The Unz Review - Mobile
A Collection of Interesting, Important, and Controversial Perspectives Largely Excluded from the American Mainstream Media
 
Email This Page to Someone

 Remember My Information



=>
Topics/Categories Filter?
2016 Election Ancient Near East Australia Banking Industry Banks Bubble & Beyond China Debt Deregulation Dollar Donald Trump Economic Theory Economics EU Euro Eurozone Federal Reserve Financial Bailout Financial Bubbles Financial Crisis Financial Sector Financial Times Foreign Policy Greece History Housing Iceland Ideology IMF Land Latvia Max Keiser Neoliberalism Norway Obama Paul Krugman Privatization Radio Interviews Real Estate Rentier Russia Tax Cuts The Insiders Economic Dictionary TV Ukraine Wall Street Washington Consensus Al Jazeera American Debt American Media American Military Austerity Banking Banking System Barack Obama Ben Bernanke Bernie Sanders Brazil Brexit BRICs Britain Bush Chicago School Chile Chinese Classical Economics Communism Consumer Debt Counterpunch Cuba Currency Speculation Deficits Deflation Democracy Now! Democratic Party Democrats Dictatorship Economic History Empire Employment Energy Event FAZ Finance Financial Debt FIRE Free Trade Geo-Politics Globalization Gordon Brown Government Spending Government Surveillance Great Recession Henry George Hillary Clinton Imperialism Income Tax Inequality Inflation Infrastructure Interest Iraq Italy Jeff Sommers Joseph Stiglitz Killing The Host Labor Latin America Leon Trotsky Markets Marx Marxism Medicine Michael Hudson Middle East MMT Modern Money Theory Money Supply National Debt NATO Neocons Nobel Prize One Percent Panama Papers Paul Samuelson Pinochet Poland Political Correctness Ponzi Scheme Poverty Prizatization Productivity Property Tax Protectionism Public Enterprise Radio Radio Interview Renegade Economists Republican Party Shanghai Cooperation Organisation Simon Patten Social Security Socialism Student Debt Switzerland Syria Syriza Tax Taxes Technology Terrorism Thorstein Veblen Trade Surplus TTIP Unemployment Unions USA Veblen Venezuela Working Class YouTube
Nothing found
 TeasersMichael Hudson Blogview

Bookmark Toggle AllToCAdd to LibraryRemove from Library • BShow CommentNext New CommentNext New Reply
The Hudson Report
🔊 Listen RSS

Left Out, a podcast produced by Paul Sliker, Michael Palmieri, and Dante Dallavalle, creates in-depth conversations with the most interesting political thinkers, heterodox economists, and organizers on the Left.

The Hudson Report is a new weekly series produced by Left Out with the legendary economist Michael Hudson. Every episode we cover an economic or political issue that is either being ignored—or hotly debated—that week in the press.

Paul Sliker: Michael Hudson welcome back to The Hudson Report.

Michael Hudson: It’s good to be back. I’m just home from China, getting over jetlag.

Paul Sliker: You recently gave a paper at Peking University about the economy and what sorts of policies they should implement and what to avoid.

But Michael, because we only have a short amount of time in these weekly segments, I want to look specifically at housing in China, and then compare that to what’s going on here in the U.S. In your speech you argued that China’s most pressing policy challenge is to keep down the cost of housing and that the policies best suited to avoid what you call the “neo-rentier disease.” Can you give us a picture of what’s going on currently with housing in China, and then explain what you mean by “neo-rentier disease” and how the Chinese can avoid it.

Michael Hudson: To put this in international perspective, you could say that international competition is based on labor’s cost of living in each country. The most important expense in every country’s cost of living today is housing. What makes a country competitive in manufacturing or other sectors comes down to how much it costs to pay for housing.

20 or 30 years ago only 10 percent to 12 percent of one’s income had to go for housing. That’s about the ratio in Germany today. But in America today it’s over 40 percent in the big cities. It’s also over 40 percent in London, and and it’s rising throughout Europe. But this is not a force of nature. It doesn’t have to be this way. It’s largely because banks have found that they can do to housing the same thing they’ve done to education: Housing is an excuse to get people into debt.

The most important way to get people into debt for housing is to take control of the government with your lobbyists to un-tax housing. The property tax is way less than the rise in land prices. That leaves the rising rental value available to be paid to the banks. The reason why housing prices are going up is because a house is worth whatever a bank will lend. And they are lending more and more, to enable new borrowers to bid up property prices.

You’d think that China would have learned this by looking at the West, or at least by reading Volume 3 of Capital. In fact the Peking University meeting, the Second World Conference on Marxism, David Harvey gave the opening and closing speech. His point was that the Chinese should read Volume III of Capital to understand why and how the volume of debt and credit grows exponentially. As banks get richer and richer, the One Percent get richer. They need to nurture more and more markets for their credit and debt creation. So they lend on easier and easier terms, at a rising proportion of the home’s value. So it’s bank credit that has been inflating the price of housing.

David Harvey asked how China can let the price of housing go up so high in Shanghai (the most privatized city) that almost everybody who has a house is a millionaire. How can China expect to remain competitive in exporting industrial products when the cost of housing is so high?

Unfortunately, his talk and mine were almost the only economic talks at the meeting in Peking. As one of the Russian attendees pointed out to me, “Marxism” is the Chinese word for politics. “Marxism with Chinese characteristics” means to doing what they want politically. But economically they’ve sent their students to the United States, to attend business schools to learn how U.S. financial engineering practices.

Shanghai is where Milton Friedman and the Chicago Boys came in the 1970s and early 80s, because the Chinese government worried that if western Marxists came over, they would tend to interfere with domestic Chinese politics. So actually, China had less exposure to foreign Marxian economics than to U.S.-style neoliberal teaching.

I gave the same basic talk in neighboring Tianjin, which is a more interesting city in many ways. It’s where Chou En-Lei went to school. Talking to women students (about 80 percent of the economics students were women, because it’s considered a social science there) about how they planned to get an apartment, I was told that they would have to marry a boy whose parents gave him an apartment. I didn’t meet any male student who said he would have to marry a woman with her own apartment. It’s a male’s role to have an apartment for his wife. So if you can’t find a guy with his own apartment this is not going to lead to a happy married life, and there may be no marriage at all.

Some of the students that I talked to three years ago are graduating now, but are still not married. So I asked where they were going to live. One of the problems I found out – in addition to what we just talked about – was that in order to prevent a rural exodus to the big cities, people from the provinces or from small towns are not allowed to get a passport to live in these cities. They’re only allowed to buy apartments in their home town. China is trying to prevent overcrowding and the development of slums. As a result, in order to get an apartment the student decided to teach at a university or the high school that provides its own housing.

So China’s corporations, public universities and other institutions are doing much what the Russian Soviets did: Employers provide their own workers with housing.

Meanwhile, you’ve had a move in the last three years under President Xi against corruption. The way they’ve moved against corruption is to put in a bureaucracy to prevent it. That is a natural step in any country. The bureaucracy has put a short lease on what governments can spending. So most universities, if they have big conferences, need a private-sector participant to share in the cost, especially if they bring people over from abroad. At the worse, this shifts corruption from the public sector to the private sector.

Meanwhile, there’s a shift going on in China now, and the political attitude of the students I talked to is quite different from what it was a decade ago, when students really thought that they could change the country and get rid of corruption. OK, they’ve cracked down on corruption. They put in bureaucracy. But now they’re faced with a problem that their students have all been sent to America to study economics and come back and ask “How do we get a free market?”

I couldn’t believe that students in China were asking me about a free market. But that idea led President Xi a few months ago to say they’re thinking of letting in American and European banks. Well, I think this would be a disaster. If you let in the American and foreign banks, their product is debt! What are they going to lend money for?

The answer is that they’re going to lend more money to buy apartments than other Chinese banks are willing to lend. That’s how banks increase their market share – a race to the bottom, into deeper and deeper debt. The new banks will lend on easier terms, with lower down payments. That provides buyers with even more credit to bid up the price of real estate. The effect will be to start pricing China out of the market.

 
• Category: Economics • Tags: China, Housing 
The West’s Finance-Capitalist Road
🔊 Listen RSS

May 5-6, 2018 Lecture
Second World Marxism Conference
Peking University, School of Marxist Studies

Volumes II and III of Marx’s Capital describe how debt grows exponentially, burdening the economy with carrying charges. This overhead is subjecting today’s Western finance-capitalist economies to austerity, shrinking living standards and capital investment while increasing their cost of living and doing business. That is the main reason why they are losing their export markets and becoming de-industrialized.

What policies are best suited for China to avoid this neo-rentier disease while raising living standards in a fair and efficient low-cost economy? The most pressing policy challenge is to keep down the cost of housing. Rising housing prices mean larger and larger debts extracting interest out of the economy. The strongest way to prevent this is to tax away the rise in land prices, collecting the rental value for the government instead of letting it be pledged to the banks as mortgage interest.

The same logic applies to public collection of natural resource and monopoly rents. Failure to tax them away will enable banks to create debt against these rents, building financial and other rentier charges into the pricing of basic needs.

U.S. and European business schools are part of the problem, not part of the solution. They teach the tactics of asset stripping and how to replace industrial engineering with financial engineering, as if financialization creates wealth faster than the debt burden. Having rapidly pulled ahead over the past three decades, China must remain free of rentier ideology that imagines wealth to be created by debt-leveraged inflation of real-estate and financial asset prices.

Western capitalism has not turned out the way that Marx expected. He was optimistic in forecasting that industrial capitalists would gain control of government to free economies from unnecessary costs of production in the form of rent and interest that increase the cost of living (and hence, the break-even wage level). Along with most other economists of his day, he expected rentier income and the ownership of land, natural resources and banking to be taken out of the hands of the hereditary aristocracies that had held them since Europe’s feudal epoch. Socialism was seen as the logical extension of classical political economy, whose main policy was to abolish rent paid to landlords and interest paid to banks and bondholders.

A century ago there was an almost universal belief in mixed economies. Governments were expected to tax away land rent and natural resource rent, regulate monopolies to bring prices in line with actual cost value, and create basic infrastructure with money created by their own treasury or central bank. Socializing land rent was the core of Physiocracy and the economics of Adam Smith, whose logic was refined by Alfred Marshall, Simon Patten and other bourgeois economists of the late 19th century. That was the path that European and American capitalism seemed to be following in the decades leading up to World War I. That logic sought to use the government to support industry instead of the landlord and financial classes.

China is progressing along this “mixed economy” road to socialism, but Western economies are suffering from a resurgence of the pre-capitalist rentier classes. Their slogan of “small government” means a shift in planning to finance, real estate and monopolies. This economic philosophy is reversing the logic of industrial capitalism, replacing public investment and subsidy with privatization and rent extraction. The Western economies’ tax shift favoring finance and real estate is a case in point. It reverses John Stuart Mill’s “Ricardian socialism” based on public collection of the land’s rental value and the “unearned increment” of rising land prices.

Defining economic rent as the unnecessary margin of prices over intrinsic cost value, classical economists through Marx described rentiers as being economically parasitic, not productive. Rentiers do not “earn” their land rent, interest or monopoly rent, because it has no basis in real cost-value (ultimately reducible to labor costs). The political, fiscal and regulatory reforms that followed from this value and rent theory were an important factor leading to Marx’s value theory and historical materialism. The political thrust of this theory explains why it is no longer being taught.

By the late 19th century the rentiers fought back, sponsoring reaction against the socialist implications of classical value and rent theory. In America, John Bates Clark denied that economic rent was unearned. He redefined it as payment for the landlords’ labor and enterprise, not as accruing “in their sleep,” as J. S. Mill had characterized it. Interest was depicted as payment for the “service” of lending productively, not as exploitation. Everyone’s income and wealth was held to represent payment for their contribution to production. The thrust of this approach was epitomized by Milton Friedman’s Chicago School claim that “there is no such thing as a free lunch” – in contrast to classical economics saying that feudalism’s legacy of privatized land ownership, bank credit and monopolies was all about how to get a free lunch, by exploitation.

The other major reaction against classical and Marxist theory was English and Austrian “utility” theory. Focusing on consumer psychology instead of production costs, it claimed that there is no difference between value and price. A price is whatever consumers “choose” to pay for commodities, based on the “utility” that these provide – defined by circular reasoning as being equal to the price they pay. Producers are assumed to invest and produce goods to “satisfy consumer demand,” as if consumers are the driving force of economies, not capitalists, property owners or financial managers.

Using junk-psychology, interest was portrayed as what bankers or bondholders “abstain” from consuming, lending their self-denial of spending to “impatient” consumers and “credit-worthy” entrepreneurs. This view opposed the idea of interest as a predatory charge levied by hereditary wealth and the privatized monopoly right to create bank credit. Marx quipped that in this view, the Rothschilds must be Europe’s most self-depriving and abstaining family, not as suffering from wealth-addiction.

These theories that all income is earned and that consumers (the bourgeois term for wage-earners) instead of capitalists determine economic policy were a reaction against the classical value and rent theory that paved the way for Marx’s analysis. After analyzing industrial business cycles in terms of under-consumption or over-production in Volume I of Capital, Volume III dealt with the precapitalist financial problem inherited from feudalism and the earlier “ancient” mode of production: the tendency of an economy’s debts to grow by the “purely mathematical law” of compound interest.

Any rate of interest may be thought of as a doubling time. What doubles is not real growth, but the parasitic financial burden on this growth. The more the debt burden grows, the less income is left for spending on goods and services. More than any of his contemporaries, Marx emphasized the tendency for debt to grow exponentially, at compound interest, extracting more and more income from the economy at large as debts double and redouble, beyond the ability of debtors to pay. This slows investment in new means of production, because it shrinks domestic markets for output.

 
• Category: Economics, Ideology • Tags: Debt, Housing, Marxism, Neoliberalism, Rentier 
The history of debt cancellation and Jesus's economic justice activism 
🔊 Listen RSS

Left Out, a podcast produced by Paul Sliker, Michael Palmieri, and Dante Dallavalle, creates in-depth conversations with the most interesting political thinkers, heterodox economists, and organizers on the Left.

The Hudson Report is a new weekly series produced by Left Out with the legendary economist Michael Hudson. Every episode we cover an economic or political issue that is either being ignored—or hotly debated—that week in the press.

In this episode we discuss the ancient history of debt cancellation, the untold life of Jesus as an economic justice activist, and more largely Professor Hudson’s forthcoming book, “…and forgive them their debts,” out in summer 2018.

Michael Palmieri: Professor Michael Hudson welcome back to another episode of The Hudson Report.

Michael Hudson: It’s good to be back here.

Michael Palmieri: I know we usually cover topical or current event that’s been either ignored or hotly debated in the weekly news cycle. But I thought it would be much more interesting this week to talk about your forthcoming book “…and forgive them their debts credit and redemption through the Bronze Age to the Jubilee Year” scheduled to be released early summer 2018. And I thought it was interesting in two ways, one–Easter’s three weeks passed and yet a lot of your work is centered around Christianity and the life and activism of Jesus. The second reason is that you’ll be leaving for the next few weeks to teach at Peking University in China.

But can you explain or maybe give a little bit of a summary as to what the book looks at and describe it. I know it’s focused on the origins of debt and debt forgiveness. But can you elaborate a bit more?

Michael Hudson: It’s a history of the origins of interest bearing debt – the origins of interest and Sumer in the third millennium BC, in an epoch when most debts were owed to the palace, either for taxes or for fees for services. Periodically for a thousand years, from Sumer, Babylonia, and other Near Eastern countries, when new rulers took the throne, they would begin their reign with a debt amnesty.

We’re familiar since medieval times for European rulers often freeing the prisoners when they came to power. But the amnesties in Sumer and Babylonia extended to everything that was owed to the palace. They were general cancellations of personal debts, mainly agrarian debts by cultivators – citizens who also manned the military.

The idea was to restore the economy to the stability that existed before widespread debts ran up during the preceding ruler’s reign. What was “restored” was an idealized “original” or “normal” state in which nobody owed debts to the palace.

These debt remissions extended in due course to debts owed to palace collectors – and, by Babylonian times (from about 2000 to 1600 BC), to debts owed to individual creditors. Most agrarian and personal debts were cancelled, but not debts among businessmen that were owed to each other. They were left in place.

The guiding logic of these debt cancellations was spelled out by Egyptians. If rulers had not cancelled these debts, they would have faced a situation in which indebted cultivators were falling into permanent bondage. Their labor would have been pledged to their creditors, and thus would not be available to perform the corvée labor that had to be mobilized each year to build basic infrastructure – walls, temples, palaces and other basic construction that was public or communal in character.

Also if the debtors on the land had to pay private creditors, they wouldn’t be able to pay their stipulated fees or taxes run up to the palace. So for two thousand years throughout the Bronze Age (circa 3200 to 1200 BC), there was a tension between the rulers and the emergence of a private wealthy class of creditors who used their money to try to become landowners. By about 1800 BC you had cultivators pledging their land to creditors and losing it. You begin to find large aggregations of landholdings, all at the expense of palace authority and its ability to levy taxes on labor, crops or money.

The big picture therefore is that for thousands of years you have a tension between centralized authority, which needed to preserve economic balance and wanted the population (and hence, the army) to keep growing, and wealthy creditors, traders and land buyers who made gains by impoverishing the rest of the population. That was the same dynamic found in early Greece and Rome. In fact, it’s a dynamic that you still have today.

The difference is that today’s governments have been taken over and captured by creditor interests. The result is that today’s ethic is the opposite of the first few thousand years of debt. Today’s ethic, ever since Rome, is a sanctity of debt, not of its cancellation. All debts have to be paid – regardless of how this may impoverish and polarize society.

But in Sumer, Babylonia, Egypt and the Biblical lands there was a royal understanding that if poor cultivators – the 99 percent – had to pay the debts that they ran up, they would fall into bondage to the 1 percent, and forfeit their land to their creditors. Rulers sought to prevent this from happening, because if they had not intervened, they would have a citizenry available to serve in the army. They wouldn’t have taxes. They would have had a kind of Margaret Thatcher type economy – and quickly been conquered by outsiders or overthrown from within.

Michael Palmieri: This gets us to where we began in the first episode of The Hudson Report. We spoke about the ACLU report called ‘A Pound of Flesh,’ about the “modern-day debtors’ prisons” that are beginning to pop up throughout society.

Michael Hudson: Shakespeare’s famous “pound of flesh” owed by the Merchant of Venice actually was a zero interest loan. So debt problems arose even before interest came to be charged. But obviously, once you begin to charge interest, debt expands exponentially at a geometric rate. Babylonian scribes were taught to calculate these doubling times. So one of the aims of my book is to explain how interest began.

There’s no question that when it began, the objective was not to find a way to impoverish society, polarize it and impose austerity. But that’s how matters ended up. Interest was innovated in the Sumerian temples and palaces, basically in the form of trade credit. The palace consigned export and import trade to entrepreneurs. Sumer – present-day Iraq – had very rich soil, deposited by rivers over the millennia. But it didn’t have hard stone, metal or gems. So Sumer had to trade in order to get the copper and tin that gave their name to the Bronze Age.

This trade had to be financed on credit. The palace and the temples employed war widows, children, the blind and other people who couldn’t make a go of things on the land. They were set to work to weave textiles or make other handicrafts, which were turned over to traders. These traders exported these handicrafts northwest to Turkey and eastward across the Iranian plateau. That’s how the Sumerians obtained the tin, copper and other raw materials, like stone and silver.

There was a transmutation of this practice of charging interest to creditors to merchants who could pay. Interest began to be charged on debts in general, including advances of fees owed to the palace by cultivators on the land. That’s where problems arose, especially when there was a crop failure or when members of a family got sick.

Most of these debtors didn’t actually borrow money. They simply ran up debts and arrears. Most debts thus did not result from loans, but were unpaid bills, headed by those that were owed to the palace or its collectors.

 
• Category: Economics, History • Tags: Banking System, Debt 
The Hudson Report
🔊 Listen RSS

Left Out, a podcast produced by Michael Palmieri, Dante Dallavalle, and Paul Sliker, creates in-depth conversations with the most interesting political thinkers, heterodox economists, and organizers on the Left.

We’re excited to announce our new weekly series called The Hudson Report with the legendary economist Michael Hudson. Every episode we’ll pick Professor Hudson’s brain for 10 or 15 minutes on an economic issue that is either being ignored—or hotly debated—that week in the press.

Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri at Kansas City. He counsels governments around the world on finance and tax policy and has served as an economic adviser to the US, Canadian, Mexican, and Latvian governments. Michael is a financial analyst and a veteran of Wall Street, an economic historian and one of the world’s leading experts on the history of private property, debt, and real estate and the origins of economic civilization in the Ancient Near East. He’s widely credited with being one of the few economists who foresaw the financial crisis of 2007-08. His new book, …and forgive them their debts: Credit and Redemption From Bronze Age Debt Remissions to the Jubilee Year, releases in May of 2018.

LISTEN to this week’s first episode of The Hudson Report on modern-day debtors’ prisons in America and debt in antiquity:

*If you’re enjoying Left Out, please consider becoming a supporter on Patreon. Your small donations are crucial to keeping this show alive.

[FULL TRANSCRIPT]

Paul Sliker: So Michael, in conjunction with Harvard University’s Peabody Museum you headed up an archaeological research team on the origins of private property, debt, and real estate and the origins of economic civilization in the ancient Near East. You actually have a new book coming out in May called ‘…and forgive them their debts: Credit and Redemption From Bronze Age Debt Remissions to the Jubilee Year’. And speaking of debt that’s a perfect segue into the topic of our first discussion here. A new ACLU report just got released called A Pound of Flesh: The Criminalization of Private Debt, that shows that thousands of debtors are arrested in jail each year in the U.S. because they owe money–and millions more are threatened with jail. The debts can be as small as a few dollars and can involve every kind of consumer debt from medical bills to car payments to student loans to credit card debt.

It goes sort of something like this… cities and private collections agencies have teamed up to bring back a system of modern day debtors’ prisons to skirt around federal law that has prohibited debtors’ prisons since 1833. And it’s also in clear violation of the Equal Protection Clause of the 14th Amendment. And these agencies and their hired lawyers will send out a notice to someone who’s missed a payment. That person won’t show up to court. They get a notice of contempt and then it goes on their record and an arrest warrant is issued for their failure to appear in court. And this takes some pretty big cooperation or coordination with the prosecutors and the judge. One of the most alarming things is that there’s sort of a business relationship or a quid pro quo between collection agencies and the prosecutors.

So my question for you Michael is, as an economist and someone who is an expert on the history of debt, can you give us your reaction to this report?

Michael Hudson: Well I think much of the modern variable is the privatization of prisons. If you have a privatization of prisons you run them for profit. And what do you need in order to run the prison for profit? Well, you need inmates. So the first question is how are you going to get inmates. And that’s what brings us back to the issue of debt.

So far for the last 20 or 30 years most of the inmates have been racial minorities on drug deals…marijuana and other drug deals putting them in. But now that’s being phased out because they realize how destructive and racist it is. So they want an equal opportunity source of inmates and debt is a major source of the inmates to be employed to make a profit. Now in a way this goes back to the very origins of debt. I’m a little surprised that the title that the ACLU gave its report A Pound of Flesh. That obviously refers to Shylock’s loan–and that was a zero interest loan. And that misses the whole point. The whole point of debt is interest!

We’ve done a number of books recently through the Harvard group. One is on labor in the ancient world, where we look at the origins of how labor was mobilized in the Neolithic and the early Bronze Age in Egypt. And originally there were no workers for hire. There was no labor for hire… you couldn’t say well I’m a cultivator on the land and I need to make some money so I think I’ll go into town and get a job. The governments could mobilize labor to work on public building projects and that’s how the infrastructure was built up. How would individual merchants or even temples or palaces get labor? The only way of doing it was to make an interest bearing loan to a cultivator where the interest was paid in the form of labor and where the worker himself or his family member –his son, his daughter or a household servant– was pledged as collateral. The collateral was supposed post to work off the interest. The original way of getting labor for hire was to make a loan, and it was paid as interest, not to pay wages. Wages only developed maybe in the second millennium very largely on the basis of what labor had to be paid or supported when it was pledged for debt. So the idea of working off a debt by one’s labor and in the form of being a bondage pledged to one’s creditor is a very old idea.

What’s fairly new in history is that there are public institutions–public jails–that you’d be pledged for if you couldn’t pay a debt. Instead of being pledged to the creditor to work off the debt you would be–especially in England it was known from the medieval times through pretty recent times–they still have the debtors’ prisons open and if you couldn’t pay a debt you’d be consigned to a debtors’ prison. You’d have to pay for your own food and board and you’d be charged for the support. And the only way if you didn’t have any money to pay for your own food–or if you didn’t have friends who would bring by food for you–would be to stick your hands out of the grate for alms. Many people who were Almsgivers would go by the debtors’ prison supporting the debtors so they wouldn’t simply starve to death.

Paul Sliker: And Michael I want to talk a little bit about about the reasons for why debts have been written down over the course of history. So I mean, you know, according to your work from my perception, writing down debts obviously reduces the overall economy’s financial costs… so the perception of this long term macroeconomic dynamic explains why debtors’ prisons have been closed and things like bankruptcy laws have become increasingly humanitarian to enable debtors to make a fresh start and become economic actors and start spending into the economy again.

So what are the reasons why they’re sort of trying to bring back these arrangements particularly here in the U.S. today?

 
• Category: Economics • Tags: Financial Debt 
🔊 Listen RSS

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. The Organization for Economic Cooperation and Development, or known as the OECD, predicted on Tuesday that Trump’s tariffs on aluminum and steel imports could initiate a wave of protectionism and slow global economic growth. The tariffs have already spurred various countries to announce retaliatory measures. For example, the European Union plans to impose tariffs on Harley Davidsons and blue jeans. China has also promised to retaliate. Meanwhile, US companies that use steel and aluminum as raw materials for their production processes already report significant cost increases by as much as 40%.

Joining me now to analyze Trump’s tariffs is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri Kansas City. He’s the author of several books, the most recent among them is J is for Junk Economics. Michael, welcome back.

MICHAEL HUDSON: Great to be here again, Sharmini.

SHARMINI PERIES: Michael, what do you think of Trump’s tariffs on aluminum and steel, will they protect US manufacturing industries?

MICHAEL HUDSON: On the one hand, it’s supposed to protect and rebuild US manufacturing. But to really rebuild manufacturing, you need much more than a tariff against foreign goods. You need public infrastructure, and that’s not going to happen. You also need a different tax system, and that’s not going to happen. You need a more competitive economy; that’s not going to happen. So I think there’s not really any attempt to repeat how America built up manufacturing by what Henry Clay called the American System in the 19th century: infrastructure, public investment, tariffs and an industrial banking system.

We’re still in a Thatcherite economic policy, so I think what Trump really wants to do is use diplomatic leverage and economic threats against Canada and Mexico. I think what is on his mind is “We’ll let Mexico’s steel in, but it’ll have to build the wall and pay for it. If it doesn’t do that, then we’re going to punish it. For Canada, you’re going to have to surrender to all of our renegotiated NAFTA demands. You have to buy more American cars. You have to do whatever we tell you to, otherwise we’re going to create unemployment in your steel industry.”

That’s called national security somehow. But how can it really be national security if he’s willing to let in most of the aluminum and most of the steel if Canada and Mexico do things that have nothing to do with national security at all?

His policy is what we call an internal contradiction that doesn’t make sense. Canada has already announced that it is not going to renegotiate NAFTA and let the tariff be used as a threat. The Canadians are getting fed up with American pushing special interest favoritism against it. The Mexican president refused to come up a few weeks ago when it was obvious that Trump was going to make demands on Mexico that were so much against its national interest that they just canceled.

SHARMINI PERIES: So then why is US manufacturing, steel manufacturing in particular, predicting a 40% increase in prices?

MICHAEL HUDSON: It’s not just a prediction, Sharmini. The Financial Times just had a chart, and steel prices have already gone up 40%. Aluminum prices have already gone up one-third. If you look at the forward market, the prices are already up. We don’t have to say this is a dire prediction, it’s already happening.

SHARMINI PERIES: Michael, historically tariffs and protectionist policies have been used by countries as a strategy to industrialize. Can this strategy work again in light of the fact that US has been de-industrializing for several decades now?

MICHAEL HUDSON: It can’t work again, for a number of reasons. For one thing, from the very beginning of the 19th century, ever since Henry Clay put forth the American System in the 1840s of internal improvements, protective tariffs, and a national bank and financial policy to fund an industry, those three had to go together. In order to make industry competitive, you need not only tariffs to block imports, you need to support manufacturing by infrastructure investment, roads, canals, an educational system.

By the end of the 19th century, you had the Conservative Party in Britain, Benjamin Disraeli, saying “Health is everything. We have to have a health policy to promote our workforce.” In Germany, Bismarck said “We need a pension system. We need an industrial banking system to fund Germany. We need government spending on infrastructure, on railroads.” You had European, French, German and English investment in public spending. But Trump is a Thatcherite. You cannot have a Thatcherite economy, which is basically an asset-stripping economy, you cannot have a tax policy like Trump has, which is basically a financialization policy, and at the same time, have an industrial policy.

In fact, what Trump is saying is that he wants this to be the first salvo in a trade war against the whole world that has a mixed economy. He’s announced pretty much that within the World Trade Organization he’s going to promote blockages against any country where the government plays a role. For instance, if they tax companies that pollute with a pollution tax, any government that regulates, any government that provides subsidized services like subsidized education, subsidized healthcare, subsidized roads and railroads, this is somehow not a free market economy.

A free market economy is an austere economy sort of like Thatcherism. This aim is to dismantle industry, and Trump is essentially saying “Any economy that has an industrial strategy, we’re going to exclude from the American-centered way of reorganizing society.” Basically, this means that either you’re going to join the neoliberal Thatcherite block, or the rest of the world is going to be a state socialist or other socialist, or just plain mixed economy block.

But no other country outside of the neoliberal countries is going to say “Okay. We’re going to privatize our education just like America’s doing. We’re not going to give free education or subsidized roads. We’re not going to regulate industrial monopolies.” No country is going to go along with this attempt to essentially declare war on countries that are not “free enterprise economies,” meaning financialized economies.

SHARMINI PERIES: Michael, legally, trade policies are supposed to be coordinated through Congress. However, Trump is sidelining Congress and saying that he has the right to negotiate and to do his wheeling and dealing from The White House. We just saw a recent decision where he’s denied the $177 billion Broadcom takeover of Qualcomm that he considers this a national security threat. We don’t know whether it is or not but let’s take it for granted that it is. This kind of wheeling and dealing and sidelining Congress, does that concern you?

MICHAEL HUDSON: Yes, for two reasons. Number one, it’s the imperial presidency. It’s an attack on the American Constitution. You’re right, Congress is supposed to be in charge of trade policy, just as it’s supposed to be in charge of declaring war, but the president can say that there’s a national security emergency. The problem with this is that ever since the World Trade Organization was created anew in the 1990s, no country, not even the United States, has used the national security excuse to impose tariffs. George W. Bush thought about it, but then he was told that there was no persuasive basis for it.

 
• Category: Economics • Tags: Donald Trump, Free Trade 
🔊 Listen RSS

Trump’s series of threats this week was a one-two punch. First, he threatened to impose national security tariffs on steel and aluminum, primarily against Canada and Mexico (along with Korea and Japan). Then, he suggested an alternative: He would exempt these countries IF they agree to certain U.S. demands.

But these demands make so little economic sense that they should be viewed as an exercise in what academia used to call power politics. Or in Trump’s world, Us versus Them, a zero-sum game in which he has to show that America wins, they lose.

It won’t work. Trump’s diplomatic ploy with Mexico is to say that he’ll be willing to exempt them from the steel and aluminum tariffs if they agree to (1) build the wall that he promised to make them build, and (2) give other special favors to the United States. He can then go to American voters and say, “See, we won; Mexico lost.”

This is unlikely to elicit a Mexican surrender. Its president already has said that building a wall makes no sense, and cancelled the planned diplomatic visit to Washington last week. Giving in to Trump’s election promise to American voters (or more to the point, indulging in his own ego trip about the wall) would be political suicide. Trump would crow that he made Mexico bow to his bidding.

Matters aren’t much better in Canada. While some Pennsylvania and Ohio steel companies probably will try to make Trump look good by hiring back a few hundred workers if and when the tariffs are announced, Canada and other suppliers employees would have to be laid off. Canadian resentment already has been building up for decades, ever since the auto agreement of the 1960s and ‘70s that favored U.S. suppliers.

But the real economic problem comes from within the United States itself. If new steel workers are hired, they may be laid off in a few months. Most important is the bigger economy-wide picture: The Chamber of Commerce and other groups have calculated that the loss of jobs in steel- and aluminum-using industries will far outnumber the new hiring of steel and aluminum workers.

NPR on Wednesday had a maker of beer kegs explain that if the cost of steel goes up, he can’t afford to match the prices of foreign keg manufacturers who buy their raw materials cheaper – and do NOT have tariffs raised on higher manufactures.

There are many good arguments for protectionism. These arguments are in fact much better than the free-trade patter talk used to indoctrinate college economics students. Of all the branches of today’s mainstream economics, free-trade theory is the most unrealistic. If it were realistic, Britain, the United States and Germany never would have risen to world industrial power. (I review the fallacies of free-trade theory in Trade, Development and Foreign Debt.)

Economic history provides a long and successful pedigree of good arguments for protective tariffs. Britain created its empire by protectionism, stifling manufactures in the United States as long as it pursued free trade. After the Civil War ended, America built up its industry and agriculture by protectionism, as did Germany and France. (I discuss the strategy in America’s Protectionist Takeoff: 1815-1914.)

But as each of these nations became world leaders, they sought to pull up the ladder and prevent other countries from protecting their own industry and agriculture. So they changed to “free trade imperialism.” The aim of industrial leaders is to convince other countries not to regulate or plan their own markets, but to let the United States engineer an asymmetrical trade policy whose aim is to make other countries dependent on its food exports and monopoly exports, while opening their markets to U.S. companies.

Since the 1920s the protectionist economies that came to support free trade have rewritten history to white out how they got rich. The strategy of protectionism has been forgotten. Trump’s so-called protective tariffs against steel and aluminum are the antithesis to every principle of protectionism. That is why they are so self-destructive.

A really nationalistic trade strategy is to buy raw materials cheaply, and sell finished manufactured goods at a high value-added price.

The idea of industrial protectionism, from British free trade in the 19th century to U.S. trade strategy in the 20th century, was to obtain raw materials in the cheapest places – by making other countries compete to supply them – and protect your high-technology manufactures where the major capital investment, profits and monopoly rents are.

Trump is doing the reverse: He’s increasing the cost of steel and aluminum raw materials inputs. This will squeeze the profits of industrial companies using steel and aluminum – without protecting their markets.

In fact, other countries are now able to legally raise their tariffs to protect their highest-technology sectors that might be most threatened by U.S. exports. Harley Davidson motorcycles have been singled out. They also can block U.S. monopoly exports, such as bourbon and Levi blue jeans, or pharmaceuticals. Or, China can block whatever U.S. technology it decides it wants to compete with.

Trump’s tariff threats caused short-term aluminum prices to jump by 40 percent, and steel prices by about 33 percent. This raises the price of these materials to U.S. manufacturers, squeezing their profits. Foreign manufacturers will not have their material prices increased, and so can out-compete with U.S. steel- or aluminum-using rivals. The global oversupply in fact may make the price of steel and aluminum decline in foreign markets. So foreign industry will gain a cost advantage.

On top of that, foreign countries can legally raise tariffs in their own markets – for whatever industries they deem will best gain from this advantage.

Trump’s tariffs will not induce new capital investment in steel or aluminum

America’s logic behind protective tariffs after the Civil War ended the Southern free-trade policies was that tariff protection would create a price umbrella enabling U.S. manufacturers to invest in plant and equipment. Britain already had made these sunk costs, so the United States had to include the cost of capital in its revenue.

That’s how America built up its steel industry, chemical industry and other manufacturing industries.

But no steel or aluminum company is likely to invest more or hire more U.S. labor as a result of higher tariff revenues. These companies may raise their prices, but neither investment nor trickle-down effects are likely.

For one thing, aluminum is made out of electricity, and America is a high-cost producer. Alcan – America’s largest supplier – has a rip-off deal with Iceland, getting electricity almost for nothing.

For steel, it takes a long time to build a modern steel mill. No company will do this without an assured market. Trump’s tariff increases do not guarantee that.

America’s policy of breaking international agreements (we’re the “indispensable nation”)

Few companies, labor groups or banks in New York City have been willing to trust Mr. Trump in recent years. He should have called his book “The Art of BREAKING THE deal.” That’s how he made his money. He would sign an agreement with suppliers to his hotels or other buildings, and then offer only 80 cents (or less) on the dollar. He’d tell them, in effect: “You want to sue? That will cost you $50,000 to get into court, and then wait three or four years, by which time we’ll have made enough money to pay you on the cheap.”

 
• Category: Economics • Tags: Donald Trump, Free Trade 
🔊 Listen RSS

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. President Trump presented his infrastructure plan on Monday. The long-awaited plan proposes to spend $200 billion in federal funds over the next 10 years. This is to be complemented with another 1.3 trillion in spending from cities, states, and private investors for a total of 1.5 trillion. Another major component of the plan is to reduce red tape and approval processes so that projects are approved much faster.

Here’s what Trump had to say in presenting the plan.

DONALD TRUMP: This morning, I submitted legislative principles to Congress that will spur the biggest and boldest infrastructure investment in American history. The framework will generate an unprecedented $1.5 to $1.7-trillion investment in American infrastructure. We’re going to have a lot of public-private. And that way it gets done on time, on budget.

SHARMINI PERIES: Joining me now to analyze the infrastructure proposal is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri-Kansas City. He’s the author of several books, the most recent among them is J is for Junk Economics. Welcome back, Michael.

MICHAEL HUDSON: Good to be here, Sharmini.

SHARMINI PERIES: Michael, it sounds like you had your own infrastructure failure experience last night. Tell us about it.

MICHAEL HUDSON: Well, I was coming back from Washington from a week at Democracy Collaborative on a $400 round trip on the Acela Express, which is supposed to be the elite Amtrak. We left Washington at 3:00. At 5:30, just before we got to New York, the train stopped. The conductor said, we were told we can’t go any further, there is a track outage, no trains are running in and out of Penn Station. He suggested if anyone wanted to take the Jersey tubes across the station, they could do that. But there was no idea when things would be restored.

So, everybody waited about five minutes. Then about half the people got off and got into the New Jersey tube train standing shoulder the shoulder. But that wasn’t moving because they had an announcement there was no electricity going in and out of New York, you can’t get there. So, I had to spend, I shared a Uber car with someone who was sitting next to me to get into Manhattan. And I must say the trip was so jiggly that it was very hard to read or to write along the whole route.

And this whole idea that somehow the infrastructure plan can develop a China-style, high-speed transit is just a fantasy because in order to have high-speed transit, anything fast you need a dedicated roadway. Otherwise, well, while I was in Washington, the Republicans, as you know, were going to their meeting down south, and their Amtrak train crashed into a garbage truck. You can imagine that a train track that goes through crossing gate crossings wouldn’t possibly work for high-speed rail.

And the cost would, I think, be closer to $20 trillion just to buy the land rights along the current railroad or other railroad because the land is all built up in America. And there’s a law of eminent domain and there have been so many lawsuits that it’s completely infeasible to rebuild the railroads.

SHARMINI PERIES: So, Michael, let’s go over some of the key points in the plan, which includes deregulation and the so-called private-public partnerships you speak of and of course incentives to states and cities from matching funds. Let’s take up first the issue of deregulation. What effect will this have on communities?

MICHAEL HUDSON: Well, many states and localities have blocks to prevent privatization, and they want to prevent what’s happening to them from what happened in Indiana with the toll road. They say, “Wait a minute. Privatization is going to be a giveaway. It’s going to triple the costs of providing infrastructure services. It’s going to price our cities and states out of the market if we try to go along with this plan.” And Trump says, “Well, in order to qualify for public funding, you have to abolish these restrictions on private funding.”

You have to let yourself be robbed blind by the hedge funds and Wall Street. That’s basically what he said. He said just as the hedge funds robbed Chicago blind on the parking meters getting a huge rate of return that probably will force Mayor Rahm out of office, you have to let other privatizers come in and vastly increase your cost of living.

So, the infrastructure is going to really destroy America’s competitiveness instead of contributing to it. It’s going to vastly raise the price of the cost of living rather than providing more resources and making things easier for the population.

SHARMINI PERIES: Michael, the American Society of Civil Engineers agrees with you that this is inadequate in terms of funding, that the Trump plan is just not sufficient. In fact, it needs, they say, just to deal with the backlog a $4.6-trillion investment by 2025 and Trump’s plan doesn’t even come close. What do you make of this?

MICHAEL HUDSON: Well, to begin with, Trump’s plan would triple the cost of what the engineers say to $22 trillion and the reason is that it’s a Thatcherite privatization plan. Trump’s plan reverses the last 150 years of public infrastructure. And in fact, it’s the biggest attack on industrial capitalism in over 100 years, more serious than a socialist attack.

Now, America’s first professor of economics at the first business school, Simon Patten, said public infrastructure is a fourth factor of production, but unlike labor, land, and capital, the role of public infrastructure is not to make a profit. It’s to provide public services that are basic for the economy’s living standards and capacity to produce at a subsidized rate. So, America got rich and came to dominate the world industrial economy by subsidizing all of the basic costs. Low-cost roads, low-cost infrastructure. The government bore these costs so that, in effect, public infrastructure subsidizes the economy to lower the cost of production.

Trump’s plan is to vastly increase it because he forces all of this into the marketplace. Instead of offering, say, roads at the cost of production, he’d actually triple the cost of production by insisting that it be privately financed, probably by hedge funds and by bank credit that would add the interest charges, the capital gains charges, the management fees, the oversight charges and the fines for criminal fraud that goes with it by factoring all these prices into the cost.

Look at the, for instance, the Indiana Toll Road. That was done by a Trump-style private and public infrastructure and the toll roads are so high to try to pay off the hedge fund backers that people don’t use them. They go on the free, slower internal roads. And that sort of is a horror story that anyone who’s thinking of Trump’s plan should be there.

Trump mentions, for instance, water privatization. All you have to do is look at Thatcher’s water privatization in Britain, which has vastly increased the price of water. The water companies have been bought out by hedge funds, registered abroad by foreign owners that are opaque and it’s become probably the most unpopular privatization plan of all. So that part’s a disaster.

SHARMINI PERIES: Michael, another part of the plan is what is known as value capture financing in order to raise more funds. First of all, what is value capture financing? And what are its implications for states and communities that apply this principle?

 
• Category: Economics • Tags: Donald Trump, Privatization 
🔊 Listen RSS

For many decades the Federal Reserve has rigged the bond market by its purchases. And for about a century, central banks have set interest rates (mainly to stabilize their currency’s exchange rate) with collateral effects on securities prices. It appears that in May 2010, August 2015, January/February 2016, and currently in February 2018 the Fed is rigging the stock market by purchasing S&P equity index futures in order to arrest stock market declines driven by fundamentals, and to push prices back up in keeping with a decade of money creation.

No one should find this a surprising suggestion. The Bank of Japan has a long tradition of propping up the Japanese equity market with large purchases of equities. The European Central Bank purchases corporate as well as government bonds. In 1989 Fed governor Robert Heller said that as the Fed already rigs the bond market with purchases, the Fed can also rig the stock market to stop price declines. That is the reason the Plunge Protection Team (PPT) was created in 1987.

Looking at the chart of futures activity on the E-mini S&P 500, we see an uptick in activity on February 2 when the market dropped, with higher increases in future activity last Monday and Tuesday placing Tuesday’s futures activity at about four times the daily average of the previous month. Futures activity last Wednesday and Thursday remained above the average daily activity of the previous month, and Friday’s activity was about three times the previous month’s daily average. The result of this futures activity was to send the market up, because the futures activity was purchases, not sales. http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_quotes_volume_voi.html

Who would be purchasing S&P equity futures when the market is collapsing from under them? The most likely answer we can come up with is that the Fed is acting for the PPT. The Fed can actually stop a market decline without purchasing a single futures contract. All that has to happen is that a trader recognized as operating for the Fed or PPT enters a futures bid just below the current price. The traders see the bid as the Fed establishing a floor below which it will not let the market fall. Expecting continuing declines to make the bid effective, they front-run the bid, and the hedge funds algorithms pick it up, and up goes the market.

Is there another explanation for the shift in the market from decline to rise? Are retail investors purchasing dips? Not according to this report in Bloomberg — https://www.bloomberg.com/news/articles/2018-02-12/record-23-billion-flees-world-s-largest-etf-as-panic-reigns — that last week a record $23.6 billion was removed from the world’s largest ETF, the SPDR S& 500 index fund. Here we see retail investors abandoning the market.

If central banks can produce zero interest rates simultaneously with a massive increase in indebtedness, why can’t they keep equity prices far above the values supported by fundamentals? As central banks have learned that they can rig financial asset prices to the delight of everyone in the market, in what sense does capitalism, free markets, and price discovery exist? Have we entered a new kind of economic system?

 
• Category: Economics • Tags: Federal Reserve, Wall Street 
🔊 Listen RSS

Introduction

The idea of annulling debts nowadays seems so unthinkable that most economists and many theologians doubt whether the Jubilee Year could have been applied in practice, and indeed on a regular basis. A widespread impression is that the Mosaic debt jubilee was a utopian ideal. However, Assyriologists have traced it to a long tradition of Near Eastern proclamations. That tradition is documented as soon as written inscriptions have been found – in Sumer, starting in the mid-third millennium BC.

Instead of causing economic crises, these debt jubilees preserved stability in nearly all Near Eastern societies. Economic polarization, bondage and collapse occurred when such clean slates stopped being proclaimed.

(2) What were Debt Jubilees?

Debt jubilees occurred on a regular basis in the ancient Near East from 2500 BC in Sumer to 1600 BC in Babylonia and its neighbors, and then in Assyria in the first millennium BC. It was normal for new rulers to proclaim these edicts upon taking the throne, in the aftermath of war, or upon the building or renovating a temple. Judaism took the practice out of the hands of kings and placed it at the center of Mosaic Law.[1]

By Babylonian times these debt amnesties contained the three elements that Judaism later adopted in its Jubilee Year of Leviticus 25. The first element was to cancel agrarian debts owed by the citizenry at large. (Mercantile debts among businessmen were left in place.)

A second element of these debt amnesties was to liberate bondservants – the debtor’s wife, daughters or sons who had been pledged to creditors. They were allowed to return freely to the debtor’s home. (Slave girls that had been pledged for debt also were returned to the debtors’ households.) Royal debt jubilees thus freed society from debt bondage, but did not liberate slaves.

A third element of these debt jubilees (subsequently adopted into Mosaic law) was to return the land or crop rights that debtors had pledged to creditors. This enabled families to resume their self-support on the land and pay taxes, serve in the military, and provide corvée labor on public works.

Commercial “silver” debts among traders and other entrepreneurs were not subject to these debt jubilees. Rulers recognized that productive business loans provide resources for the borrower to pay back with interest, in contrast to consumer debt. This was the contrast that medieval Schoolmen later would draw between interest and usury.

Most non-business debts were owed to the palace or its temples for taxes, rents and fees, along with beer to the public ale houses and other payments to these institutions. Rulers initially were cancelling debts owed mainly to themselves and their officials. This was not a utopian act, but was quite practical from the vantage point of restoring economic and military stability. Recognizing that a backlog of debts had accrued that could not be paid out of current production, rulers gave priority to preserving an economy in which citizens could provide for their basic needs on their own land while paying taxes, performing their corvée labor duties and serving in the army.

Most personal debts were not the result of actual loans, but were accruals of unpaid agrarian fees, taxes and kindred obligations to royal collectors or temple officials. Rulers were aware that these debts tended to build up beyond the system’s ability to pay. That is why they cancelled “barley” debts in times of crop failure, and typically in the aftermath of war. Even in the normal course of economic life, social balance required writing off debt arrears to the palace, temples or other creditors so as to maintain a free population of families able to provide for their own basic needs.

As interest-bearing credit became privatized throughout the Near Eastern economies, personal debts owed to local headmen, merchants and creditors also were cancelled. Failure to write down agrarian debts would have enabled officials and, in due course, private creditors, merchants or local headmen to keep debtors in bondage and their land’s crop surplus for themselves. Crops paid to creditors were not available to be paid to the palace or other civic authorities as taxes, while labor obliged to work off debts to creditors was not available to provide corvée service or serve in the army. Creditor claims thus set the wealthiest and most ambitious families on a collision course with the palace, along the lines that later occurred in classical Greece and Rome. In addition to preserving economic solvency for the population, rulers thus found debt cancellation to be a way to prevent a financial oligarchy from emerging to rival the policy aims of kings.

Cancelling debts owed to wealthy local headmen limited their ability to amass power for themselves. Private creditors therefore sought to evade these debt jubilees. But surviving legal records show that royal proclamations were, indeed, enforced. Through Hammurabi’s dynasty these “andurarum acts” became increasingly detailed so as to close loopholes and prevent ploys that creditors tried to use to gain control of labor, land and its crop surplus.

Fast-forward to today’s world. The most recent financial clean slate was the 1948 Allied Currency Reform of Germany. Basic business debts were left in place, along with employer debts to employees. The population was allowed to keep minimum working balances. But the residue of debts was cancelled, on the logic that most were owed to former Nazis. Applauded as a “free market,” Germany’s economy was freed from the postwar debt legacy that had shackled it after World War I. The aftermath in 1948 left Germany’s economy effectively debt-free, paving the way for the Economic Miracle that followed.

(3) Social purpose of Debt Jubilees

The common policy denominator spanning Bronze Age Mesopotamia and the Byzantine Empire in the 9th and 10th centuries was the conflict between rulers acting to restore land to smallholders so as to maintain royal tax revenue and a land-tenured military force, and powerful families seeking to deny its usufruct to the palace. Rulers sought to check the economic power of wealthy creditors, military leaders or local administrators from concentrating land in their own hands and taking the crop surplus for themselves at the expense of the tax collector.

By clearing the slate of personal agrarian debts that had built up during the crop year, these royal proclamations preserved a land-tenured citizenry free from bondage. The effect was to restore balance and sustain economic growth by preventing widespread insolvency.

Babylonian scribes were taught the basic mathematical principle of compound interest, thereby increasing the volume of debt exponentially, much faster than the rural economy’s ability to pay,[2] an argument recently revived by Thomas Piketty, in Capital in the Twenty-First Century, (2014). That is the basic dynamic of debt: to accrue and intrude increasingly into the economy, absorbing the surplus and transferring land and even the personal liberty of debtors to creditors.

Debt jubilees were designed to make such losses of liberty only temporary. The Mosaic injunction (Leviticus 25), “Proclaim liberty throughout the land,” is inscribed on America’s Liberty Bell. That is a translation of Hebrew deror, the debt Jubilee, cognate to Akkadian andurarum. The liberty in question originally was from debt peonage.
To insist that all debts must be paid, regardless of whether this may bankrupt debtors and strip away their land and means of livelihood, stands at odds with the many centuries of Near Eastern clean slates. Their success stands at odds with the assumption that creditor interests should always take priority over those of the indebted economy at large.

 
• Category: Economics, History • Tags: Consumer Debt, Debt, Financial Debt 
Outlook for the 1% (and the Democratic Party split), 2018
🔊 Listen RSS

Low interest rates, “quantitative easing,” and the mitigation of antitrust laws led to more mergers and acquisitions in 2017, but that’s only going to fuel greater wealth inequality and tighten the corporate grip on the political system, explains economist Michael Hudson.

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert coming to you from Quito, Ecuador. The year 2017 is turning out to be another banner year for the centralization of capital, that is, according to an article in the Financial Times this week, “Global mergers and acquisitions exceeds three trillion dollars for the fourth straight year.” The article goes on to point out the following: Faced with the prospect of Amazon’s entry into the pharmacy business, the US’s biggest drugstore chain, CVS Health, agreed to acquire health insurer, Aetna for about $69 billion. Encroachment by Facebook and Netflix into sports, media and film production led Rupert Murdoch to sell most of his 21st Century Fox empire to Disney in a $66 billion deal.

The US remained the most active region for mergers and acquisitions with $1.4 trillion in deals. The numbers of US deals struck in 2017 combined climbed above 12,400 for a record figure. The largest deal in 2017 has yet to be resolved as Broadcom pursues a hostile $130 billion bid for rival chip maker, Qualcomm. Joining me to analyze the causes and consequences of this massive centralization of capital in 2017 is Michael Hudson. Michael is a distinguished Research Professor of Economics at the University of Missouri/Kansas City. He’s author of several books. The most recent among them is J is for Junk Economics. Welcome back, Michael.

MICHAEL HUDSON: Good to be back here.

GREGORY WILPERT: So, what at heart is causing all of this frenetic activity for companies to gobble up one another and thereby creating and ever greater centralization of capital?

MICHAEL HUDSON: It’s part of the neoliberal strategy to inflate the wealth of the 1%, basically by inflating the stock market and the real estate and the bond prices. Central banks are pursuing quantitative easing that offers money at almost zero interest rates. At the same time, you have the tax system’s giveaways to the FIRE sector, capped by deregulatory policies that are encouraging mergers and acquisitions by dismantling the antitrust legislation that has been in place since the New Deal.

The tax giveaways in the Republican tax law two weeks ago enables companies that have kept hundreds of billions of their earnings tax-free in offshore banking enclaves and tax avoidance centers to now shift them to their head office accounts. (Most were kept in U.S. dollars all along, but in the name of “false flag of convenience” companies.) All this tax-avoidance money that has been accumulating since 2004 can now be replaced in the name of the head companies instead of their just-pretend foreign affiliates in these tax avoidance centers.

So the companies are going to be very cash-rich. They’ve anticipated most of this and you can look at these mergers and acquisitions as part of an arbitrage operation. If a hedge fund, a bank or large corporation can borrow at 1%, they can buy stocks that are yielding 10% or even more – or, for that matter, even less. They can get an arbitrage difference between the 1% they pay and the stocks whose dividends pay a higher rate of return, 5, 6, 7, 8, or 9%.

When you buy enough stocks to give you control of a target company, that’s called mergers and acquisitions or corporate raiding. Hedge funds have been doing this, as well as corporate financial managers. With borrowed money you can take over or raid a foreign company too. So, you’re having a monopolistic consolidation process that’s pushed up the market, because in order to buy a company or arrange a merger, you have to offer more than the going stock-market price. You have to convince existing holders of a stock to sell out to you by paying them more than they’d otherwise get.

But suppose you’re a company that doesn’t want to be bought out. Suppose you’re a corporation trying to defend yourself from this merger and acquisition movement. In that case, you do is what they’ve done since the 1980s: You take a poison pill, using your earnings to buy your own stock. Some companies even borrow to buy up their own stock, or they simply increase their dividend payouts so much that it pushes up the stock and leaves nothing in the corporate treasury to be raided by these raiders.

The upshot is that on the part of attackers and defenders alike, you have a process that bids up stock prices. Since the vast majority of stocks are owned by the 1%, and certainly by the 10%, the effect is to increase the wealth of the 1 to 10% in comparison to the wages the bottom 99% get. That basically is the financial and fiscal war in a nutshell.

GREGORY WILPERT: Just a quick question. You’re saying that low interest rates and quantitative easing are among the key factors here. But aren’t those policies also good for the bottom 90%? After all, it keeps interest rates low for ordinary borrowers, such as people who have mortgages or credit cards to pay off, and also helps keep unemployment low. What would be the alternatives if you don’t want to cause unemployment to go up by raising interest rates?

MICHAEL HUDSON: Why on earth would the 1% want to help the 99%? No, it hasn’t helped them at all.

If you’re a member of the 99%, you don’t get to borrow at 1%. Banks and hedge funds get to borrow at 1%. If you’re a credit card customer, you’re paying the same credit card rate as you’re always paying. And if you miss a payment, even to a utility company, your rate still goes up to 29% or whatever. And if the bank won’t lend to you, you still have to pay 50% or 100% or 500% to the payday loan people backed by JPMorgan Chase and other Wall Street banks as major customers. So no, the 99% have not benefited from quantitative easing. Quantitative easing is to benefit the financial sector, which means basically the 1%, not benefit the rest of the economy.

We’re living in a world that’s divided into two economies: the economy of the 1%, and the economy of the bottom 99%. I guess you could be more “centrist” and say the top 10% versus the bottom 90%. But there’s definitely a stratification at work here.

GREGORY WILPERT: The Financial Times quotes analysts who say that they expect mergers and acquisitions to accelerate even more in 2018. You touched on this when you mentioned the Republican tax reform. So would you basically agree that M&A will accelerate? What are some of the underlying causes for a further continuation of this process of centralization?

MICHAEL HUDSON: There are two underlying causes. For one thing, now that the Republicans are in power in the United States – and I don’t think it would matter if Hillary’s Democrats were in power – they’re not enforcing the antitrust regulations. What deterred a lot of mergers and acquisitions in the past was the threat of creating a monopoly, so the antitrust laws prevented you. But now they’re saying, you can make a monopoly, but make sure the 99% pay through the nose. You can make a monopoly and charge the 99% higher monopolized prices.

So, what you’re having is a rentier revolution. The aim of the 1% isn’t to make money by profits by employing labor. It’s to make economic rent. It’s to make monopoly rent, land rent and financial rent.

For instance, if you end internet neutrality and permit mergers of the big information technology corporations, that’s a form of rent seeking. It’s part of today’s political revolution.

 
• Category: Economics • Tags: Neoliberalism, Wall Street 
Michael Hudson
About Michael Hudson

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of The Bubble and Beyond (2012), Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).

ISLET engages in research regarding domestic and international finance, national income and balance-sheet accounting with regard to real estate, and the economic history of the ancient Near East.

Michael acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law.