An interview with the American Historian and Economist Michael Hudson
Michael Hudson, almost 70, is President of The Institute for the Study of Long-Term Economic Trends (ISLET) and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. Hudson is a former balance-of-payments economist for Chase Manhattan Bank and Arthur Andersen, and economic futurist for the Hudson Institute. He is the acclaimed author of Super-Imperialism: The Economic Strategy of American Empire (1972 and 2003), the first book to describe the global free ride for America after it went off the gold standard in 1971, putting the world onto a paper U.S. Treasury-bill standard. His other best seller was Global Fracture: The New International Economic order, that explores how and why the US came to achieve world economic hegemony. His forthcoming book, The Fictitious Economy, will be among the first to explain to general readers how a corrosive bubble economy is replacing the real economy via debt-financed, asset price inflation with the main purpose of increasing balance-sheet net worth, benefiting a select few while spreading risk among the general population. Prof. Hudson received his Ph.D. in Economics from New York University in 1968.
The bubble mentality
« Europe and America both have pursued an economic bubble policy – debt-fueled asset-price inflation.»
« Popular morality imagines that one can get rich by running up debt.»
« The big picture is that the debt overhead has soared without corresponding means in the ability to pay this debt.»
The wrong medicines
«FED and Treasury attempt to solve today’s debt problem by subsidizing yet MORE debt. What is needed is just the opposite: scaling back debt to reflect the actual ability to pay.»
« It’s a travesty to call this Keynesian. Keynes wanted to minimize the debt overhead, not bail out the financiers and debt pyramiders.»
Europe’s red alert
« Perhaps the most urgent crisis facing Europe is the imminent collapse of the post-Soviet economies.»
INTERVIEW by Jorge Nascimento Rodrigues
Q: What are the roots of the present financial crisis and stock market crash in the US? Do you think in Europe the problem is the same?
MH: The over-arching problem is debt in excess of the ability to pay, and in excess of the collateral pledged to back this debt. Europe and America both have pursued an economic bubble policy – debt-fueled asset-price inflation. Europe’s problems are worse, because its foreign reserves (555 billion) are in US dollars. The U.S. Government is able to avoid paying the $4 trillion it owes foreign central banks.
Q: Do you think this financial crisis and economic recession are worse than the previous ones in the last 50 years?
MH: Yes, definitely worse. All the more so because popular morality imagines that one can get rich by running up debt. But debt leveraging leaves heavy carrying charges in its wake. This is like trying to drive a car with the brake pedal pressed tighter and tighter to the floor.
Q: Do you think these are normal “cyclical” downs, after bubbles, rates manipulation and profound in-balances in world trade, or we are witnessing a ‘systemic’ and ‘structural’ crisis, as most claim?
MH: The problem is structural. That means that we can’t simply wait for a “cycle” to “automatically” pull economies out of the debt-corner into which they have painted themselves.
Q: Can we compare this crisis with the 1930s’ crash, recession and Great Depression?
MH: Yes, quite similar. Except that the 1930s problem stemmed from the breakdown of inter-government debt (the Inter-Ally arms debts and German reparations), whereas today’s debts stem more from the financing of real estate bubbles and leveraged buyouts of companies.
Q: How you evaluate the medicines from the Fed and the Treasury in the US?
MH: They bail out lenders while keeping the debt overhead in place. They attempt to solve today’s debt problem by subsidizing yet MORE debt. What is needed is just the opposite: scaling back debt to reflect the actual ability to pay.
Q: Do you think all this -sometimes coined ‘keynesian’- trillion packages and political marketing will have a positive impact, or the crisis will go deeper in the US?
MH: It’s a travesty to call this Keynesian. Keynes wanted to minimize the debt overhead, not bail out the financiers and debt pyramiders.
Q: And in Europe?
MH: Europe doesn’t seem to have much of a policy. It under-taxes real estate, overtaxes labor. And it looks to the US market more than to building up its internal domestic markets. Perhaps the most urgent crisis facing Europe is the imminent collapse of the post-Soviet economies. Since the early 1990s their neoliberal regimes have financed a structural trade deficit by foreign-currency borrowing to load down real estate with debt. The result has been to create a property bubble without putting in place the means of balancing their foreign trade.
Q: The source of the present crisis is the rentier system that the last financial revolution engineered since the 1980s?
MH: Savings have been lent out without increasing production or living standards. Much has indeed been lent out to finance gambling using junk mathematics and debt-leveraged takeovers. But the big picture is that the debt overhead has soared without corresponding means in the ability to pay this debt.
What’s the rentier economy by Hudson
«A century ago when the classical economists, Adam Smith, John Stuart Mill, in the reform era, tried to say: look, there are some incomes that are not earned. Rent is not earned, it’s an excess price. Interest is not earned, it’s a monopoly price. Monopoly profits aren’t earned, they’re extortionate. All this was viewed (by classical economists) as something that government regulators should get rid of, either by not permitting it in price, or by holding the monopolies in the public domain, or by the land itself being either nationalized or taxed. The classical economists divided almost the entire economy into productive and unproductive labor, into wealth, and overhead, into real income and costs. This threatened the vested interests with taxing away their free lunch, so you have an anti-classical reaction that is epitomized by the Chicago school of anti-government, anti-tax people whose leader, Milton Friedman, said there’s no such thing as a free lunch. Well, classical economics was all about the free lunch. Look at Ricardian rent theory. That’s all about the free lunch. The role of modern economic theory — I should call it post-modern economic theory and statistics — is to pretend that the banks, the landlords and the monopolies actually earn their income instead of extracting it from the (productive) economy. »
Q: The best solution for the financial world is to induce the euthanasia of the rentier system as Lord Keynes suggested once (Chapter 24, Concluding Notes) in his General Theory of Employment, Interest and Money (1936)?
MH: By that, he meant a debt write-down. This is the only ultimate solution. As Adam Smith noted in 1776, no government ever has repaid its foreign debt. Today one can say the same thing about the private sector. Bankruptcy seems to be the indicated way to wipe it out. Governments are postponing this resolution by bailing out creditors – not debtors.
MH: What do you expect from the new Obama Administration?
MH: A cross between Bush-III and Clinton-III. The change will not affect the finance, insurance and real estate (FIRE) sector – the rentier system – , but will be more economically marginal, applying more to cultural policy.
Keynes about the euthanasia of the rentier system (Chapter 24, General Theory)
«Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce. I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.»
As Paul Krugman explained once this rentier aspect was not transitional neither its euthanasia was gradual.
(c) Jorge Nascimento Rodrigues