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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.

ORDER IT NOW

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.

So this is a self-destructive move by China. Property is worth whatever a bank will lend, and foreign banks are going to be as aggressive as they were in America. What the Chinese don’t get is that the business plan of U.S. banks is fraud. Bill Black showed that in his analysis of the 2008 crisis. The junk-mortgage collapse was basically a fraud crisis. It may be repeated in China. In any case, it is a Trojan horse to financially bid up the price of housing, and maybe even education and anything else the banks can make loans on. That would make debt service so high that Chinese workers won’t be able to be hired to produce goods that are competitive internationally.

Paul Sliker: I wanted to ask you specifically about the issue of debt in China. Their private debt bubble is basically the biggest in the history of capitalism. I think the 2017 numbers had it at about 220% of GDP. So what do you think is going to happen there with the broader economy?

Michael Hudson: Under current conditions nothing. It’s not a problem. Here’s why: The debts are owed to government banks. A government can do what the U.S. can’t do. The government can forgive debts, at least those that are owed to itself, without creating a political backlash. If a viable corporation has run up too much debt, the government can forgive it. This is better than letting the debt close down a factory or force it be sold to a predatory asset management firm as occurs in the United States. That is the advantage of having public credit and why credit should be public. That’s how it was in Babylonia. Rulers were able to cancel debts all the time in the 3rd millennium and 2nd millennium BC, because most debts were owed to the palace or the temples. Rulers were cancelling debts owed to themselves.

China can cancel business debt owed to itself. It can proclaim a clean slate. It can minimize debt service to whatever it chooses. But imagine if Chase Manhattan and Goldman Sachs are let in. It would be much harder for the government to raise real estate taxes leading to defaults on the banks. It could save the occupants by making new loans to those who default – based on lower land prices.

Well, you can imagine the international furor that would erupt. Trump would threaten to atom bomb Peking and Shanghai to save his constituency. His constituency and that of the Democrats are the same: Wall Street and the One Percent. So China may lose its ability to write down debts if it lets in foreign banks. That was what the big political discussion was when did discuss economics at the Chinese Academy of Sciences in Beijing and in Tianjin, where we’re going to have a conference on Fictitious Capital in October.

Paul Sliker: Michael I know you briefly explained this a bit earlier in our conversation, but when we were emailing today about doing this segment, you tipped me off to a new book by the London-based economist Josh Ryan-Collins. He essentially shows that unaffordable housing is not a part of nature. That’s counter to the way most people believe that housing actually works. Can you explain that in more detail?

Michael Hudson: Yes it’s natural for people intuitively to think that housing prices are going up because people have more money to spend, or that the population is going up. But housing prices are going up even where population isn’t, like in London or Australia. The reason prices are going up is that banks are making more and more reckless loans. They’ve lowered the down payments. They’ve stretched out the mortgages to interest-only mortgages (no amortization payments!) and they’ve basically convinced government to pick up most of the costs.

ORDER IT NOW

Once you’re able to packagemortgages and sell them to somebody else, the bank doesn’t care whether or not the buyers can pay. So you can have someone without a job, without an income, or with no assets at all (the NINJA borrowers that were infamous in 2008). If you lend them a million dollars to buy an apartment, they’re can live there for a few months and then default if they can borrow 100 percent of the mortgage, as they could in 2008. But that’s going to bid up the price of everybody’s apartments.

Something like that has has happened in London. It’s happened throughout Europe. It’s happened in New York. It’s happened throughout most of the United States. The price of housing is rising, but not because people are more popular or prosperous. They’re paying more and more of their paycheck for housing. And as we’ve discussed before, that forces them to cut back on their other consumer spending, so that they don’t have enough money to spend on goods and services.

That’s why now you’re finding whole buildings like 666 Fifth Avenue that Trump’s son-in-law Kushner owns. It’s reported to be 40 percent empty. He had to go to Qatar, right near Saudi Arabia, and promised to make US foreign policy serve it if its rulers would give him a loan to bail out his building. So you’re having New York commercial real estate being bailed out by Trump’s foreign policy.

And also, you’re having business rents in New York going down because there’s no one to buy stuff in the stores, because they have to spend so much money on the apartments they rent just to live in New York City or its environs.

Paul Sliker: This is a good transition to what I want to ask you about millennials and the U.S. housing market. A good chunk of our listeners are in the millennial generation. Some of those people have reached out to us, knowing that we do these weekly episodes with you and have wanted to get your take on the state of the U.S. housing market. I know you just shared a little bit about it.

I presume they want that information because some of them are straddling that line. Maybe they make just enough to afford housing, but it’s still a pretty daunting investment. A lot of younger adults are still scared about what they saw happen, maybe to their families, neighbors or communities during 2007-2008. By the numbers millennials are buying less than older generations – and lots are rejecting the notion that they need to buy a home.

There’s still a profound cultural impression here in America that owning a home is a good investment, the ultimate symbol of prosperity, success and tangible proof that you’re living the so-called American Dream. But some people who have reached out to us have been so forthright to ask point-blank: “Can you ask Michael Hudson whether it’s worth it or a safe investment for me to get into the housing market?” Of course, there’s no blanket answer here. People’s personal finances, where they’re looking to buy the home, how much other types of debt they might be in, all would play a role in assessing that.

But excluding the trust fund babies – who are wealthy enough to buy a house without batting an eyelash – what could you say about the U.S. housing market right now to someone who is young and who is genuinely torn on whether to take out a mortgage on a house, to inform them on how to make that decision a little bit better?

Michael Hudson: Well, first of all as you just hinted, there are two classes millennials now. One class of millennials inherits houses from their parents, or have a trust fund or the parents have paid for their education in full and have helped them get a house or have given them their own house. Those are the millennials that have housing. But I don’t see how the rest of the millennials can get housing, especially if they have a student debt, because the banks are now subject to higher lending standards. These higher standards mean that if you already have to pay 15 to 20 percent of your income for your student loan or other bank debt, you’re not going to have the 40 percent of your income left to spend on the mortgage. That is what it takes now that we just raised interest rates last week to 5.3%. Banks are not going to lend you as much money as they used to. New buyers now have to actually have to make a substantial down payment, and pay off the mortgage in a shorter time. So unless the millennials can get their parents to co-sign, it’s not going to be practical for them to buy a home.

It’s not a generation gap as such, because rich millennials who have parents helping them are in one class, and self-supporting millennials (which used to be just about everybody in their late 20s) can’t afford to be self-supporting anymore, even in their 30s. If you are self-supporting and do have a job, you certainly can’t ask for a raise, because you could be escorted out quickly. And you can’t go on strike because then you would miss the mortgage payment and lose your house. So you’re painted into a corner.

So sure, housing is a good investment if you have millionaire parents. But if you don’t have millionaire parents you’re stuck. Don’t worry if you can’t get a bank loan. The market has really become extreme.

The problem is, how to rent in New York City, where the average rent is $4,500 a month. They’d have to move out to the suburbs with a roommate. So here you have the problem that China solved: the student debt problem. Basically the US government should abolish the student debt. That would enable this class of millennials to use their money to make a down payment for an apartment and actually get a place to live, like everybody for the last hundred years has been able to do.

ORDER IT NOW

I don’t think people realize the radical damage that Obama did to the economy by bailing out the banks and not rolling back the terms of bank credit to keep housing affordable. Obama basically said, “Make housing unaffordable. Make as many junk loans as you want. Don’t worry, because I’ll stand between you and the mob with the pitchforks.” He didn’t jail any bankers. He didn’t regulate them. He created the situation that Trump inherited. Trump has just pushed it to a further degree, with full Democratic support. The Democratic donor class loves Trump. They want him to be reelected because he’s cutting their taxes, he’s deregulating their banks, and he’s essentially deregulated fraud!

This leaves the millennials with a problem. How can they cope with a situation where they don’t have anyone representing their interests either in Congress where it’s really the same party now, or with an opportunity to earn enough to get a home mortgage? It’s very hard to earn the money that you need to buy a house anymore. There has to be a god in a machine – Deus Ex Machina – meaning rich parents or a rich uncle.

Paul Sliker: So maybe a better investment for millennials would be to organize outside the banks.

Michael Hudson: Well, here’s the other problem: Congress last week deregulated community banks. I’ve worked as a consultant for community banks in Chicago. Their strategy is to make more reckless loans than the commercial banks. So deregulating them enables them to lend at even higher debt to equity ratios. They can set lower down payments, and help bid up the price of real estate even more. So the congressional rewriting of bank regulations last week makes it much harder for millennials to get an apartment, because it will inflate the price of housing with yet more bank credit.

Paul Sliker: fascinating. Well Michael, like every week, I wish we had more time to talk. But I did want to let everyone know who is in the Greater New York area that this coming Saturday, June 2nd, 2pm at The Left Forum in Manhattan at John Jay College, I’ll be moderating a panel—Negative Economics – its Pedigree and History—between Michael Hudson and Michael Perelman about the long pedigree of anti-labor and anti-reform junk economics from the 18th-century classical economists to the Austrians and modern mainstream. You can find more info about that, on LeftForum.org

But Michael Hudson, thanks again for joining us on this week’s edition of Left Out’s “The Hudson Report.”

Michael Hudson: It’s good to be here with you ,and I’m glad we had a chance to talk about real estate for a change.

Paul Sliker is a writer, media consultant, and the co-host of Left Out—a podcast that creates in-depth conversations with the most interesting political thinkers, heterodox economists, and organizers on the Left. Follow him on Twitter: @psliker

 
• Category: Economics • Tags: China, Housing 
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  1. Deutsche Bank Market Research says a two bedroom Hong Kong apartment costs $3,700, Paris costs $2,450, Chicago,$1,421. Shanghai? $1,343.

    One reason real estate in Shanghai and China generally is cheap is that ownership is a human right that’s even senior in importance to stirring up trouble by advocating things that aren’t on the national agenda right now.

    China has the highest home ownership on earth and ownership is highest at the lowest end of the income spectrum: 97% of poor Chinese own their homes free and clear.

    That does NOT mean that new university graduates in Shanghai will be able to buy a home right away, but it does mean that they can afford to rent one.

    What else is new?

    • Replies: @Anatoly Karlin
  2. Biff says:

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

    It’s also an Asian thing. Many small businesses here in Asia provide housing for employees as well.

  3. This Michael Hudson guy really sucks as an economist and as a writer. It is really something to have a short article where the author studiously attempts to make a cogent argument in one direction, only to come back and fiercely defend the opposite view a few paragraphs later.

    The reason prices are going up is that banks are making more and more reckless loans. They’ve lowered the down payments. They’ve stretched out the mortgages to interest-only mortgages (no amortization payments!) and they’ve basically convinced government to pick up most of the costs.

    But I don’t see how the rest of the millennials can get housing, especially if they have a student debt, because the banks are now subject to higher lending standards. These higher standards mean that if you already have to pay 15 to 20 percent of your income for your student loan or other bank debt, you’re not going to have the 40 percent of your income left to spend on the mortgage. That is what it takes now that we just raised interest rates last week to 5.3%. Banks are not going to lend you as much money as they used to. New buyers now have to actually have to make a substantial down payment, and pay off the mortgage in a shorter time. So unless the millennials can get their parents to co-sign, it’s not going to be practical for them to buy a home.

    Jeez! Which is it Mr. Hudson? Are the banks giving out loans with loose criteria causing inflation in housing prices or are the spigots closed to all but the most qualified? I don’t understand how you can have it both ways. I believe you are basically a wind bag seeking attention sir, certainly not a qualified economist. Your work is absolute garbage. Your welcome.

    • Agree: Travis
    • Replies: @Saxon
    , @Iris
    , @gsjackson
  4. Anon[425] • Disclaimer says:

    Sayonara Japan. It’s Cuckpan now. Sumo taken over by Mongols. Track taken over by blacks. Japanese wombs taken over by foreigners. And Japanese work force to be taken by Gaijin.

    http://news.abs-cbn.com/business/05/30/18/japan-to-welcome-500000-foreign-workers-to-help-plug-labor-shortage

  5. Saxon says:
    @Linda Green

    He’s also claiming that the population of places like London or Australia aren’t going up. Spoilers: They are, all driven by mass immigration. That’s why the costs of places like London, Sydney, Vancouver etc. are sky-high. The demand has been artificially driven up by the mass immigration and is part of a population ponzi scheme in the real estate industry.

  6. If bank credit is easier, why can’t more people buy homes?

    In recent decades banks have made “easier” credit – lower down payments (from the 20 to 30 percent required until the 1980s, to 3 percent or even zero down payments), lower amortization (even zero-amortization interest-only loans, compared to 30-year self-amortizing loans in until the 1980s), and government-guaranteed loans to home buyers that absorb 43 percent of their income (vs. the standard 25 percent until the 1980s).

    So if it’s easier to borrow money to buy a home, why can’t more people afford to buy? Why is the proportion of national homeownership dropped by 10 percent since 2008, from about 68 percent to 62 percent of the U.S. population?

    The answer is that the mortgage payment to buy homes tends to approximate the property’s rental value. And rents are soaring – largely because of the loss of homeownership and the rise of hedge funds and other absentee owners buying up some of the 10 million homes that were foreclosed in the vast “Obama expropriations” of low-income and minority homeowners, and an influx of institutional and foreign financial investment in residential and commercial real estate.

    So the access price of housing has is absorbing a sharply rising proportion of the income of homebuyers. And as banks find that new mortgage applicants already are owing a sharply rising proportion of their income to carry (I won’t even say “pay off”) their student debt, credit-card debt, automobile debt and retail store debt, they fail to qualify even for the banks’ looser lending standards.

    • Replies: @Catiline
  7. Yee says:

    China is trying to establish a US-like economy but with the banks, MIC, oil companies and other important basic industries state owned or at least dominated.

    Foreign banks are not a problem, as long as you have good regulations in finance sector. There’re already foreign banks in China, but they only have a market share of 1.26%. Blackmarket financing is a bigger problem for now.

    Of course there’s no “free-market” anywhere in the world. It’s always manipulated, just a matter of by whom. By Rothschild, Morgan, Rockerfeller etc., it’s the US; by state, it’s China.

    Students learning “free-market” don’t matter, as long as state owned corporations aren’t privatized. With the example of Soviet Union, privatization is fiercely oppossed by public opinion.

    People outside of China might not know this, but media and academies have far less influence in China than in the West. I think we can thank Mao’s culture revolution for this. The US has been buying off media and academy personnels for a long time now, but I guess it’s not working as well as expected.

  8. jim jones says:

    Millennial Home Buyer:

  9. Catiline says:
    @Michael Hudson

    Mr. Hudson, what do you think of a national property tax as a way of addressing all of this?

    • Replies: @Anon
    , @jacques sheete
  10. Hudson’s right that property values (like education costs) are out of hand but I don’t find his explanations convincing. Maybe lack of competition (too few banks) and rampant speculation?

  11. The focus on the large increase in housing prices in cities such as New York and London, without any mention of the extremely large influx of foreigners into these cities, clearly shows that the author is either economically illiterate and/or is supportive of this influx.

    • Agree: Mishra
    • Replies: @anon
  12. ltlee says:

    “…As Paul Kennedy has explained, complex finances made Britain more
    rather than less vulnerable to by the turn of the twentieth century. …

    Harvard economic historian David Landes saw the first steps toward
    post-industrialism as having been taken even earlier:

    By the late 1700s, most wealthy Dutches were big land owners, high state
    officials or rentiers…. the United Provinces had abdicated as world leader in
    trade and manufacture and went into a postindustrialism. Italy had gone that
    way before. In Venice, for example, the wool craft had sunk under the
    burden of taxes…” (AMERICAN THEOCRACY by Kevin Phillips)

    Trade and manufacturing are the means of economic development. The examples above provided by Kevin Phillips went through industralization. The society as a whole became wealthier. Big banking sector then signaled post-industralism. Complex finance made a country more vulnerable to market disturbance. Hence their decline.

    What if a developing economy has a sudden influx of foreign banks and foreign loan ( such as latin America nation during the second half of the last century) before full industralization? Will they not go post-industralism prematurely. If so, an influx of foreign bank is the smoking gun of the “Middle Income Trap.

  13. TG says:

    Interesting and intelligent as always.

    But one major mistake. “But housing prices are going up even where population isn’t, like in London or Australia.” FALSE! Populations are booming in London and Australia, because of those governments abusive cheap-labor immigration policies. It’s right there in wikipedia.

    Yes Virginia, there is such a thing as supply and demand. Indeed I agree with what you say about property being worth whatever banks are willing to lend – BUT – when you have a fixed stock of housing and you jam in tens of millions more people, yes, you do accelerate the process.

    If populations in London and Australia were not being forced upwards, and everyone owned their own homes and there were more apartments for lease than potential tenants, even the banks would have a very hard time jacking up rents.

    Which is why the rich want forced population growth more than anything else. And also why they will browbeat anyone mentioning this. Because it is true.

  14. anon[286] • Disclaimer says:

    Michael Hudson missed the boat. The real culprit for soaring real estate prices all over the US is not the banks but hot money coming in from China. Corrupt Chinese businessmen and government officials are desperately trying to move their money out of China before Xi Jin Ping confiscates their dirty money and throws them in jail for corruption. The Economist wrote about the “naked officials” who bought homes in the west and quietly moved their families here so they can escape in the middle of the night if need be. These corrupt Chinese are the ones pushing up real estate prices all over the West, from the US to Canada, Australia, NZ.

    I can see it all around me. At least 1/3 of the real estate in the Seattle area are bought up by China nationals, with a large % left vacant. They are all cash buyers, nothing to do with our bank’s mortgage rates. They bid up the prices and push millennials out of the home market.

    The Seattle Times reported that Chinese buyers are now treating Seattle as “Vancouver South”. Today’s WSJ has an article on this very topic:

    https://www.wsj.com/articles/western-cities-want-to-slow-flood-of-chinese-home-buying-nothing-works-1528294587

  15. Anonymous[939] • Disclaimer says:

    If Chinese banks cancel debt owed by companies what happens to money on the other side of the ledger. Are Chinese currencies not debt based? Wouldn’t that produce a deflationary crisis?

    • Replies: @ltlee
    , @MEFOBILLS
  16. Anon[370] • Disclaimer says:
    @Catiline

    What sort of property tax do you have in mind and at what levels? Would the state and local taxes be deductible? There is a big difference between the old Henry George Land Tax idea which is now represented in Australia by state land taxes on unimproved value and those like local rates which are normally charged according to the rental value of land and improvements. And let’s not forget stamp duties up to 5% plus on purchase and VAT or GST on building costs! Maybe it isn’t a subject on which Michael Hudson’s opinion is worth much (though I hope he answers you) because, as has already been pointed out he is talking through his hat on Australia and London where prices are very much demand driven by increasing populations – with recent modifications…

    In Australia’s two very large cities there have been several years of substantial rises followed by a quarter or two of declines. I wonder what Michael Hudson would infer about banks from the fact that Sydney’s median house price is about 20 per cent higher than Melbourne’s. Nothing very instructive I think because we get no discussion of America’s varied reality. To take the extreme, how about buying a house in Detroit with left over pocket money?

    • Replies: @Catiline
  17. The late Hugh Stretton – once described to me by the chief economist for Australia’s biggest company as “the most intelligent socialist in Australia” – used to praise the 1930s to 50s Playford government in South Australia, which was pragmatic conservative, for its recognition of Hudson’s point about the importance of housing costs to the economy and its creation of housing policies to match. South Australia attracted manufacturing industry by lowering the cost of housing and thereby, via the system of fixing minimum wages, keeping down wage costs.

  18. m___ says:

    The whole of the article.

    Again myopic, “grab a bone and run with it”. In a confined context, using a limited set of variables anything can make sense and to the contrary.

    Since theoretical economics have a “magic morphing” set of terminology, ill defined, it becomes impossible to analyze any phenomenon with some exactitude. Reality… is made up as goes.

    A typical example of soft science, no quantitative analysis possible, no prevision of dynamics possible. Left or Right, theoretical economics is a hoax for religious make believe. Much more of theocratic then mathematical nature. Numbers do lie, …as much as the factor that defines them is moldeable.

    It is vulgarization’s nature. In the case of economics, the underlying theories are worse then the Torah, Bible and Koran combined. The rabbis, get away with anything.

    • Replies: @Wizard of Oz
  19. @Godfree Roberts

    This doesn’t seem right. Numbeo has Beijing and Shanghai as the world’s 4th and 5th most expensive cities, respectively (for comparison, Moscow – often cited as one of the world’s most expensive cities – is 73rd).

    https://www.numbeo.com/cost-of-living/city_price_rankings?itemId=100

    Also the world’s top three cities which are the least affordable relative to local incomes (all the more relevant in China since foreigners can’t buy property) are also Chinese:

    https://www.numbeo.com/property-investment/rankings.jsp

    Although rent is relatively cheaper, it too seems to have soared in recent years. Beijing is now about as expensive to rent in as Munich; Shanghai, as in Toronto.

    https://www.worldatlas.com/articles/local-rent-in-cities-worldwide.html

    And the Chinese remain substantially poorer than Germans or Canadians. I would not be surprised if Beijing and perhaps even Shanghai are less affordable than New York or London in PPP-adjusted terms.

    Also I suspect these numbers will continue to increase, as old rental contracts end and rental prices converge upwards.

    This is actually slightly depressing. I have long wanted to spend a considerable amount of time living in China, perhaps half a year. When I was researching this in 2012 you could rent a central studio in Beijing or Shanghai for $500, and for $200 in one of the smaller (but still vast) regional cities like Wuxi. I missed the train on that.

    However, I also think this was always inevitable. After all, Beijing and Shanghai are the political and economic capitals of a civilization with more demographic weight than the entire West, so it is not surprising that they would become pricier than New York or London.

    • Replies: @Godfree Roberts
  20. @Anatoly Karlin

    It’s slippery. Economist Weiwei Zhang[1] says, “Shanghai’s life expectancy is already higher than New York’s, its level of education is the highest in the world and its overall scientific and technological power suggests a healthy economic future. The average wealth, and even the living standard, of many Shanghai residents is higher than the Swiss, while urban housing is better than Japan’s or Hong Kong’s”. And that was written in 2010. Median wages across China have almost doubled since then while ours have remained flat.


    [1] Weiwei Zhang. The China Wave

  21. ltlee says:
    @Anonymous

    If Chinese banks cancel debt owed by companies for the common good, the companies would not be forced to go bankruptcy. It can continue its business of providing service or selling products and making money.

    The banks would absorb the loss. Of course, the government would have to print more money and inject fund into the banks to repair their balance sheet.

    • Agree: Wizard of Oz
    • Replies: @myself
  22. @Catiline

    Mr. Hudson, what do you think of a national property tax as a way of addressing all of this?

    Please don’t give the feds any ideas!!!

    PS: Your comments over at the “Italy” piece were worth far more than the piece itself!

    • Replies: @Catiline
  23. @m___

    I think you are ignoring the utility of simple (i.e. relatively simple – still requiring a few years study) models from which reality’s departures can be assessed.

    • Replies: @m___
  24. Pindos says:

    Student loans = $2 trillion birth control pill for the higher IQ.

  25. Sean says:

    Adam Ferguson, with his idea about the division of labour is more the father of modern economic theory than his contemporary Smith (and also an influence on Marx’s theory of alienation), thought technological advance was the engine of growth, not capital accumulation. Given that robots will eliminate 6% of all US jobs by 2021, the cost of workers’s accommodation is not going to be all that salient as time goes on. China is gaining on the US in relative power and that trend is going to call up forces from the hidden depths of the American nation state, rewarding with unlimited power those who act as the agent of such forces. Hence Trump.

    Inexorably losing productive capacity and the military potential that goes with it, the American nation-state is at bay, and this is when someone emerges to articulate what is salient: that China must be slapped down. The old policy (instituted by the Nixon administration) of building up the economy of China as a bulwark against Russia) has created a monster of mercantilism and trade imbalances, with economies of scale that will drive the US and the rest of the West to the wall, then dominate them politically.

    As Hudson pointed out elsewhere, Trump has repeated bilked his creditors. Julius Caesar rose to power on the support of financial jugglers, but then he turned on them and they were helpless. Be they ever so rich, woe to all who oppose Trump’s takedown of China.

    • Replies: @Wizard of Oz
  26. myself says:
    @ltlee

    The banks would absorb the loss. Of course, the government would have to print more money and inject fund into the banks to repair their balance sheet.

    Correct.

    With the crucial point that China has never had, and probably will never allow, private central banking. So the government fully controls money creation, and basically won’t owe any private entity, nor have to tax citizens to pay, essentially, itself.

    Quite different from our outdated system.

    • Replies: @Wizard of Oz
  27. 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.

    Where did you get that number from? Living in Germany, I can tell you, this is not true, at least not if you look at the take-home pay of Germans. It might be true, if you look at the income before taxes and social insurance contributions, because for higher incomes, your take-home-pay is roughly half of your pay. A rule of thumb in Germany is that you should not pay more 25-30% of your take-home pay for housing (without heating and electricity costs, which are quite high in Germany).
    In the big cities in Germany 40 percent of households pay more than 30 percent of their take-home pay for living (without heating and electricity costs).

    http://www.spiegel.de/wirtschaft/soziales/deutschland-so-viel-vom-einkommen-geht-fuer-miete-drauf-a-1167391.html

  28. renfro says:

    The housing problem can’t be explained in the short amount of time Hudson had. He would need at least an hour to outline the lead up to the problem because it is caused by politics and WS.

    In the 2008 crash first came the deregulation in the financial industry that permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. Second came the subprime mortgages to generate more mortages to sell. Third came the Federal Reserve raising the fed funds rate, that sent the subprime adjustable rate mortgage interest rates skyrocketing. resulting in defaults.

    Here’s what Warren Buffet said in 2003— “In our view mortage backed and other derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
    Who orgnally set up this disaster- in -waitng? Alan Greenspan, then Chairman of the Federal Reserve, Robert E. Rubin, then Secretary of the Treasury, and Lawrence . Summers, then Assistant Secretary of the Treasury killed an attempt by the CFTC to regulate OTC derivatives in 1998.
    Some on WS who bought diratives like Lehman Brothers went under, others got the trillion dollar bailouts by Obama.

    So what happen to the 7 millon homes foreclosed on in this mess?
    WS bought them….surprise! surprise!
    They are now rental homes and once again being packaged and IPO’ed for sale to institutional and other investors. Of the 3 biggest buyers of the foreclosed homes , now turned to rentals , Blackstone is the largest. Taking these homes off the public for sale market has jumped up homes prices once again, making it more difficult for those Hudson wrote about to own homes.

    Now who is Blackstone? Stephen Schwarzman, Trumps economic advisor and Chairman of the Strategic and Policy Forum.
    What real estate asset of Amercan’s besides are the Vultures and their 2 dollar whores in DC going to strip next?

    How about this?

    ”The Saudi kingdom joined forces with a top outside adviser to Trump to build a $40 billion war chest to privatize U.S. infrastructure.
    The vehicle would employ the same kind of public-private partnerships, known as P3s, the Trump administration has endorsed for its trillion dollar infrastructure plan. The deal hands over control of projects to rebuild American roads and bridges to the private sector and a foreign country.
    The Saudi Public Investment Fund announced its $20 billion investment with Blackstone, the private equity giant whose CEO, Stephen Schwarzman, chairs the Strategic and Policy Forum, a key group of private-sector advisers to President Trump.
    In addition to P3s, Trump’s model where proceeds from sales of public assets get funneled into new projects. So under the Trump plan, direct federal investments in infrastructure would be lowered, while private control of projects would ramp up. This benefits Blackstone and Saudi Arabia. State and local governments don’t lack private capital for infrastructure; municipal bonds are a $3.7 trillion market. That companies like Blackstone owning infrastructure would prove more costly than muni bond funding is a given.
    P3s could generate high tolls and user fees, as the private sector expects a greater return on investment.
    In addition, critics charge that P3s narrow where infrastructure projects happen; replacing water systems for the poor in Flint won’t make back the kind of money that a bridge or toll road connecting an affluent suburb might. P3s more generally have been criticized for limiting democratic control of public assets. ”

    I now pay $10 for the state owned ferry from the Outer Banks …pretty sure Schwarzman, Trump and the Saudis would up that to $25…they gotta make profit and pay their share holders don’t ya know.

    • Agree: Catiline, Iris
  29. Catiline says:
    @jacques sheete

    It’s the anti-Feds I’m worried about. (Wink)

    On the Italy thread I was going to release some data but the discussion is stale now. Ringraziamenti!

  30. Catiline says:
    @Anon

    No deductions. A high exemption for the vast majority of home “owners” and a soak the rich rate for the remainder. (Big Grin)

  31. @Sean

    Your connecting the use of robots with the need for cheap housing for workers is completely obvious – in retrospect [imagine friendly emoji].

    Let’s extend the thought. What is the optimum mix if one seeks to integrate all the new unemployables into a functioning city or county. Let’s start with Detroit which I assume is not yet far off the bottom. Can the newly robot-replaced be made into a new poor but happy leisure class here?

  32. @myself

    A government can never totally control money creation in the modern world although it could make a lot of people worry about being money changers in the temple or the Jews who helped peasants get by till the next harvest.

    Anything negotiable that isn’t designed to self destruct after a short time serves as money. In many countries it is as simple as having US dollars or Swiss francs under the mattress. An accepted bill of exchange is a bit more upmarket.

    • Replies: @ltlee
  33. Iris says:
    @Linda Green

    “Are the banks giving out loans with loose criteria causing inflation in housing prices or are the spigots closed to all but the most qualified?”

    Hi Linda; both statements are true. The banks first caused inflation in real asset prices by lending very large amounts. This was made possible by Central Banks’ (Federal Reserve, ECB) policies of large money creation (Quantitative Easing) and of zero interest rate. (The latter is the rate at which the Fed lends money to commercial banks, who then lend it to the public at a higher rate).
    These two policies were devised to counter the effects of the 2008 crisis.

    But 10 years have passed and interest rates have remained relatively low, leaving central banks without levy to address the next crisis. (Central banks would, in case of crisis, lower the rates, to ease the economy by injecting money in it). So this is why the Fed is trying to quickly rise the rates, and why conditions will become much harder for borrowers.

    • Agree: renfro
  34. ltlee says:
    @Wizard of Oz

    Many do hold US dollar or Swiss Franc denominated assets for investment purpose. Under the mattress? Dollar and Franc are only accepted in the US and Swiss and nowhere else.

    • Replies: @Wizard of Oz
  35. @ltlee

    The holding of assets for investment purposes is totally irrelevant to the money issues I was addressing.

    And your last sentence is just plain wrong. I recall paying for meals in Buenos Aires with US dollars, suits in Hong Kong with Australian dollars, and frequently paying drivers in Sri Lanka with those or other foreign currencies amongst many examples. I believe Zimbabwe may still be amongst those countries that have given up on their own inflation wrecked currencies in favour of the US dollar. The pound Sterling (GBP today) used to be used as currency in much of the British Empire and Commonwealth even in independent countries. The Great Depression (from memory) ended that for Australia although the fixed exchange rate presumably made people happy to take pounds everywhere as they are still taking US dollars.

  36. MEFOBILLS says:
    @Anonymous

    If Chinese banks cancel debt owed by companies what happens to money on the other side of the ledger. Are Chinese currencies not debt based? Wouldn’t that produce a deflationary crisis?

    This is actually a secret that China uses. In order to get MFN status, China swept old Communist era debt into the dustbin. In other words, it erased the debt.

    Erasing debt means that State Bank ledger has a paper “asset” that is erased, while at the same time the liability on another ledger is released. The parties that were on the hook to pay the State Bank no longer have to do so. Example, a state bank creates new Yuans to fund Solar Cell activity. The Solar Cell company that was in debt can be released by the State Bank. China routinely stimulates new enterprises with new loans and then prunes the laggards. Pruning gets rid of the deadwood, while simultaneously releasing the debt.

    If anything debt free “floating” Yuans are made available in money supply as they are no longer earmarked to pay the state debt – this is more inflationary than deflationary.

    China’s high growth rate is no accident.

  37. gsjackson says:
    @Linda Green

    First of all, this isn’t a written “article,” it’s an oral interview in which Hudson responds to the questions put to him rather than trying to make a “cogent argument.”

    It’s just showy sophistry to try to frame what he said as contradictory. A mixed bag of policies — lax lending standards by all banks in the past, rising interest rates, and now de-regulated community banks re-introducing lax lending standards — all are having the effect of driving housing prices up to the point where it is simply unaffordable for most millennials.

    In my opinion, Michael Hudson is the best economist in the world, an opinion shared and explicitly stated by Paul Craig Roberts, who’s a pretty fair economist himself.

    • Replies: @JamesD
  38. renfro says:

    Worry about this instead.

    US deficit surges to $530 billion in May: CBO

    The federal budget deficit surged to $530 billion in the first eight months of fiscal 2018, which began in October, surpassing last year’s deficit over the same period by $97 billion, according to new figures.

    The Congressional Budget Office (CBO) said in a report released Thursday that government spending surged 6 percent relative to last year, while revenues only increased 3 percent.

    Budget watchers projected that the combination of the GOP tax bill, which slashed tax rates, and the bipartisan agreement to increase government spending would push up the deficit.

    Corporate tax revenues, for example, were down $42 billion, about 25 percent, though much of that revenue reflected 2017 taxes, CBO said.

    The government spent a whopping $239 billion on interest payments alone, up 15 percent from the same period last year.

    CBO has predicted that federal deficits will top $1 trillion in 2020.”

  39. Tim too says:

    “Jeez! Which is it Mr. Hudson? Are the banks giving out loans with loose criteria causing inflation in housing prices or are the spigots closed to all but the most qualified? I don’t understand how you can have it both ways.”

    Professor Hudson is correct, financial conditions have been loose for several years now, as the Fed and banks operate to support real estate. The capitalization rate has lifted real estate to record levels. The Case Shiller home price index is above the highs of the last bubble. At the same time, wages have been stagnant, meaning that house prices are increasingly unaffordable. Millenials with student debt and/or poor job prospects are not viewed as good loan prospects. The participation rate of working age population actually working is at multi-year lows. Millenials are being thrown under the bus.

    Who’s getting the loans? The upper income part of society, people that are buying second homes, for rentals.

    • Replies: @JamesD
  40. Anon[425] • Disclaimer says:

    Michael, what you have all said, had exactly happened in Singapore, a liberated banking sector to foreign institutions fueling the property speculation & rental to sky high, while artificially pushing up demand with relax immigration policy & foreign institution investment.

    The result is a future new generation enslaved to pay 30yrs bank loans with 50% of income paying mostly on interest. Many become unable to afford a house but to depend/live with parents. Singapore city is now one of most expensive place to live in. To keep business cost competitive, salary is largely been suppressed by endless import of cheap migrants.

    A 30yrs old government subsidized public apartment cost US$300k~1M, with private apartment easily over $1M, while bottom 20% labour are struggling with less than $600/mth wage. Despite its GDP per cap(ppp) is ranked 3rd at $90k, 20% graduate are now unemployed. Most are asset rich, cash poor with high loan debts. The society pay a high price for such wreck policy without a way out but to continue going up hoping it won’t burst.

    Oz PM John Howard visited Spore during 2001 & hooked on its get rich quickie conned soup of property speculation. Oz Banks started promoting 10% down payment with remorgage of existing property to invest in another 10 new properties. Gov offered new owner subsidies while imposing a near term new property stamp duty tax. This fire up property speculation. West Aust derived 50% of its 2002 tax income from property tax, that’s how terrible it went.

    But China with its best think tanks & visionary policy makers not kowtow to West, won’t be so foolished to let in foreign financial institutions to ruin its country like most Asian countries did(either stupidly or too weak to resist). Its central control policy will tightly regulate the influx to fuel its next growth phase & Yuan internationalization. But speculative property price is a popular discussed true problem.

    China policy maker likely learn the trick from Spore, to enslave the people with high property loan debt so they will work very hard, while gov is flooded with property derived tax to invest. But China kept the bank profits mostly within China state owned, instead of suck off by foreign institutions.

    Free market, liberated finance & democracy are just West scams for capitalists to enslave & exploit the people, only those foolish Asians & developing countries people been brainwashed will fall for the BS.

  41. JamesD says:

    It’s not a problem. Here’s why: The debts are owed to government banks. A government can do what the U.S. can’t do. The government can forgive debts, at least those that are owed to itself, without creating a political backlash. If a viable corporation has run up too much debt, the government can forgive it. This is better than letting the debt close down a factory or force it be sold to a predatory asset management firm as occurs in the United States.

    Lost me there. WHY is the factory in so much debt? Usually because the managers are idiots. You are removing the discipline of the markets.

    Also, no mention of Central Banking pumping TRILLIONS as a reason for high home prices (asset bubbles)? No, the reason is because …… banks lobby to keep property taxes low.

    I couldn’t finish the article.

  42. JamesD says:
    @Tim too

    Millennials get thrown under the bus by cultural marxist (and economic marxists) public schools and universities. They were taught that your feelings are the most important thing, hence their nickname: snowflakes.

  43. JamesD says:
    @gsjackson

    Symptoms. The cause was the Fed pumping in Trillions. You get lax lending standards when the Fed has so destroyed the yield curve banks can’t make any return.

    The next shoe to drop will be pensions, again a problem exasperated by the Fed (Dem politicians, e.g. Detroit, are the cause.)

  44. JamesD says:

    Didn’t finish the article, but what I read didn’t mention the glaring problem of Fed pumping and Trade Deficits resulting in a huge current account surplus in China. When long bond yields crashed, the Chinese started buying other things, like Real Estate. To ignore the China influence in California and Vancouver is crazy.

  45. 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)

    As indeed it is a social science and it’s about time someone noticed; thank you China!  Now, finally, maybe those two hundred years of wandering about in the dismal science of economics will produce the voices and instincts to get it right.

    https://robertmagill.wordpress.com/2018/06/20/half-the-pieand-the-recipe-a-manifesto/

  46. Tim too says:

    Housing unaffordability:

    “In February 2018, the ratio of the trailing twelve month averages of median new home sale prices in the United States to median household income reached an all time high value of 5.45, which is to say that the typical new home sold in the U.S. cost nearly 5 and a half times the annual income earned by a typical American household.”

    https://politicalcalculations.blogspot.com/2018/06/us-housing-unaffordability-remains-near.html#.WzWEr6S4RPl

    This is a core fact in what professor Hudson has discussed.

  47. China can cancel business debt owed to itself. It can proclaim a clean slate. It can minimize debt service to whatever it chooses. But imagine if Chase Manhattan and Goldman Sachs are let in. It would be much harder for the government to raise real estate taxes leading to defaults on the banks. It could save the occupants by making new loans to those who default – based on lower land prices.

    Well, you can imagine the international furor that would erupt. Trump would threaten to atom bomb Peking and Shanghai to save his constituency. His constituency and that of the Democrats are the same: Wall Street and the One Percent. So China may lose its ability to write down debts if it lets in foreign banks. That was what the big political discussion was when did discuss economics at the Chinese Academy of Sciences in Beijing and in Tianjin, where we’re going to have a conference on Fictitious Capital in October.

    can the chinese govt be this stupid? I thought they were doing incredibly well by keeping the western financial vampiric system out of china.

    thought the whole point of the trade war was to crack open that chinese shield, why would china give up the game before the trade war even really starts?

    • Replies: @myself
  48. bigdirt says:

    Hudson lost me right at the front of this interview when he drew a correlation between skyrocketing education costs and housing. Then – – – he lapsed into banker blame. Krugman, Obama, Warren and Sanders must be in his club of magic wealth creation.

    Education didn’t go cost crazy until the government began insuring student loans and outrageous faculty earnings. Housing went off the cliff when the government began insuring banks would get 90% loan recovery if the loan(s) went bad. And yes, this was all put in place with a maze of shadowy programs, noble sounding poverty fixes and fancy liberal gibberish.

    Duh??? even a banker (not known for sterling character traits) would go for this funny money scheme.

  49. myself says:
    @Astuteobservor II

    thought the whole point of the trade war was to crack open that chinese shield

    No worries, NOT going to happen, ever.

    The Han positively despise the non-productive, to include money-lenders. Basically, when you produce no goods or services yourself, but specialize renting out capital at a profit (which is what banking, in essence, is), then you are not wanted and will probably be shut down and sent away. Or even sent to “re-education”.

    Now, allocation of idle capital is a needed function in society, which is why, since Imperial times, money creation, or its ancient equivalent minting, has been very firmly under the control of the state, never of private individuals.

  50. anon[107] • Disclaimer says:
    @Фрэнк в СПБ

    Chinese are very heavily invested in housing in DC suburbs.
    Maybe all those students sent to US universities to learn how it’s done, practiced in US markets.

    nb Lots of Chinese investors pay cash, even in the $ million + range. Perhaps they borrow from Chinese banks?

  51. m___ says:
    @Wizard of Oz

    Are you referring to an answer to the question: “Does theoretical economics have a place in social analytics?”. Of course we agree to a yes. Should it look as anything conceived, as existing theories and method? Of course not.

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