I fear we’ve got too much inertia. Even if we put on the brakes and steer away from it we’ll still go over the edge.

        A big test will be if the Democrats can actually pull off this hat trick by denying the two bills for Biden’s agenda, or passing them. If that’s possible then a lot of other things might be possible. If that’s impossible, then we’re not interested in using brakes or changing course. We’ll go over the edge shifting gears :/

        1. drumlin woodchuckles

          “We” and the “Democratic officeholders” are two different groups of people. It it turns out that the Sinemanchin DLC types are too strong for the progressives to be able to torture them into a both-bills or no-bills outcome, that doesn’t mean “we’re” not interested. It means that “they’re” not interested.

          At which point, “we” will have to start busting the glass out of the car windows and jumping through them to “escape” in some way.

          1. chris

            Yes, definitely an issue of who is “we” in what’s being discussed. But I really did mean we as in all US citizens. If these issues aren’t fixed for all of us, they won’t be fixed. I don’t know how that will happen. I can see that it needs to though.

    3. splittter

      I watched this on youtube rather than reading the transcript, and am French/English dual national, so have some experience with French accented English. I was confused by these comments and went back to the video to check, and I’m pretty sure that Piketty is saying “debt cancellation” and “cancelling” when the transcript has him saying “debt consolidation” and “considering” in his intro. So where he mentions long term and medium term cycles and the french revolution he is saying that he considers the methods used to be genuine cancellations

  4. cnchal

    > Moderator: How about you, Thomas, do you think that we need to clarify how we talk about and define value?

    Using the word value to describe a number is self deception, irregardless of dictionary definitions.

    As your statistics point out, capital gains are really what explains [00:20:30] the increase in wealth. You don’t get rich by saving out of earnings and income. Rent is for paying interest. Income is for paying interest. You get rich off the government subsidizing an enormous increase in the value of stocks and bonds by the central banks.

    Here the word “value” is used instead of “price” which obscures what is going on. That enormous increase in the “price” of stawks and bonds is imaginary wealth based on the concept of selling your stawks for a higher price to someone moar deluded than yourself.

    1. Mikel

      As demonstrated this past year and a half. They also have this new con about “pulling forward earnings” (trying not laugh) as the the explanation for the silly season in stock prices being witnessed.

      Since they never say exactly when the SUPER EARNINGS! are going to materialize and for how long, it goes on until enough people do research to call BS.

  5. Bill Smith

    “There’s one statistic that I stress a lot. If you look at the net wealth of the public sector, the net wealth of the government – government assets minus government debt”

    Does the above mean anything under MMT?

    Is the below supposed to be an actual quote?

    “Paul Volcker said, “Let’s raise interest rates very high, because the 99% are getting too much income. Their wages are going up. Let’s raise interest to slow the economy, and that will prevent wages from going up.”

    The above had nothing to do with inflation?

  6. Rodger Mitchell

    Very few economics professors have learned, understand, or teach the following facts of economics:

    1. Financial debt is money, and money is debt. They are two sides of the same “coin.”
    2. Eliminating debt means eliminating money, which always is a recessionary/depressionary economic plan. GDP growth (by formula) requires debt/money growth. (GDP=Federal Spending + Non-federal Spending + Net Exports.)
    3. Gap Psychology dictates that the rich get richer (widen the Gap) not only by increasing their ownership of debt/money, but by reducing the not-rich’s ownership of debt/money.
    4. Federal “debt” is not debt, but rather it is deposits into privately-owned T-security accounts. The Treasury does not use those dollars. The accounts are paid off simply by returning their balances to the account owners. No tax dollars are involved. Thus misnamed federal “debt” is not a burden on the government or on future taxpayers.
    5. The federal government is Monetarily Sovereign. It has the infinite ability to create dollars. Thus, it does not borrow dollars. It accepts deposits into T-security accounts, the purposes of which are not to provide spending funds, but rather to stabilize the dollar and to help the Fed control interest rates.
    6. For the same reasons, federal taxes do not fund federal spending. Even if all federal tax collections totaled $0, the federal government could continue spending, forever. Federal taxes are destroyed (i.e. cease to be part of M1 or any other money supply measure) the instant they are received by the Treasury. That is why no one can answer the question, “How much money does the Treasury have?” The best answer is, “Infinite,” which remains “infinite” whether or not tax dollars are received.
    7. The purpose of federal taxes is not to provide spending funds, but rather to control the economy by discouraging what the government doesn’t like and encouraging what it does like.
    8. The income/wealth/power Gap is what makes the rich rich. Without the Gap no one would be rich; we all would be the same. The wider the Gap, the richer are the rich. The best way to narrow the Gap between the rich and the rest is for the federal government to provide benefits to the rest, which the federal government has the infinite ability to do.
    9. There is no public benefit to private ownership of banks. All banks should be nationalized.
    10. Federal spending is not socialism. Federal ownership (as with, for instance, VA hospitals and national highways is socialism.)
    11. No inflation in history has been caused by “excessive” federal spending. All inflations are caused by shortages of key goods and services, most notably shortages of food, energy, and labor.

    1. jimmy cc

      Inflation in the Stock Market isn’t caused by the Feds handing over money?

      QE had nothing to do with it?

      1. Rodger Mitchell

        Ah, that misleading word, “inflation.” So many meanings.

        I am referring to the price inflation of goods and services.

        After debt-worriers have been forced to agree that the federal government never unintentionally can run short of dollars (which demonstrates the idiocy of the debt ceiling), the next false excuse for not providing benefits to the populace is: “But federal spending causes inflation.”

        You’ll note that no one complains, “But federal deficit spending causes the stock market to rise.”

        Stock prices are based on investors’ predictions about future corporate profits. And yes, those are based, in part, on federal spending. Is that a bad thing, in your opinion>

        1. d w

          i do sort of wonder, is the reason inflation this year, is so ‘ high ‘ is because last year was almost a depression.
          never mind the other impacts of the on going pandemic. like shortages of goods ( high demand causes high cost? ), and the trouble transporting goods (for some reasons those who were doing the transport jobs, just dont want to come back, maybe because the pandemic isnt over? and maybe because those jobs werent all that good to begin with?)

      2. Mikel

        Does the Fed put guns to people’s heads and make them buy stocks instead of investing it otherwise?

        And if the environment is too bad to find businesses or ideas to invest in, what booming economy are they talking about?

        1. Yves Smith Post author

          There have been many many many papers on how investors require unduly (one might say irrationally high if you were to assume investors are rational) high rates of return. That is why you have underinvestment.

          1. Mikel

            I hear the Fed chanting for “transitory inflation” to calm nerves, but don’t know how that will turn out.

            1. Yves Smith Post author

              The Fed can’t do anything about this inflation. It’s due to energy prices, food shortages (a function of energy prices and climate change), and supply chain disruptions. It’s not demand side driven. The supply chain disruption will resolve but that could take as long as a year or two.

                1. Yves Smith Post author

                  Steve Keen considers increases in debt to be an increase in aggregate demand. The rise in house prices in the runup to the crisis was fueled by mortgage debt. It was not the result of a shortage of houses.

                2. jimmy cc

                  if that is true, how do taxes reduce inflation?

                  is that not a tenant of MMT?

                  if what you say is true, how does lower interest rates have an effect on inflation?

  7. Brooklin Bridge

    Off topic, but interesting to me never the less, I was amazed at Piketty’s command of the English language. Given his accent, I’d be surprised if he had an English speaking parent or parents, though his education did include stints in English speaking universities such as the London School of Economics and MIT. Still, to get into such a sophisticated discussion with such fluency and detail with so few “ah’s” and “Um’s” or momentary word searches strikes me as an amazing feat in and of itself.

    Still largely off topic, I was also taken by both Piketty and Hudson in their ability to hew so closely to point and develop their arguments so tightly. I realize this is their profession, the subject something they have been over countless times, and that both are clearly good speakers, but still I found the organization and coherence of their arguments remarkable; all the more so if the questions were not given in advance.

    Still nibbling at the edges, I found Piketty’s conciliatory tone engaging. Is that intentional? To me, it sounded sincere, it seemed he really did agree with Hudson in large part. Am I missing his blind spots with regards to the whole concept of rent extraction? He did not sound to me like a main stream economist (Alas, I would be hard pressed to describe what one does sound like for that matter), so at least as far as this discussion goes, I am certainly missing something (perhaps some little detail like the Titanic passing by).

  8. Susan the other

    When Einstein said that compound interest was the most miraculous thing in the universe (or stg. like that) he was being facetious because compound interest is insane. If it were part of natural law it would have long since blown the cosmos into smithereens. And… that’s our idiotic economic model. God loves a good laugh. Somehow, in spite of us (so far), the universe stays in balance. The wave function spins and collapses with regularity so that there is an equality of forces. Energy is the inverse of gravity. But when we define “value” in the abstract we do not use an equation of “equality” – we use a symbol of power, power than can take what it wants – money. That’s our first mistake. Value, in human terms, is nothing more than cooperation. That’s it. But we define it as money. We allow money to be “privatized” and we indebt all the forms of human cooperation to the power of money. Privatized money. And then we agonize over how to fix the system. Let’s put some undefined sanctions on these people here and starve them into compliance… let’s tax these rocket joyriders and make fun of them…. let’s nationalize the system even though it is still completely illogical. But let’s not ever face reality. Let’s not ever seriously define money.

  9. Gulag

    What is the nature of the actual structure of political power that stands over or behind or integrated into our economic system?

    In this discussion Thomas Piketty states that “…it is all about power and political institutions…”as long as the system of political finance and parties, companies… media and think tanks are largely controlled by wealth holders…”

    While Michael Hudson maintains that “…financial wealth has become the economy’s central planners…Its not planned in Washington, or Paris or London, its planned in Wall Street, the City of London and the Paris Bourse.”

    Are either of these conceptions completely accurate? Who are the individuals and institutions in the United States who formulate the grand strategies and goals for both domestic and foreign policy.

    Certainly a one group of power players not mentioned by either individual is the Pentagon and our intelligence agencies and their roles in defining defense strategy, security objectives, and our immediate and presently ongoing shift in global posture towards containing/confronting China.

    These powerful state players do not fit neatly into the Hudson or Piketty views on who controls and determines the strategic goals of our country (it is not simply powerful private wealth holders and billionaire financial players).

    Staring right in our faces, for example, is a Pentagon Budget for 2022 of $752 billion of which $715 billion is for the Department of Defense. Certainly the U.S. military/intelligence/Central Bank complex are major state players whose various types of leverage over budget priorities are also key in determining the direction of both domestic economic policy priorities as well as foreign policy shifts.

    1. jsn

      You should read Hudson’s “Super Imperialism” on the corporate and financial nature of the MIC.

      Pentagon budget is about making contractors rich, not defense, it’s why we fight perpetually losing wars. The US “deficit” IS what the pentagon spends abroad, it forces the states we occupy to purchase Treasury bills which balances the flow of funds while making chaos abroad profitable in Arlington.

      Yes, there’s destructive power there, but it’s marginal compared to the death and suffering caused by the financial elite who own all those contractors along with almost everything else all of which they optimize for profit rather than any public interest. Military destruction is more obvious, financial murder is more like COVID in taking out mostly societies weakest in small spaces that very few see and fewer understand.

      1. Acacia

        BTW, Hudson commented recently here at NC that a revised edition of Super-Imperialism is coming soon (I think he said a few weeks, even). It might be to coincide with the Chinese translation, but in any case I’m really looking forward to it.

      2. Dr. R.k. Barkhi

        “Pentagon budget is about making contractors rich, not defense, it’s why we fight perpetually losing wars. ”

        Thanks for stating this clearly. Let’s hope more Americans realize this.

  10. Sound of the Suburbs

    It’s a lot easier to see what’s happening when you look at the big picture.

    Economics the timeline.
    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 again?

    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 and 1940s, by which time it had already demonstrated its flaws.

    What did the economists learn in WW2?
    In the paper from 1943 you can see …..
    They knew Government debt and deficits weren’t a problem as they had seen the massive Government debt and deficits of WW2.
    They knew full employment was feasible as they had seen it in WW2.

    Balancing the budget was just something they used to do before WW2, but it wasn’t actually necessary.
    Government debt and deficits weren’t a problem.
    They could now solve all those problems they had seen in the 1930s, which caused politics to swing to the extremes and populist leaders to rise.
    They could eliminate unemployment and create a full employment economy.
    They could put welfare states in place to ensure the economic hardship of the 1930s would never be seen again.
    They didn’t have to use austerity; they could fight recessions with fiscal stimulus.

    They had worked out how to create stable societies after the 1930s, but we forgot what they had learned before.

    What did go wrong with Keynesian economics?
    After a few decades of Keynesian, demand side economics, the system became supply side constrained.
    Too much demand and not enough supply causes inflation.
    Neoclassical, supply side economics should be just the ticket to get things moving again.
    It does, but it’s got the same problems it’s always had.

    Mariner Eccles, FED chair 1934 – 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s.
    “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped”

    This is what it’s supposed to be like.
    A few people have all the money and everyone else gets by on debt.

    This is why Keynes added redistribution to the system.
    Maggie/Reagan removed the redistribution and inequality soared as things returned to the old normal of neoclassical economics.

    They did fix a lot in the Keynesian era.
    Financial stability arrived in the Keynesian era and was locked into the regulations of the time.
    “This Time is Different” by Reinhart and Rogoff has a graph showing the same thing (Figure 13.1 – The proportion of countries with banking crises, 1900-2008).

    The neoliberals removed the regulations that created financial stability in the Keynesian era and put independent central banks in charge of financial stability.
    Not the best idea they’ve ever had, the financial crises came back.

  11. Sound of the Suburbs

    We have been copying Japan’s mistakes blissfully unaware that this is what we were doing.

    Japan led the way and everyone followed.
    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.
    The PBoC saw the financial crisis coming unlike the BoJ, ECB, BoE and the FED.
    They did see it coming, but it was very late in the day, so they are still in trouble.

    Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
    Policymakers sooner or later use the economic growth model of the Roaring Twenties, oblivious to where this is leading.

    The US had done it first in the 1920s, so Japan could study the Great Depression to avoid this fate.
    How did Japan avoid a Great Depression?
    They saved the banks
    How did Japan kill growth and inflation for the next thirty years?
    They left the debt in place and the repayments on that debt killed growth and inflation (Japanification)

    Japan discovered how to avoid a Great Depression and deliver Japanification instead.
    The West copied this solution after 2008 and can’t work out why things haven’t been the same since.

    We copied Japan’s mistakes and went on to make a few new ones they didn’t make.

    Why didn’t the Japanese use QE after their financial crisis?
    Japan saved the banks, but left the debt in place.
    QE couldn’t get into the real economy due to a lack of borrowers.
    The banks were ready to lend, but there were too few borrowers as they were struggling with the debt they had already taken on.
    This is why the Japanese used fiscal, rather than monetary policy.

    We saved the banks, but left the debt in place.
    QE couldn’t get into the real economy, but it could get into financial markets.
    The gap between economic fundamentals and the US stock market widened until it reached 1929 levels.

    This is why the Japanese didn’t do much QE until Kuroda, as they knew it couldn’t get into the real economy when people were more concerned with paying off existing debt than taking on new debt.
    Richard Koo has no idea what Kuroda is doing and has put this down to him having no central banking experience.
    Personally I think Kuroda does know what he’s doing.
    He knows QE can’t get into the real economy due to a lack of borrowers, but is using it to inflate asset prices as this is what QE does best.

    We look at the markets and think things are OK.
    This is where the QE money has been going.

    We have done nothing to solve the real problem.
    We have used monetary policy to try and solve a private debt problem with more private debt.
    The Japanese used fiscal policy to maintain the money supply as they paid down private debt. There is a way out this way, but it is a long and painful road.

  12. Vic Lai

    The distinction between the 1% and the 99% is misleading, especially in the US.
    The following paper published by the Levy Economics Institute in March 2018 should be read in detail :
    “Income distribution, household debt, and aggregate demand : A critical assessment”

    According to the real-world statistical data, most debt is owed by households near the top of the income distribution.
    The highest debt ratios are consistently found between the 75th and 90th percentiles.
    For households, debt is overwhelmingly used to finance asset positions.
    The great majority of household debt (over 90 percent) is incurred to finance homeownership, autoownership, and postsecondary degrees.
    Low-income households are unlikely to own homes or attend college or university — the subprime crisis is an exception, which proves the rule.
    Low-income households do own vehicles, they are often purchased used, which may not require debt financing.
    As people get poorer, they don’t borrow more, they buy less.
    A fall in income will normally be associated with less borrowing (less debt), not more.
    A redistribution of income toward the bottom half (say by taxing the rich more) would result in more household debt, not less, as debt-financed home ownership, higher education, and new cars, currently inaccessible for most of these households, come into reach.

    1. Yves Smith Post author

      The information you quote does not prove your opening claim.

      And the low-income car owners I know are indebted, but not necessarily to car lessors but to friends, family, or employers. We gave our aide an advance so she could buy a car. We gave an advance to a cleaning woman years back to rebuild her transmission.

  13. paul

    Perhaps we should refrain from using the noun ‘crisis’ regarding financial delinquency.

    crisis (n.)

    early 15c., crise, crisis, “decisive point in the progress of a disease,” also “vitally important or decisive state of things, point at which change must come, for better or worse,” from Latinized form of Greek krisis “turning point in a disease, that change which indicates recovery or death” (used as such by Hippocrates and Galen), literally “judgment, result of a trial, selection,” from krinein “to separate, decide, judge,” from PIE root *krei- “to sieve,” thus “discriminate, distinguish.”

    Transferred non-medical sense is 1620s in English. A German term for “mid-life crisis” is Torschlusspanik, literally “shut-door-panic,” fear of being on the wrong side of a closing gate.

    What is referred to as a ‘financial crisis’ is a calamity for the asseted class.
    A loss of control, of ‘holdings’ in the current arrangements.

    Their decadence and dereliction is cart and horse to their insatiable obesity.
    That is our current crisis.

    1. Susan the other

      Hudson’s analysis of debt deflation is classic economics. Clear out the debt and the economy will revive and grow. Growth and prosperity will return. That’s tried and true. But climate change is not. And it has nothing to do with human logic. We are watching evolution in motion. And I don’t know anyone who isn’t confused. If Hudson proposes debt forgiveness and clean slates for everyone he has a bigger problem than just satisfying the old debt holders. Before we can take the next step, Mother May I?, we must consider where it will take us. Without establishing a good direction for “growth” we’ll all just go back to buying new cars and homes and maybe consider starting a business that is unsustainable. Before we can forgive the debt we need a new place to channel human enterprise; before we can configure a new place we need to clean away the old place full of dinosaur industries and wasteful systems that are not sustainable; before we can clean away the old place we need to put in it’s place a temporary safety net but we don’t know for how long; before we can do a safety net we must agree and legislate it; before we can legislate it we must all understand how critical climate change is; and on and on. We seem to have already started this off by demolishing the old economy. But it is too soon to forgive debt – there’s no place to go with the money. Probably Space Force isn’t going to be liquid enough. So I’d just imagine that at this point in time we should actually legislate a new definition for “money” in terms of equality and also what it can accomplish, and then use it accordingly. Construe new accounting methods altogether. But before we can do that we really have to admit that a “free market” – the heart and soul of capitalism – is the exact opposite of what we need. And before we can do that we need good drugs to placate the far-right lunatics with a trunk full of guns and ammo.

      1. KiWeTO

        Wouldn’t that be a “freed market”?
        – A market freed from economic rents (which is in itself a rule – no economic rents!)

        A market is a place with agreed rules. The malignant capitalist’s version is a place freed from all rules. Also known as anarchy, or exploitation. Therefore, the free market as logically understood today by the malignant is an oxymoron?

  14. Sound of the Suburbs

    “Today, we are talking about “What is debt.” The next one will be about the nature of money.”
    After that we get to, “What is wealth?”
    How do the three link together?

    What is the relationship between money and wealth?
    It is easier to see when it all goes wrong.

    Weimar Germany and Zimbabwe were never short of money.
    Weimar Germany and Zimbabwe had created far too much money compared to the goods and services available within the economy causing hyper-inflation.
    States can just create money, and the last thing you want is too much of the damn stuff in your economy.
    They had made so much money it lost nearly all its value, and they needed wheelbarrows of the stuff to buy anything.
    Money has no intrinsic value; it comes from what it can buy.
    Central bankers actually look at the money supply, and expect it to rise in line with the new goods and services in the economy, as it grows. More goods and services in the economy require more money in the economy.

    Paul Ryan was a typically confused neoliberal and Alan Greenspan had to put him straight.
    Paul Ryan was worried about how the Government would pay for pensions.
    Alan Greenspan told Paul Ryan the Government can create all the money it wants, there is no need to save for pensions.
    What matters is whether the goods and services are there for them to buy with that money.
    That’s where the real wealth in the economy lies.

    Money comes out of nothing.
    States can create money out of nothing (think Weimar Germany, Zimbabwe).
    Private banks create money out of nothing.
    Real wealth doesn’t lie here.

    The real wealth in the economy lies in its goods and services, and is measured by GDP.
    Central bankers expect the money supply to rise in line with GDP.
    When there is not enough money in the economy this will hold back growth.
    This is the problem with gold, the supply of it doesn’t grow with the economy and it tends to be deflationary and hold back growth.
    There is a good reason for fiat currencies, but you need to know how the system works, which neoliberals don’t.

    Private banks create the money supply.
    Money and debt come into existence together and disappear together like matter and anti-matter.
    Bank loans create money and debt repayments to banks destroy money.
    Bank loans create 97% of the money supply
    The money supply ≈ public debt + private debt
    Money and debt are like opposite sides of the same coin.

    Money and debt are opposite sides of the same coin.
    If there is no debt, there is no money.
    It’s a debt based monetary system.
    The economy needs to be able to manage the associated private debt contained within it, which is why debt should grow with GDP.
    When you let debt rise faster than GDP, as we do now, that debt will eventually start to hold back the growth of the economy.

    The UK is the best example.
    The UK was once the great financial superpower, and it looks as though we understood this in the past.
    The economy needs to be able to manage the debt contained within it, which is why debt should grow with GDP.
    We used to do this.
    Bank credit was directed into areas that grew GDP.
    As soon as the neoliberals get in things start going wrong.
    The UK eliminated corset controls on banking in 1979, the banks invaded the mortgage market and this is where the problem starts.
    The transfer of existing assets, like real estate, doesn’t add to GDP.
    There is now too much debt in the UK economy.
    Let’s call it a “Productivity Puzzle”, as we don’t know what the problem really is.

    Before 1979 – banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy)
    Debt grows with GDP

    After 1979 – banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation)
    Debt rises faster than GDP

  15. Vic Lai

    By double-entry (or quadruple-entry) bookkeeping, one’s debt or liability is another’s asset or savings, which is part of his or her wealth — they are just too sides of the same coin.
    Reducing debts also means reducing wealth as well.
    Also, we should only consider net debt, not total debt, as most economic entities are owing monies to each other.
    Even though we consider the total amount of debts, it’s usually more than compensated for by the amount of total assets or wealth in the same economy.
    Yes, I have a high home-mortgage debt, but I also concomitantly have a very valuable home to live in, and I can also rent it out so that the rent I collect pays for my mortgage interests owed to the bank.
    Security and social status depend on asset ownership.
    Debt-financed home ownership, for instance, substitutes for strong tenant protections that would make renting a more viable alternative.
    An example of this is Germany, which has both the lowest levels of household debt AND the lowest levels of household wealth in the euro area (European Central Bank 2013).
    One major reason for this is that strong tenant protections make homeownership less necessary for middle-class German households.
    But what’s suitable for Germany is not necessarily good for the US.

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