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From: The Journal of Economic Issues, Vol. L No. 3, September 2016

Abstract: Conflation of real capital with finance capital is at the heart of current misunderstandings of economic crisis and recession. We ground this distinction in the classical analysis of rent and the difference between productive and unproductive credit. We then apply it to current conditions, in which household credit — especially mortgage credit — is the premier form of unproductive credit. This is supported by an institutional analysis of postwar U.S. development and a review of quantitative empirical research across many countries. Finally, we discuss contemporary consequences of the financial sector’s malformation and overdevelopment.


Why have economies polarized so sharply since the 1980s, and especially since the 2008 crisis? How did we get so indebted without real wage and living standards rising, while cities, states, and entire nations are falling into default? Only when we answer these questions can we formulate policies to extract ourselves from the current debt crises. There is widespread sentiment that this crisis is fundamental, and that we cannot simply “go back to normal.” But deep confusion remains over the theoretical framework that should guide analysis of the post-bubble economy.

The last quarter century’s macro-monetary management, and the theory and ideology that underpinned it, was lauded by leading macroeconomists asserting that “The State of Macro[economics] is Good” (Blanchard 2008, 1). Oliver Blanchard, Ben Bernanke, Gordon Brown, and others credited their own monetary policies for the remarkably low inflation and stable growth of what they called the “Great Moderation” (Bernanke 2004), and proclaimed the “end of boom and bust,” as Gordon Brown did in 2007. But it was precisely this period from the mid-1980s to 2007 that saw the fastest and most corrosive inflation in real estate, stocks, and bonds since World War II.

Nearly all this asset-price inflation was debt-leveraged. Money and credit were not spent on tangible capital investment to produce goods and non-financial services, and did not raise wage levels. The traditional monetary tautology MV=PT, which excludes assets and their prices, is irrelevant to this process. Current cutting-edge macroeconomic models since the 1980s do not include credit, debt, or a financial sector (King 2012; Sbordone et al. 2010), and are equally unhelpful. They are the models of those who “did not see it coming” (Bezemer 2010, 676).

In this article, we present the building blocks for an alternative. This will be based on our scholarly work over the last few years, standing on the shoulders of such giants as John Stuart Mill, Joseph Schumpeter, and Hyman Minsky.

Immoderate debt creation was behind that “Great Moderation” (Grydaki and Bezemer 2013). That is what made this economy the “Great Polarization” between creditors and debtors. This financial expansion took the form more of rent extraction than of profits on production (Bezemer and Hudson 2012) — a fact missed in most analyses today (for a proposal, see Kanbur and Stiglitz 2015). This blind spot results from the fact that balance sheets, credit, and debt are missing from today’s models.

The credit crisis and recession are, therefore, a true paradigm test for economics (Bezemer 2011, 2012a, 2012b). We can only hope to understand crisis and recession by developing models that incorporate credit, debt, and the financial sector (Bezemer 2010; Bezemer and Hudson 2012). Here we provide the conceptual underpinning for this claim.

To explain the evolution and distribution of wealth and debt in today’s global economy, it is necessary to drop the traditional assumption that the banking system’s major role is to provide credit to finance tangible capital investment in new means of production. Banks mainly finance the purchase and transfer of property and financial assets already in place.

This distinction between funding “real” versus “financial” capital and real estate implies a “functional differentiation of credit” (Bezemer 2014, 935), which was central to the work of Karl Marx, John Maynard Keynes, and Schumpeter. Since the 1980s, the economy has been in a long cycle in which increasing bank credit has inflated prices for real estate, stocks, and bonds, leading borrowers to hope that capital gains will continue. Speculation gains momentum — on credit, so that debts rise almost as rapidly as asset valuations.

When the financial bubble bursts, negative equity spreads as asset prices fall below the mortgages, bonds, and bank loans attached to the property. We are still in the unwinding of the biggest bust yet. This collapse is the inevitable final stage of the “Great Moderation.”

The financial system determines what kind of industrial management an economy will have. Corporate managers, as well as money managers and funds, seek mainly to produce financial returns for themselves, their owners, and their creditors. The main objective is to generate capital gains by using earnings for stock buybacks and paying them out as dividends (Hudson 2015a, 2015b), while squeezing out higher profits by downsizing and outsourcing labor, and cutting back projects with long lead times. Leveraged buyouts raise the break-even cost of doing business, leaving the economy debt-ridden. Profits are used to pay interest, not to reinvest in tangible new capital formation or hiring. In due course, the threat of bankruptcy is used to wipe out or renegotiate pension plans, and to shift losses onto consumers and labor.

This financial short-termism is not the kind of planning that a government would undertake if its aim were to make economies more competitive by lowering the price of production. It is not the way to achieve full employment, rising living standards, or an egalitarian middle-class society.

To explain how the bubble economy’s debt creation leads to debt deflation, we distinguish between two sets of dynamics: current production and consumption (GDP), and the Finance, Insurance and Real Estate (FIRE) sector. The latter is associated primarily with the acquisition and transfer of real estate, financial securities, and other assets. Our aim is to distinguish this financialized “wealth” sector — the balance sheet of assets and debts — from the “real” economy’s flow of credit, income, and expenses for current production and consumption.

In the next section, we state our case, distinguishing the financial sector from the rest of the economy, and rent from other income. It is as if there are “two economies,” which are usually conflated. They must be analyzed as separate but interacting systems, with real estate assets and household mortgage debt at the center of the bubble economy. In section three, therefore, we examine the significance of household debt. In today’s “rentier economy” this represents not real wealth, but a debt overhead. In section four, we discuss the pathologies arising from this overhead: loss of productivity and investment, with rising inequality and volatility.

Finance Is Not the Economy; Rent Is Not Income • 1,500 Words

Analysis of private sector spending, banking, and debt falls broadly into two approaches. One focuses on production and consumption of current goods and services, and the payments involved in this process. Our approach views the economy as a symbiosis of this production and consumption with banking, real estate, and natural resources or monopolies. These rent-extracting sectors are largely institutional in character, and differ among economies according to their financial and fiscal policy. (By contrast, the “real” sectors of all countries usually are assumed to share a similar technology.)

Economic growth does require credit to the real sector, to be sure. But most credit today is extended against collateral, and hence is based on the ownership of assets. As Schumpeter (1934) emphasized, credit is not a “factor of production,” but a precondition for production to take place. Ever since time gaps between planting and harvesting emerged in the Neolithic era, credit has been implicit between the production, sale, and ultimate consumption of output, especially to finance long- distance trade when specialization of labor exists (Gardiner 2004; Hudson 2004a, 2004b). But it comes with a risk of overburdening the economy as bank credit creation affords an opportunity for rentier interests to install financial “tollbooths” to charge access fees in the form of interest charges and currency-transfer agio fees.

Most economic analysis leaves the financial and wealth sector invisible. For nearly two centuries, ever since David Ricardo published his Principles of Political Economy and Taxation in 1817, money has been viewed simply as a “veil” affecting commodity prices, wages, and other incomes symmetrically. Mainstream analysis focuses on production, consumption, and incomes. In addition to labor and fixed industrial capital, land rights to charge rent are often classified as a “factor of production,” along with other rent-extracting privileges. Also, it is as if the creation and allocation of interest-bearing bank credit does not affect relative prices or incomes.

It may seem ironic that Ricardo wrote just when Britain’s economy was strapped by war debts in the wake of the Napoleonic Wars that ended in 1815. The previous generation’s writers, from Adam Smith to Malachy Postlethwayt, had explained how the government paid interest on each new bond issue by adding a new excise tax to cover its interest charge (Hudson 2010). These taxes raised the cost of living and doing business, while draining the economy to pay bondholders. Yet, the banks’ Parliamentary spokesman (and indeed, lobbyist) Ricardo established a countervailing orthodoxy by claiming that money, credit, and debt did not really matter as far as production, value, and prices were concerned. His trade theory held that international prices varied only in proportion to their “real” labor costs, without taking money, credit, and debt service into account. Credit payments to bankers, and the distribution of financial assets and debts, are not seen to affect the distribution of income and wealth.

Adam Smith decried monopoly rent, especially for the special trade privileges that the British and other governments created to sell to their bondholders to reduce their war debts. Ricardo emphasized the free lunch of land rent: prices in excess of the cost of production on lands with better than marginal fertility, or implicitly on sites benefiting from favorable location. But like Smith, he treated interest as a normal cost of doing business, and hence as part of the production sector, not as an extractive rentier charge autonomous and independent from the economy of production and consumption. On this ground, he omitted banks and monopolies from his discussion of economic rent — on the assumption that their income was payment for a productive service, and hence interest seemed to be a necessary cost of production.

This assumption underlies today’s National Income and Product Accounts (NIPA). Everyone’s “income” (not including capital gains, which make no appearance in the NIPA) finds its counterpart in a “product,” in this case a service for financial income. Most revenue — and certainly most ebitda (short for “earnings before interest, taxes, depreciation and amortization”) — is generated within the FIRE sector. But is it actually part of the “real” economy’s sphere of production, consumption, and distribution (in which case it is income); or is it a charge on this sphere (in which case it is rent)? This is the distinction that Frederick Soddy (1926) drew between real wealth and “virtual wealth” on the liabilities side of society’s balance sheet.

To answer this question, it is necessary to divide the economy into a “productive” portion that creates income and surplus, and an “extractive” rentier portion siphoning off this surplus as rents: that is, as payments for property rights, credit, or kindred privileges. These are the payments on which the institutionalist school focused in the late nineteenth century. A key policy aim of the institutionalist school was to regulate prices and revenue of public utilities and monopolies in keeping with purely “economic” costs of production, which the classical economists defined as value (Hudson 2012).

Our aim is to revive the distinction between value and rent, which is all but lost in contemporary analysis. Only then can we understand how the bubble economy’s pseudo-prosperity was fueled by credit flows — debt pyramiding — to inflate asset markets in the process of transferring ownership rights to whomever was willing to take on the largest debt.

To analyze this dynamic, we must recognize that we live in “two economies.” The “real” economy is where goods and services are produced and transacted, tangible capital formation occurs, labor is hired, and productivity is boosted. Most productive income consists of wages and profits. The rentier network of financial and property claims — “Economy #2” — is where interest and economic rent are extracted. Unfortunately, this distinction is blurred in official statistics. The NIPA conflate “rental income” with “earnings,” as if all gains are “earned.” Nothing seems to be unearned or extractive. The “rent” category of revenue — the focus of two centuries of classical political economy — has disappeared into an Orwellian memory hole.

National accounts have been recast since the 1980s to present the financial and real estate sectors as “productive” (Christophers 2011). Conversely, much of the notional household income in national accounts does not exist in cash flow terms (net of interest and taxes). Barry Z. Cynamon and Steven M. Fazzari (2015) estimate that U.S. NIPA-imputed household incomes overstate actual incomes in cash flow terms by about a third.

That is what makes the seemingly empirical accounting format used in most economic analysis an expression of creditor-oriented pro-rentier ideology. Households do not receive incomes from the houses they live in. The value of the “services” their homes provide does not increase simply because house prices rise, as the national accounts fiction has it. The financial sector does not produce goods or even “real” wealth. And to the extent that it produces services, much of this serves to redirect revenues to rentiers, not to generate wages and profits.

The fiction is that all debt is required for investment in the economy’s means of production. But banks monetize debt, and attach it to the economy’s means of production and anticipated future income streams. In other words, banks do not produce goods, services, and wealth, but claims on goods, services, and wealth — i.e., Soddy’s “virtual wealth.” In the process, bank credit bids up the price of such claims and privileges because these assets are worth however much banks are willing to lend against it.

To the extent that the FIRE sector accounts for the increase in GDP, this must be paid out of other GDP components. Trade in financial and real estate assets is a zero-sum (or even negative-sum) activity, comprised largely of speculation and extracting revenue, not producing “real” output. The long-term impact must be to increase debt-to-GDP ratios, and ultimately to stifle GDP growth as the financial bubble gives way to debt deflation, austerity, unemployment, defaults, and forfeitures. This is the sense in which today’s financial sector is subject to classical rent theory, distinguishing real wealth creation from mere overhead.

“Money” consists mainly of credit creation since “loans create deposits” (McLeay, Radia and Thomas 2014). So any increase in the sum of final GDP goods-and-services transactions is mirrored in bank credit supporting these transactions (alongside inter-firm trade credit, and now money market placements as well). But since the 1980s, bank lending has risen relative to GDP (that is, relative to income). Much of the credit created since then has been used not for production, but for asset price inflation, driving up costs of living. Consumers — especially those who own real estate, stocks, and bonds — have run deeper into debt in order to maintain their living standards. Real wages have fallen a bit, while after-tax costs of living have increased.

In the United States, FICA wage withholding for Social Security and Medicare has risen to 15.2 percent, medical insurance costs have risen, education charges have risen for buyers of educational diplomas, and the mortgage bubble (which Alan Greenspan euphemized as “wealth creation”) has driven up the price of obtaining a home. It is now recognized that U.S. living standards since the 1970s have become debt-fueled, not income-supported. This went largely unnoticed until the bubble burst, since the underlying distinction in credit flows has been excluded from the economics curriculum.

Drawing the Distinction Today • 800 Words

It was not always like that. Economic theory today is in some ways a step backward by expunging the nineteenth-century view — and indeed that of medieval economics and even of classical antiquity — with regard to how banking and high finance intrude into economic life to impose austerity and polarize the distribution of wealth and income. More recently, Marx ([1887] 2016, 1), in Chapter 30 of Capital, distinguished “credit, whose volume grows with the growing volume of value of production” as differing from “the plethora of moneyed capital — a separate phenomenon alongside industrial production.” This implied a corollary distinction between transactions in goods and services from those in property and financial assets. Keynes (1930, 217-218) likewise distinguished between “money in the financial circulations” and “money in the industrial circulations.”

James Tobin already in 1984 worried that “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services” (Tobin 1984, 14). Minsky in his later years warned against what he called “money manager capitalism” as distinct from industrial capitalism (Minsky 1987; Wray 2009). Richard Werner (2005, also 1997) adapted Irwin Fisher’s (1933) equation of exchange (MV=PT) to distinguish credit to the “real” economy from that to the financial and “wealth” sectors.

Applying these distinctions to Japanese data, Werner (2005, 222) finds “a stable relationship between ‘money’ (credit to the real sector) that enters the real economy and nominal GDP.” Likewise, Wynne Godley and Gennaro Zezza (2006, 3) observe for the United States: “Major slowdowns in past periods have often been accompanied by falls in net lending. Indeed, the two series have moved together to an extent that is somewhat surprising.” Federal Reserve economists note that many contemporary “[a]nalysts have found that over long periods of time there has been a fairly close relationship between the growth of debt of the nonfinancial sectors and aggregate economic activity” (BGFRS 2013, 76).

These correlations suggest a one-on-one ratio between bank credit and the non- financial sector’s economic activity (Figure 1). Growth in credit to the real sector paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s — that is, until financialization became pervasive. Allowing for technical problems of definitions and measurement, growth of bank credit to the real sector and nominal GDP growth moved almost one on one, until financial liberalization gathered steam in the early 1980s.


Figure 1 shows how, after the mid-1980s, the real sector was borrowing structurally more than its income — a remarkable trend noted by few. Wynne Godley wrote in 1999 that “during the last seven years … rapid growth could come about only as a result of a spectacular rise in private expenditure relative to income. This rise has driven the private sector into financial deficit on an unprecedented scale” (Godley 1999, 1).

Households went into negative savings territory. Firms moved from taking their returns as profits from the sale of goods and services to taking their returns as capital gains and other purely financial transactions. General Electric became GE Capital. Maria Grydaki and Dirk Bezemer (2013) explain how the rise of indebtedness explains the eerie tranquility of the bubble years, dubbed by some the “Great Moderation” which Greenspan, Bernanke, and others attributed to (their own) superior monetary policy skills. In reality, it was the “lull before the storm” of debt deflation, as a prescient author noted in 1995 (Keen 1995).

There is contemporary research supporting the classical viewpoint that debt can be a rentier burden, rather than a service to society. Wiliam Easterly, Roumeen Islam, and Joseph Stiglitz (2000) shows that the volatility of growth tends to decrease and then increase with larger financial sectors. In their article, “Shaken and Stirred: Explaining Growth Volatility” (2000, 6), the authors find that “standard macroeconomic models give short shrift to financial institutions … our analysis confirms the role that financial institutions play in economic downturns.”

In their article, “Too Much Finance?” Jean-Louis Arcand, Enrico Berkes, and Ugo Panizza (2011) argue that expectation of bailouts may lead a financial sector to expand in size beyond the social optimum. They use a variety of empirical approaches to show that “too much” finance starts to have a negative effect on output growth when credit to the private sector reaches 110 percent of GDP. Stephen G. Cecchetti, M.S. Mohanty, and Fabrizio Zampolli (2011, 1) likewise argues that, “beyond a certain level, debt is a drag on growth.” The authors estimate the threshold for government and household debt to be around 85 percent of GDP and around 90 percent for corporate debt. Likewise, as we were writing this article, the OECD and the IMF both issued reports warning of a financial overgrowth (OECD 2015; Sahay et al. 2015).

The Significance of Household Debt • 200 Words

The classical analysis of rent to credit and debt, combined with these recent findings, begs a key question: When does the financial system support production and income formation in a sustainable manner, and when does it support speculation and rents in the form of capital gains, rather than income formation?

The answer to this question will have to be both theoretically sound and institutionally relevant, capturing the specific forms that “unproductive” revenues take in a particular era. For the classical economists, this form was land rent. For Minsky (e.g., 1986), this form was capital gains from stock market investment “on margin” — influenced both by the 1929 Great Crash experience and by the shape of financial markets in the 1950s and 1960s, when he developed his financial instability hypothesis. But, like the classical analysis of rents, the Minskyan progression from “hedge” to “speculative” to “Ponzi” finance is not confined to land markets or stock markets.

In our time, arguably the most significant form that rent extraction has taken is in the household credit markets, especially household mortgages. The contrast is with loans to non-financial business for production. A useful way to discuss this distinction is to categorize loans on two planes: their contribution to income growth and their tendency to increase financial fragility. Table 1 illustrates this. There are both conceptual and empirical grounds to draw the distinction today along these lines. We now discuss them in turn.



Conceptual Differentiation of Credit • 700 Words

Loans to non-financial business for production expand the economy’s investment and innovation, leading to GDP growth. A dollar drawn down as a loan and spent on domestic investment goods will increase domestic incomes proportionally. And, if the business plan on which the loan is given is good, the revenues from increased production will more than suffice to pay off the loan: financial fragility need not develop. Debt increases, but so does income. The debt/income ratio need not rise.
Like loans to non-financial business, household consumer credit provides the purchasing power and the effective demand for GDP to grow. But compared to business loans, it has two features that cause less growth for the same loan amount, and more financial fragility.

The first is a mismatch between the debt burden and the income generated from the loan. Consumer credit is not used to generate the income that will pay off the loan, as with business finance. The revenues from the loans and the debt liabilities are not on the same balance sheet. Unless macroeconomic institutions effectively transfer revenues from firms to households (e.g., as wages), consumer credit creates financial vulnerabilities in household balance sheets.

Second, in terms of how much income is generated for a given debt service burden, household consumer credit is not an efficient way to finance production due to its usually very high interest rates. A number of studies have shown that, compared to business credit, the growth impact of household credit is small (Beck et al. 2012; Jappelli and Pagano 1994; Xu 2000). For every dollar realized in value added by extending credit to households which spend it with firms, more dollars of debt servicing must be paid than is the case for business credit. Bezemer (2012) shows that the ratio of the growth in private debt and the growth in GDP moved from 2:1 on average in the 1950s and 1960s to 4:1 in the 1990s and 2000s. These are rough, but still telling indications. The trend is not exclusively attributable to growth in consumer credit since the 1960s, for an even larger category of household credit is household mortgage credit.

Like consumer credit, household mortgage credit increases the debt, but not the income of households. This increases financial fragility. Unlike consumer credit, mortgage credit for existing properties does not generate current income anywhere else — at least, not in the classical taxonomy of incomes and rents. Mortgage credit is extended to buy assets, mostly already existing. It generates capital gains on real estate, not income from producing goods and services. The distinction becomes blurred to the extent that mortgages are used to finance personal consumption (especially “equity loans” to homeowners) or new construction, but that is a minor part of the total volume of mortgage loans.

Mortgages are also special in that real estate assets have grown into the largest asset market in all western economies, and the one with the most widespread participation. Following classical analysis, if every real estate asset bought on credit skims off the income of the owner-borrower, then the rise in home ownership since the 1970s has sharply increased rent extraction and turned it into a flow of interest to mortgage lenders. Securitization added another dimension to this. Not only domestic homeowners, but also global investors can participate in the mortgage market. As in a Ponzi scheme, the larger the flows of income the mortgage market commands, the longer the scheme can continue. This is a key reason for the unusually long mortgage credit boom synchronized across western economies from the 1990s to 2007.

Household mortgage loans are also unique among types of bank loans for their macroeconomic effects in downturns — that is, for their potential to increase the financial fragility of entire economies. Because of widely held debt-leveraged asset ownership, the effects of falling house prices and negative equity on household consumption are significant on a macroeconomic level. And because real estate collateral is a key asset on bank balance sheets, there is also an effect on banks’ own financial fragility. This leads to lending restrictions not only in mortgages, but also to nonfinancial business.

Empirical Evidence • 800 Words

A number of empirical studies have been undertaken in the last few years to corroborate the above conceptual discussion. In Figure 2, based on calculations by Dirk Bezemer, Maria Grydaki, and Lu Zhang (2016), we plot the correlation of income growth with credit stocks scaled by GDP. This provides a proxy for the growth effect of credit over time. The trend is downward from the mid-1980s, and from the 1990s the correlation coefficient is not significantly different from zero. Credit was no longer “good for growth,” as many had for so long believed (from King and Levine 1993 to Ang 2008).

A major reason for this trend was that credit was extended increasingly to households, not business. Figure 3 shows the change in bank credit allocation from 1990 to 2011 for a balanced panel of 14 OECD economies. While the total credit stock expanded enormously in the 1990s and 2000, credit to nonfinancial business was stagnant at about 40 percent of GDP, while its share in overall credit plummeted. By contrast, the share of household mortgage credit issued by banks rose from about 20 to 50 percent of all credit. Òscar Jordà, Alan Taylor, and Moritz Schularick (2014), in their excellent historical study “The Great Mortgaging,” report for a sample of 17 countries an increase from 30 to 60 percent in household mortgage credit as share of GDP since 1900, with by far most of that increase since the 1970s. The costs to income growth were large. Torsten Beck et al. (2012), Bezemer, Grydaki, and Zhang (2016), and Jordà, Taylor, and Schularick (2014) all show with advanced statistical analysis that the contribution of household credit to income growth has become negligible or is plainly negative. Last year, IMF and OECD reports made the same point (Sahay et al. 2015; Cornede, Denk and Hoeller 2015).

The falling growth effectiveness of credit

Such large stocks of household credit do not just depress income growth. As we noted above, they also increase financial fragility. A large number of recent cross- country studies report that the expansion of household credit is positively related to crisis probability (Barba and Pivetti 2009; Büyükkarabacak and Valev 2010; Frankel and Saravelos 2012; Obstfeld and Rogoff 2009; Rose and Spiegel 2011; Sutherland et al. 2012). There is also a clear impact on the length and severity of post-2008 recessions. The mechanism is shown by Karen Dynan (2012) and by Atif Mian and Amir Sufi (2014) for the United States.

More leveraged U.S. homeowners have cut back their spending after 2007. But the nefarious effect of more private credit — a rise which, as we have seen, is driven by the growth in household mortgage credit — on the severity of the post-crisis recession is not confined to the US. Philip Lane and Gian Maria Milesi-Ferretti (2011) find that, on average across a large swath of countries, falls in output, consumption, and domestic demand in 2008–2009 correlate to the pre-crisis increases in the ratio of private credit to GDP.

S. Pelin Berkmen et al. (2012) show that the gap between realized output growth in 2009 with the more optimistic pre-crisis forecasts is strongly correlated to pre-crisis credit growth. They infer that pre- crisis household credit growth is a prime suspect for the causes of the depth of the recession. Similar findings are reported by Cecchetti, Mohanty, and Zampolli (2011), Stijn Claessens et al. (2010); Tatiana Didier, Constantino Hevia, and Sergio Schmukler (2012), and others.

In sum, if we divide bank credit into three categories as in Table 1, our categorization suggests that both household consumer credit and loans to non- financial business are productive — in the sense of providing the purchasing power to support production of goods and services — but with greater buildup of financial fragility in the case of consumer credit. Installment loans were instrumental in developing mass markets for cars, but this made household balance sheets more vulnerable. Many U.S. students could not attain a college degree without student loans. In this sense, these loans are productive by enabling graduates to earn more. But if students cannot find jobs that pay enough extra income to service the loan, it is not productive. In any event, the debt burden after graduation weakens their household balance sheets. In this sense, mortgages and other debts tend to increase financial fragility.

This categorization is not exhaustive and should be further refined within each category. For instance, much lending to non-financial business does not support production. It may take the form of mortgage lending pushing up commercial real estate prices, or loans for mergers and takeovers, or for stock buyback programs. Conversely, household mortgages may be productive to the extent that they are used for new construction. They thus should be distinguished from margin (brokers’) loans and interest-only loans to “flip” houses or commercial real estate, which are unproductive.

These more fine-grained categories cannot be observed in the data in a cross- country consistent manner as done in the above studies. They can be applied in country studies building on the Figure 3 distinctions. But a major obstacle to this research program is not empirical, but paradigmatic: the impression that debt-
leveraged real estate valuations represent the economy’s wealth, with little recognition that its financing structures undermine wealth creation. To this we now turn.

The Rentier Economy: Wealth or Overhead? • 1,200 Words

Bank credit to the nonbank “asset” sector (mainly for real estate, but also LBOs and takeover loans to buy companies, margin loans for stock and bond arbitrage, and derivative bets) does not enter the “real sector” to finance tangible capital formation or wages. Its principal immediate effect is to inflate prices for property and other assets. Recent econometric analysis confirms that mortgage credit causes house price to increase (Favara and Imbs 2014) — and not just vice versa, as in the demand-driven textbook credit market theories.

How does this asset-price inflation affect the economy of production and wages and profits? In due course this process involves increasing the debt-to-GDP ratio by raising household debt, mortgage debt, corporate and state, local and government debt levels. This debt requires the real sector to pay debt service — a fact that prompted Benjamin Friedman (2009, 34) to write that “an important question — which no one seems interested in addressing — is what fraction of the economy’s total returns … is absorbed up front by the financial industry.”

To ignore this rising fraction is to ignore debt and its consequence: debt deflation of the “real” economy. Of course, the reason why debt leveraging continued so long was precisely because credit to the FIRE sector inflated asset prices faster than debt service rose — as long as interest rates were falling. The tidal wave of post-1980 central bank and commercial bank liquidity drove interest rates down, increasing capitalization ratios for rental income corporate cash flow.

The result was the greatest bond market rally in history, as the soaring money supply drove down interest rates from their 20-percent high in 1980 to under 1.0 percent after 2008.

A debt-leveraged rise in asset prices has a liability counterpart on the balance sheet of households and firms. Homes, commercial properties, stocks, and bonds are loaded down with debt as they are traded many times by investors or speculators taking out larger and larger loans at easier and easier terms: lower down-payments, zero-amortization (interest-only) loans and outright “liars’ loans” with brokers and their bankers filing false income declarations and crooked property valuations, to be packaged and sold to pension funds, German Landesbanks, and other institutional investors. Each new debt-leveraged sale may bid up prices for these assets.

But the credit can be repaid (with interest) only by withdrawing payment from the “real” sector (out of profits and wages), or by selling financialized assets, or borrowing yet more credit (“Ponzi lending”). The rising indebtedness approaching the 2008 crest was carried not so much by diverting current income away from buying goods and services or by selling financial assets, but by loading down the economy’s balance sheet and national income with yet more debt (that is, by borrowing the interest falling due, for example, by home equity loans). What kept the “Great Moderation” income growth and inflation levels so “moderate” was an exponential flood of credit (i.e., debt) to carry the accumulation and compounding of interest. It was like having to finance a chain letter on an economy-wide scale, with banks creating the credit to keep the scheme going.

This is the institutional reality behind the negative correlation coefficient of credit and income growth, reported in the previous section. In fact, to assess credit for its income growth potential is to miss its true function in the rentier economic system. The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.

Just as classical rents were defined as transfer payments rather than earned by factors of production, financial investment by itself is a zero-sum activity. With interest and related charges taken into account, it is a negative-sum activity. The problem with the transfer character of financial payments is that the assets backing the loans to buy them, must plunge in price at the point where debt service diverts so much income and liquidity from the real sector that debt-financed asset-price inflation becomes unsustainable. This is confirmed by a recent Bank of International Settlements study. Mathias Drehman and Mikael Juselius (2015) report that debt- service ratios are an accurate early warning signal of impending systemic banking crises, and strongly related to the size of the subsequent output losses.

Financial markets can grow sustainably — that is, without rising fragility — only when loans to the real sector are self-amortizing. For instance, the thirty-year home mortgages typical after World War II were paid over the working life of homebuyers. The interest charges often added up to more than the property’s seller received, but the loans financed about two million new homes built each year in the United States in the early post-war decades, creating enough economic growth to pay down the loans.

When building activity slowed, debt growth was kept going by financial engineering and lending at declining rates of interest and on easier payment terms. This is what happened from the 1980s to 2008, and especially after 2001, as the real estate bubble replaced the bubble of the 1990s. Prices for rent-yielding and financial assets were bid up relative to the size of the real economy. Housing and other property prices (as well as prices for stocks and bonds) rose relative to wages, widening the polarization between property owners and labor. Christopher Brown (2007) showed already before the crisis how household credit is central to this divergence. Financial engineering, which freed household incomes and home equity to be invested in speculative assets, greatly increased the amount of borrowing that household could and did take on. By applying Minsky’s categorization, he identified the move from speculative to Ponzi financing structures, and concluded that debt growth, and the consumption growth based on it, was not sustainable. Because a Ponzi scheme is a “pyramid scheme,” sucking money from a broad base to a narrow top, financial engineering also increased inequality (see also Brown 2008).

This polarization occurred largely because resources were flowing to FIRE speculation and arbitrage instead of to more moderate-return, fixed capital formation. The main dynamic was financial, not the industrial relationship between employers and workers described by socialists a century ago. It originated in the United States and spread to most industrial economies via the carry trade and other international lending in an increasingly deregulated environment. Toxic financial waste became the most profitable product and the fastest way to quick fortunes, selling junk mortgages to institutional investors in a financial free-for-all.

Robin Greenwood and David Scharfstein’s (2012) “The Growth of Modern Finance” provides a telling empirical illustration of the transfer (rather than income- generating) character of today’s financial sector. In addition to showing that the financial industry accounted for 7.9 percent of U.S. GDP in 2007 (up from 2.8 percent in 1950), they calculated that much of this took the form of fees and markups — the quintessential transfer payments. Such charges by asset managers of mutual funds, hedge funds, and private equity concerns now account for 36 percent of the growth in the financial sector’s share of the economy, as Gretchen Morgenson (2012) reports. Finance also accounts for some 40 percent of corporate profits. But our point is that financial “profits” in the classical scheme are largely rents, not profit. They are not the same thing as industrial earnings from tangible capital formation.

Capital Gains Are Linked to Debt Growth • 900 Words

This raises a vital question for today’s economies. Can debt-financed rising asset prices make economies richer on a sustainable basis? If the aim of raising asset prices is to increase the capitalization rate of rents and profits by lowering interest rates, can pension funds, insurance companies, and retirees save enough for their retirement out of current earnings, or can they live by capital gains alone?

Asset prices can rise only by debt creation or by diverting current income. The recognition that such debt-fueled inflation of asset prices is a form of rent extraction is central to our analysis of its unsustainability. By contrast, the now conventional economic models give us no handle to even start addressing these phenomena. By viewing capital gains as transfers instead of as income, we define the long-term sustainability of capital gains and asset prices in terms of trends in disposable income plus debt growth. Just as a Ponzi scheme must collapse with mathematical certainty (even though the timing of the collapse is uncertain), so it is with asset markets that expand faster than income growth. The divergence between income growth and rent extraction (asset price growth and financial transfers) is unsustainable, although, by going global, asset markets can be kept inflated over decades.

What obscures this dynamic is a micro-macro fallacy. Homeowners thought they were getting rich as real estate prices were inflated by easier bank credit. According to representative-agent models, the nation was getting rich as new buyers of homes, stocks, and bonds took on larger debts to sustain this price rise. Alan Greenspan applauded this as wealth creation. Individuals borrowed against their capital gains, hoping that future gains would pay off the new debt they were taking on.

This is not how classical economists described the profitability and accumulation of capital under industrial capitalism. Gains were supposed to be achieved by “real” growth, not by asset-price inflation. The financial drive for capital gains has become decoupled from tangible capital investment and employment.

On the individual micro-level, it may be of little concern whether gains are made by higher asset prices or from direct investment to produce and sell goods. To the corporate manager or raider, speculator or entrepreneur, the financial returns appear equal. But on the society-wide macro-level, there is a micro-macro paradox or “fallacy of composition.” Capital gains via asset-price inflation must be fueled by rising indebtedness of the overall economy. Prices for assets will rise by however much a bank is willing to lend, and asset price gains over and above income constitute debt growth in the economy.

In the end, “wealth creation” in the real estate market was fueled by mortgage loans larger than the entire GDP. Each loan was a debt: total mortgage debt doubled relative to the economy in 25 years. That was the cost of “wealth creation.” It is not real wealth. It is debt which is a claim on wealth. It derives not from income earned by adding to the economy’s “real” surplus, but is a form of rent extraction eating into the economy’s surplus.

John Stuart Mill described this contrast in his Principles of Political Economy (1848, 1): “All funds from which the possessor derives an income … are to him equivalent to capital. But to transfer hastily and inconsiderately to the general point of view, propositions which are true of the individual, has been a source of innumerable errors in political economy.” In the United States, John Bates Clark popularized the superficial “businessman’s” perspective, viewing “cost value” as whatever a buyer of a real estate property or other asset pays. No regard was paid to economically and socially necessary cost-value, which in the classical analysis is ultimately resolvable into the cost of labor. Cost-value is different from a gift of nature, and also differs from financial and other rentier charges built into the acquisition price. These are rents, not costs. But as Simon Patten stated a century ago, this difference faded from economists’ memory (see Hudson 2011, 873). Clark’s post- classical approach became the preferred Weltanschauung of financial and real estate interests (Clark in Hudson 2011, 875).

“In the present instance,” Mill (1848, 2) had elaborated, “that which is virtually capital to the individual, is or is not capital to the nation, according as the fund … has or has not been dissipated by somebody else.” In other words, funds not used (Mill used the word “dissipated”) in the real economy provide revenue to their owner, but not to the economy for which this revenue is an overhead cost. Mill’s term “virtually capital to the individual” is kindred to Frederick Soddy’s (1926) term “virtual wealth,” referring to financial securities and debt claims on wealth — its mirror image on the liabilities side of the balance sheet. In a bubble economy, the magnitude of such “virtual wealth” is inflated in excess of “real wealth,” supporting the ability to carry higher debts on an economy-wide level.
Financial and other investors focus on total returns, defined as income plus “capital” gains. But although the original U.S. income tax code treated capital gains as income, these asset-price gains do not appear in the NIPA. The logic of their exclusion seems to be that what is not seen has less of a chance of being taxed. That is why financial assets are called “invisibles,” in contrast to land as the most visible “hard” asset.

Growth of Financial Rents and Its Consequences • 300 Words

We have developed the argument that finance is not the economy. Rent is not income, and asset values do not represent wealth, but rather a claim on the economy’s wealth. They are an overhead cost which is not necessary from a production point of view. We have shown that what keeps asset values rising and the overhead burden growing is debt — in particular, household mortgage debt. We reviewed many recent econometric studies which report that debt hurts income growth. It remains for us to discuss the forms in which this occurs.

An economy based increasingly on rent extraction by the few and debt buildup by the many is, in essence, the feudal model applied in a sophisticated financial system. It is an economy where resources flow to the FIRE sector rather than to moderate-return fixed capital formation. Such economies polarize increasingly between property owners and industry/labor, creating financial tensions as imbalances build up. It ends in tears as debts overwhelm productive structures and household budgets. Asset prices fall, and land and houses are forfeited.

This is the age-old pattern of classical debt crises. It occurred in Babylonia, Israel, and Rome. Yet, despite its relevance to the United States and Europe today, this experience is virtually unknown in today’s academic and policy circles. There is no perspective forum in which to ask in what forms debt growth may hurt the economy today. To start to fill the gap, we now consider what “too much finance” (Arcand, Berkes and Panizza 2011) does to the economy. It decreases productivity and investment, and increases inequality and volatility. In each of these mechanisms, the role of household mortgages is pivotal.

Loss of Productivity • 300 Words

Faced with the choice between the arduous long-term planning and marketing expense of real-sector investment with single digit returns, the quick (and lower-taxed) capital gains on financial and real estate products offering double-digit returns have lured investors. The main connection to tangible capital formation is negative by diverting new borrowing away from the real sector, as recent studies show (Chakraborty Goldstein and McKinlay 2014).

Industrial companies were turned over to “financial engineers” whose business model was to take their returns in the form of capital gains from stock buyback programs, higher dividend pay-outs, and debt- financed asset takeovers (Hudson 2012, 2015a, 2015b). Charting the ensuing rise of interest and capital gains relative to dividends, and of portfolio income relative to normal cash flow in America’s nonfinancial businesses, Greta Krippner (2005, 182) concludes: “One indication of financialization is the extent to which non-financial firms derive revenues from financial investments as opposed to productive activities.”

Much as real estate speculators grow rich on inflated land values rather than production, so financialization threatens to undermine long-term growth. Since the 1980s, the major OECD economies have seen rising capital gains divert bank credit and other financial investment away from industrial productivity growth. Engelbert Stockhammer (2004) shows a clear link between financialization and lower fixed capital formation rates.

This turns out to be finance capitalism’s analogue to the falling rate of profit in industrial capitalism. Instead of depreciation of capital equipment and other fixed investment (a return of capital investment) rising as a proportion of corporate cash flow as production becomes more capital-intensive (“roundabout,” as the Austrians say), it is interest charges that rise. Adam Smith assumed that the rate of profit would be twice the rate of interest, so that returns could be shared equally between the “silent backer” and entrepreneur. But as bonds and bank loans replace equity, interest expands as a proportion of cash flow. Nothing like this was anticipated during the high tide of industrial capitalism.

Inequality • 500 Words

Minsky (1986) described financial systems as tending to develop into Ponzi schemes if unchecked. Echoing Marx ([1887] 2016), he focused on the exponential overgrowth and instability inherent in the “miracle of compound interest,” underlying such schemes and indeed financialized economies. For the economy at large, such growth sucks revenue and wealth from the broad base to the narrow top, impoverishing the many to enrich the few.

Indeed, income inequality has risen since the late 1980s in most OECD countries. Top incomes have skyrocketed (Atkinson, Piketty and Saez 2011). Thomas Piketty (2014) casts this in terms of a redistribution of income from wage earners to owners of capital, but “capital” includes both physical production assets and real estate and financial assets. Given the large role of real estate lending, it is unsurprising that “the growth of the U.S. financial sector has contributed to the exacerbation of inequality in recent decades” (van Arnum and Naples 2013, 1158). Christopher Brown (2008, 9, Figure 1.3) shows how consumer borrowing has supported effective demand since 1995, and how credit market debt owed by the household sector increased exponentially from the turn of the millennium.

Contrary to textbook consensus, household debt had macroeconomic significance, as Brown (2008) shows. More recently, an OECD report also found that financial sector growth in support of household credit expansion exacerbates income inequality (Cournède, Denk and Hoeller 2015).

U.S. data shows that through the 1950s, 1960s, and 1970s, the top 10-percent share remained stable at 30 percent, but started to rise with the explosion of financial credit in the 1980s. However, by 2009, the top 10 percent of income “earners” received about half of the national income, not taking into account capital gains, which is where the largest returns have been made. Anthony Atkinson, Thomas Piketty, and Emmanuel Saez (2011) show that this is a general trend in most developed economies.

Rising leverage increases the rate of return for investors who borrow when asset prices are rising more rapidly than their debt service. But the economy becomes more indebted while creating highly debt-leveraged financial wealth at the top. The resulting financial fragility may appear deceptively stable and self-sustaining as long as asset prices rise at least as fast as debt. When home prices are soaring, owners may not resent (or even notice) the widening inequality of wealth as the top “One Percent” widen their lead over the bottom “99 Percent.” Home equity loans may give the impression that homes are “piggy banks,” conflating the rising debt attached to them with savings in a bank account. Real savings do not have to be paid off later. Mortgage borrowing does.

The “Bubble Illusion” may keep spending power on a rising trend even while real wage income stagnates, as it has done in the United States since the late 1970s. Our analysis that Ponzi-like financial structures exacerbate inequality is reflected in the joint rise of inequality and the share of bank credit to the FIRE sector, as Bezemer (2012a, 2012b) demonstrates. Brown (2007) showed already before the crisis how household credit is central to this. Financial engineering, which freed household incomes and home equity to be invested in speculative assets, greatly increased the amount of borrowing that household could and did take on.

Instability • 100 Words

The Ponzi dynamic explains why financialization first leads to more stability, but then to instability and crises. Easterly, Islam, and Stiglitz (2000) showed that the volatility of economic growth decreases as the financial sector develops in its early stages, but that finance means more instability when credit-to-GDP ratios rise above 100 percent in more “financially mature” (i.e., debt-ridden) economies. Is it a coincidence that this was just the level above which Arcand, Berkes, and Panizza (2011) find that credit growth starts slowing down real-sector growth? After the crisis, a plethora of research has shown that a larger credit overhead increases the probability of a financial crisis and deepens post-crisis recessions (see, for instance, Barba and Pivetti 2009; Berkmen et al. 2012; Claessens et al. 2010)

Concluding Remarks • 900 Words

The banking and financial system may fund productive investment, create real wealth, and increase living standards; or it may simply add to overhead, extracting income to pay financial, property, and other rentier claimants. That is the dual potential of the web of financial credit, property rights, and debts (and their returns in the form of interest, economic rent, and capital gains) vis-à-vis the “real” economy of production and consumption.

The key question is whether finance will be industrialized — the hope of nineteenth-century bank reformers — or whether industry will be financialized, as is occurring today. Corporate stock buybacks or even a leveraged buyout may be the first step toward stripping capital and the road to bankruptcy rather than funding tangible capital formation.

In Keynesian terms, savings may equal new capital investment to produce more goods and services; or they may be used to buy real estate, companies, and other property already in place or financial securities already issued, bidding up their price and making wealth more expensive relative to what wage-earners and new businessmen can make. Classical political economy framed this problem by distinguishing earned from unearned income and productive from unproductive labor, investment, and credit. By the early twentieth century, Thorstein Veblen and others were distinguishing the dynamics of the emerging finance capitalism from those of industrial capitalism.

The old nemesis — a land aristocracy receiving rent simply by virtue of having inherited their land, ultimately from its Norman conquerors — was selling its property to buyers on credit. In effect, landlords replaced rental claims with financial claims, evolving into a financial elite of bankers and bondholders.

Conventional theory today assumes that income equals expenditure, as if banks merely lend out the savings of depositors to borrowers who are more “impatient” to spend the money. In this view, credit creation is not an independent and additional source of finance for investment or consumption (contrary to Marx, Veblen, Schumpeter, Minsky, and other sophisticated analysts of finance capitalism). “Capital” gains do not even appear in the NIPA, nor is any meaningful measure provided by the Federal Reserve’s flow-of-funds statistics. Economists thus are operating “blindly.” This is no accident, given the interest of FIRE sector lobbyists in making such gains and unearned income invisible, and hence not discussed as a major political issue.

We therefore need to start afresh. The credit system has been warped into an increasingly perverse interface with rent-extracting activities. Bank credit is directed into the property sector, with preference to rent-extraction privileges, not the goods- and-service sector. In boom times, the financial sector injects more credit into the real estate, stock, and bond markets (and, to a lesser extent, to consumers via “home equity” loans and credit card debt) than it extracts in debt service (interest and amortization). The effect is to increase asset prices faster than debt levels. Applauded as “wealth creation,” this asset-price inflation improves the economy’s net worth in the short run.

But as the crash approaches, banks deem fewer borrowers creditworthy and may simply resort to fraud (“liars’ loans,” in which the liars are real estate brokers, property appraisers and their bankers, and Wall Street junk-mortgage packagers). Exponential loan growth can be prolonged only by a financial “race to the bottom” via reckless and increasingly fraudulent lending. Some banks seek to increase their market share by hook or by crook, prompting their rivals to try to hold onto their share by “loosening” their own lending standards. This is what happened when Countrywide, Wachovia, WaMu, and other banks innovated in the junk-mortgage market after 2001, followed by a host of community banks. Rising fragility was catalyzed by Wall Street and Federal Reserve enablers and bond-rating agencies, while a compliant U.S. Justice Department effectively decriminalized financial fraud.

The 2008 financial crash pushed the bubble economy to a new stage, characterized by foreclosures and bailouts. Faced with a choice between saving the “real” economy by writing down its debt burden or reimbursing the banks (and ultimately their bondholders and counterparties) for losses and defaults on loans gone bad, the policy response of the US and European governments and their central banks was to save the banks and bondholders (who incidentally are the largest class of political campaign contributors). This policy choice preserved the remarkable gains that the “One Percent” had made, while keeping the debts in place for the “99 Percent.” This accelerated the polarization that already was gaining momentum between creditors and debtors. The political consequence was to subsidize the emerging financial oligarchy.

In light of the fact that “debts that can’t be paid, won’t be paid,” the policy question concerns how they “won’t be paid.” Will resolving the debt overhang favor creditors or debtors? Will it take the form of wage garnishments and foreclosure, and privatization selloffs by distressed governments? Or will it take the form of debt write- downs to bring mortgage debts and student loan debts in line with the ability to pay? This policy choice will determine whether “real” economic growth will recover or succumb to post-bubble depression, negative equity, emigration of young skilled labor, and a “lost decade.” According to our analysis, the present choice of financial and fiscal austerity in much of Europe threatens to subject debt-ridden economies to needless tragedy.

Dirk Bezemer is a professor of economics at the University of Groningen, the Netherlands. Michael Hudson is a distinguished research professor of economics at the University of Missouri, Kansas City, and a professor at Peking University. The authors thank the editor and two anonymous referees for helpful suggestions that greatly improved this article. Bezemer wishes to thank the Equilibrio Foundation and the Institute for New Economic Thinking for financial support. Any remaining errors are the authors’ own.

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Sutherland, Douglas, Peter Hoeller, Rossana Merola and Volker Ziemann. “Debt and Macroeconomic Stability.” OECD Economics Department Working Papers No.1003. OECD Publishing, 2012. Accessed December 1, 2015.
Tobin, James. “On the Efficiency of the Financial System.” Lloyds Bank Review 153 (1984): 1-15
Van Arnum, Bradford and Michele Naples. “Financialization and Income Inequality in the United States, 1967–2010.” American Journal of Economics and Sociology 72, 5 (2013): 1158-1182.
Werner, Richard. “Towards a New Monetary Paradigm: A Quantity Theorem of Disaggregated Credit, with Evidence from Japan.” Kredit und Kapital 30, 2 (1997): 276-309.
———. New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance. Basingstoke, UK: Palgrave Macmillan, 2005.
Wray, L. Randall. “The Rise and Fall of Money Manager Capitalism: A Minskian Approach.” Cambridge Journal of Economics 33, 4 (2009): 807-828.

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• Category: Economics • Tags: Finance, Wall Street 
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  1. Anonymous • Disclaimer says: • Website

    I think I am widely read, and this has got to be the best financial essay in the last decade. And zero comments? These profs have nailed it, and I’ll read the rest of what they got to say. Finally, academics I can cite! I’ll be mining this for my blog tomorrow.

    John Wiley Spiers

    • Replies: @boogerbently
    , @gwynedd1
  2. Durruti says:

    Nice detailed article from Bezemer & Hudson. Thanks to Unz for placing it here.

    I forwarded it to an economist friend, who should appreciate it.

    In the 1970s, the Oligarchy began the destruction and looting of America’s middle class, by encouraging the export of industry and jobs to parts of the world where workers were paid bare subsistence wages. The long decline of the local economy has led to the political decline of the working class, as well as the decay of cities, towns, and infrastructure, such as education.

    The impoverishment of America’s middle class has undermined the nation’s financial stability. Without a productive foundation, the government has accumulated a huge debt of $trillions of dollars. Adding to the debt, the so-called ‘Bailout’ of the nation’s Bankers has looted America’s workers of another $13trillion. This debt will have to be paid, or suffered by future generations. Concurrently, the top 1% of the nation’s population has benefited enormously from the discomfiture of the rest. Additionally, the interest rate has been reduced to 0, thereby slowly robbing millions of depositors of their savings, as their savings cannot stay even with the inflation rate.

    In the absence of Time, (Einstein’s 4th dimension), I append a revolutionary appreciation of – how to deal with debt (by Jefferson). This Jefferson approach is specially favored by Anarchists, such as myself.

    The Restoration of the Republic will be a Revolutionary Act, that will cancel all previous debts owed to our unconstitutional regime and its business supporters. All debts, including Student Debts, will be canceled. Our citizens will begin, anew, with a clean slate.

    As American Founder, Thomas Jefferson wrote, in a letter to James Madison:

    “I set out on this ground, which I suppose to be self evident, ‘that the earth belongs in usufruct to the living’:”

    “Then I say the earth belongs to each of these generations, during it’s course, fully, and in their own right. The 2d. Generation receives it clear of the debts and incumberances of the 1st. The 3d of the 2d. and so on. For if the 1st. Could charge it with a debt, then the earth would belong to the dead and not the living generation.”

    For the VISION of a bright shiny new Republic, complete with our Constitution, with its Bill of Rights, a happy and prosperous and productive people, with our Pride, our Sovereignty, and our Honor restored!

    • Replies: @Art
  3. Vinnie says:

    I COMPLETELY agree with Mr. Spiers. I’ve read a fair bit about The Great Depression and the Austrian School’s explanations for modern economic problems, but this article now requires me to START OVER from bare ground.

    I expect I’ll have to read it 2 or 3 times just to understand what is being said, and then read it again to try to catch the linkage and logic.

    And then of course there are the references…

  4. Rehmat says:

    No matter which way you slice the cake – Capitalism was created by Western vultures to loot the 99% world population.

    India’s famous human rights activist and author, Arundhati Roy, in her new book, ‘Capitalism: The Ghost Story’, examines the dark side of democracy in contemporary India, and shows how the demands of the globalized western capitalist banking system has subjugated billions of peoples to the highest and most intense form of racism and exploitation. Watch two videos below to understand the evil world of capitalism and the evildoers who benefit from this system.

    Roy says that India’s 100 richest people controls 25% of the country’s GDP. A 2010 Oxford University study reported that 55% of India’s populations of 1.1 billion live below poverty line.

    Roy, though, talks mostly the capitalist culture in her native India – she would certainly get medal of ‘antisemitism’ from ADL and other Jewish supremacists for attacking the Jewish-controlled Council on Foreign Relations (CFR), which is funded by Rockefeller, Carnegie and Ford Foundations, and CIA …..

    • Replies: @Alden
  5. annamaria says:

    “…by 2009, the top 10 percent of income “earners” received about half of the national income, not taking into account capital gains, which is where the largest returns have been made. Anthony Atkinson, Thomas Piketty, and Emmanuel Saez (2011) show that this is a general trend in most developed economies.”
    And yes, this is neo-Feudalism.

  6. This was indeed an excellent essay , but quite long and therefore not likely to be widely read other than by persons with some command of the lingo. I’m a former tech analyst/equity trader who had his epiphany in 1995, reading Robert Prechter’s At the Crest of the Tidal Wave. It became obvious that the US was going to sacrifice its industrial base to non-productive finance and that the consequences would eventually be catastrophic. By 1997 equity valuations could no longer be logically determined and seemed frothy. I’d saved earnings and at age 51 decided it was time to go. Left the profession, left the US. I’m a strong believer in subsidiarity and in “small is beautiful”. I now spend monthly on all expenses what a garage space in Manhattan cost 20 years ago and live a more graceful life than friends spending ten or more times that per month.

    The ill-gotten gains of the renter class, along with the political influence it buys them, must be confiscated and the privately owned central bank system suppressed and eliminated in favor of state banks. The US must re-industrialize no matter how great the difficulties. Trump’s platform is the only viable means of correcting gross imbalances.

    I am and have always been anti big government, and an old school industrial capitalist, but this jiggery-pokery is not productive, as the authors demonstrate, so for the first time in my life I see the necessity of governmental intervention in an area of public policy from which it should ordinarily be kept. Not this time, though: this time, only decisive and draconian measures will do the trick.

  7. Hudson’s analysis of the ills of our FIRE based economy is, as usual, accurate, but this essay lacks his prescription for a cure. In the past when he has provided a glimpse of his prescriptions they have relied heavily on government power and intervention. I have seen nothing in his writings but the exchange of one oligarchy for another.

    Radical measures are coming whether they involve “helicopter money” or a jubilee (the only “difference” being in who are the recipients of the largess), but be prepared to meet the new boss, same as the old boss.

  8. Andrei Martyanov [AKA "SmoothieX12"] says: • Website

    Excellent piece. Superb, really.

  9. Sam Shama says:

    A brilliant essay, one which lays the groundwork to explicitly model credit and finance as inputs in the neo-classical model.

    Keynes was a giant and recognised the deleterious effects of credit growth outstripping the growth of non-rent output, back when these things were not well understood let alone explicitly modelled.

    A relevant question/quibble perhaps, but have you thought of how much capital needs to be deployed in the process of price discovery in order to ensure full reflection of all available information? We are increasingly in the grips of machines taking over the investment processes and in that environment, the obvious answer is not zero, but begs the question as to whether the current amount of “active” investing adds any more information content to prices, or worse, actually contaminates the signal. In the latter case, active trading is nothing more than a zero-sum game, where society could care less overall but there are winners and losers among the active traders. Much of what passes for “Global Macro” and other styles of HF investing are pure punts, with zero effort expended at determining the optimal allocation of funds for the economy. The societal harm in this case is large but would require an article by itself.

    As an aside, it’d be interesting to resurrect the “Socialist Calculation” debate from the 1940s (Oscar Lange, in this context, updated with the technological, real-time information access that could theoretically be made available to central planners.

    What are the prescriptive policies? Who decides what is or isn’t rent? How do we tackle the issue of re-distributive taxation on these?

    Enjoyed this post immensely. Please keep them coming.

  10. woodNfish says:

    banks deem fewer borrowers creditworthy and may simply resort to fraud (“liars’ loans,” in which the liars are real estate brokers, property appraisers and their bankers, and Wall Street junk-mortgage packagers).

    …banks innovated in the junk-mortgage market after 2001, followed by a host of community banks. Rising fragility was catalyzed by Wall Street and Federal Reserve enablers and bond-rating agencies, while a compliant U.S. Justice Department effectively decriminalized financial fraud.

    …the policy response of the US and European governments and their central banks was to save the banks and bondholders (who incidentally are the largest class of political campaign contributors). This policy choice preserved the remarkable gains that the “One Percent” had made, while keeping the debts in place for the “99 Percent.” This accelerated the polarization that already was gaining momentum between creditors and debtors. The political consequence was to subsidize the emerging financial oligarchy.

    When it crashes, those responsible should be hunted down and executed.

    • Agree: edNels
    • Replies: @Willem Hendrik
    , @Rehmat
  11. @woodNfish

    Human nature is responsible.

    At least everybody is having fun shuffling digits, keeping busy.

    In the old days people had to build piramides, dig canals with a shovel or do other back-breaking work. Now you may break a fingernail. Isn’t that progress?

    • Replies: @woodNfish
    , @another fred
  12. Pandos says:

    I keep the article as an index of the usual economist suspects. During the writing, I think my wallet was stolen – again.

    Where is their elevator pitch? The authors admit this blah, blah, blah has begin ongoing for 300 years and the lobbyist for the asset owners always win. The progressives (tools of wealth) even got us morons to have our income taxed to complete the skimming operation. Wealth is not made building the house but burning it down.

    My elevator pitch: Tax balance sheets not income statements.

  13. Anonymous • Disclaimer says: • Website

    Wonderful essay on productive vs non-productive financial activity.

    One can almost hear Ezra Pound chanting his great poem With Usura in the background. Pound defined all non-productive loans as “usury”. You can read With Usura and listen to Pound himself declaiming With Usura via this link:

  14. woodNfish says:
    @Willem Hendrik

    …the modest, safe, productive life of Russians was over. The vast wealth of the Soviets, accumulated by the intensive work of generations, has been divided and shared by a few (mainly Jewish) oligarchs. The rich became obscenely rich, while the middle class perished.


    No, it is more than that and you can bet it has “Jew” written all over it.

    • Replies: @Willem Hendrik
  15. Anonymous • Disclaimer says:

    This has got to be one of my favorite pieces I have read all year. Bravo.

    Thanks for publishing this Unz.

  16. Outwest says:

    I’ve read this and other such essays and struggled to relate the empirical logic to my reality. Both of my businesses own the real estate that shelters the workers, equipment and inventory. I have trouble distinguishing between the productivity of the capital, labor and real/or estate necessary for production. Arguments citing Norman invaders –but not Anglos- seem a bit dated.

    This is not to say there isn’t misuse. Anything from tulip bulbs to liar loans can be subject to exploitation. I can’t think of a business loan that I took and promptly repaid that I regret. Maybe we’re discussing the government’s decision to “roll the dice” again when the storm clouds were already ominous.

  17. alexander says:

    Thank you gentlemen, for an excellent essay.

    and thanks too, to the Unz Review, for posting it.

    I have always tried to make a distinction between a belief in capitalism with those who reject it (for whatever rationales)…..and the FRAUD that can be allowed to permeate within a capitalist system that can most hastily speed the system and the society which employs it, into crises and collapse.

    They are NOT the same thing.

    Its impossible to say where the US economy would be today, were the massive and systemic fraud that enabled both our catastrophic war debt, and our horrendous banking debt, not allowed to win the day.

    I think you gentlemen would do very well to explore the fraud that permeates throughout our political and financial system, not just the mechanisms of production and rent.

    For it is within the mechanisms of this “defrauding” that we see the MOST injurious and life threatening elements to our nations solvency, evolve.

    For example ,In the banking crisis, Citicorp kept all its subprime derivative transactions , OFF BOOK . This constitutes a profound “defrauding” of the investor who purchases its stock.

    We know to a certainty, that “blue chips” like Citigroup were heavily weighted in every pension fund, 401k plan, and mutual fund across the country.

    When Citi decided to disclose their losses from their (hidden) subprime bungle and throw them on the books, the stock dropped from $ 70 down to $1.90 virtually overnight.

    If people had their retirement fund in a conservative mutual fund which weighted heavily in Citi, their nest egg of 10k shares of Citigroup went from a value of $700,000.00 to $19,000.00 in under a week.

    Imagine, if you will, this “nest egg” represented the retirement fund of a mason who had been highly “productive” building homes for forty years, and we begin to see how “fraud” can disable the most positive results of any healthy “production” cycle.

    This constituted a deep, deep hemorrhaging of wealth throughout our entire economic system.

    And it is really all due to FRAUD, gentlemen.

    Were Citigroup to have been HONEST with its investors by having its subprime trades on the books the WHOLE TIME, not hidden, like they did, buyers and holders of the stock could have viewed an actual balance sheet, not a phony one,THEN made the choice to own or sell the stock.

    This is just one example, of the way in which “fraud” can destroy the wealth of nations, but it is by no means the only one.

  18. Alden says:

    Wonderful article I read it twice and should read it again.

  19. CanSpeccy says: • Website

    These authors, Steve Keen, and others outside the bubble of Nobel-Prize-winning bullshit economics, have well revealed the pathologies of the FIRE economy that has dominated the West since the drive for globalization went into high gear in 1994 with Clinton’s signature to the GATT agreement, a treaty that exposed US labor to unrestricted competition from workers of the Third World earning less than 5% of US wages.

    As Western workers became increasingly uncompetitive in the internationally tradable sectors of the economy, they made up for the short-fall in income by taking on ever increasing amounts of debt, the debt bubble continually stimulated by declining interest rates (now absurdly entering negative territory), and money creation, mainly by private institutions.

    The question is, what to do?

    The answer, obviously, is to redirect capital from consumption and speculative investments in a Ponzi economy into productive activities. Trouble is, Western governments are all owned by the banks and other financial corporations that reap the profits of the debt-based economy.

    So what to do? A lynching or two might help. At least the total public humiliation of scoundrel politicians such as Blair and Brown and Cameron, the Bush’s and the Clinton’s would be a start, so the ongoing public humiliation of Hillary, a life-long liar and swindler, is an encouraging start. A war crimes trial for Bush and Blair would be another step in the right direction. Publicly debagging some Central Bankers, past and present, would be a good idea too.

    • Replies: @gwynedd1
    , @RadicalCenter
  20. @Willem Hendrik

    Human nature is responsible.

    A voice crying in the wilderness.

    Cassandra by Robinson Jeffers

    The mad girl with the staring eyes and long white fingers
    Hooked in the stones of the wall,
    The storm-wrack hair and screeching mouth: does it matter, Cassandra,
    Whether the people believe
    Your bitter fountain? Truly men hate the truth, they’d liefer
    Meet a tiger on the road.

    Therefore the poets honey their truth with lying; but religion—
    Vendors and political men
    Pour from the barrel, new lies on the old, and are praised for kind
    Wisdom. Poor bitch be wise.
    No: you’ll still mumble in a corner a crust of truth, to men
    And gods disgusting—you and I, Cassandra.

  21. Anonymous • Disclaimer says:

    A pile of dross–sand–is transmuted into gold–an Integrated Chip–through the intelligent application of Intelligence. This is the value added by Labor.

    Things worth doing are those which have a future.

    Getting drunk on prom night and driving a car occupied by three other teenagers over a ravine at 80 mph into a two foot diameter tree trunk is an example of behavior which does not have a future.

    Patching a leaky roof or planting a garden are examples of behavior that does have a future.
    A sound economy is one based on behavior that has a future i.e. it is self perpetuating and life enhancing.

    Because Labor is the essential ingredient to all viable economic activity, the smallest unit of currency in a functioning, healthy economy is the lifetime wage of a worker that will enable him to raise a family in comfort and ensure that he lives in modest comfort and happiness for his/her allotted span of 80 years.

    Whenever business planners, economists, workers, managers, owners et al sit down to negotiate wages, investment etc. this is the irreducible minimum, the quantum with which they must deal. It is the standardized brick with which they must build their edifice. All else derives from this and is, in a sense, just the technical working out of the details. The job of economists is to grind through the details, the ratios that keep current assessments of today’s wage in line with gains in productivity, percentage of profits allocated to reinvestment in production, interest, dividends etc.

    It is a waste of energy to do a job so poorly that one must do it over and over again. An intelligent person strives to minimize wasted energy. Therefore there is a tendency for intelligent people to devise ways to make a product perform better and to make it with less effort.

    Gains in productivity mean the supply of goods increase in proportion to the money supply. A worker’s wage buys more and more as time passes. In an economy in which the life-time wage of the worker is the basis of all calculations the value of money rises through time. A steady rise in the value of money allows planners to make accurate predictions and calculations for future scenarios. The result is a well ordered economy.

    Importing alien workers who will work for less than natives is a form of counterfeiting. If wages are halved and there are no concomitant gains in productivity, then demand declines by half as well. When purchasing power falls, then in order to maintain sales, manufacturers must cheapen goods. Cheaper goods fall apart sooner. With goods falling apart sooner, production must increase if standard of living is not to decline. Then, the worker must work harder to maintain a lower standard of living. That is how, paradoxically, importing cheap labor reduces quality of life.

    When speculators borrow money to purchase productive assets, they are artificially, expanding the money supply. Having little interest and even less talent at running factories, speculators reroute money that should go to wages and research and development into interest payments, dividends and stock buy backs thereby depleting the Intelligence of the company. Depleted of its Intelligence, the company can no longer make a competitive product that would enable it to compete in world markets. The nation then runs a trade deficit and must borrow abroad to make ends meet if it is to avoid lower consumption and massive layoffs. To repay this foreign debt, the nation must expand its money supply. Expanding the money supply with no increase in productivity would result in inflation except that wages are no longer tied to the expanding money supply (see above).

    Since wages are delinked from inflation, the worker must borrow to buy what he makes. Borrowing puts him in debt to the banks which are the same financial speculators that now own his factory. The speculator is loaning money to the worker so that he (the worker) can support himself while he works for the speculator-owned factory to make the money with which he repays the loan that allows him to stay alive and work for the financial speculators that borrowed virtual money to buy the factory for which the worker works.

    The financial speculators must make enough money on the interest of its loans to the worker to pay off the loans with which they bought the company and to pocket a profit as well. Nor can they let wages outrun the interest on the consumer and home loans they make to the worker/borrower or the long-term interest on the loans they incurred in buying the company for which their wage slave works. But, since productivity is not growing fast enough to offset overall need for money to make interest payments, the money supply must be expanded. All of this new money ends up in the pockets of the financial speculators.

    This is why union contracts that linked wages to inflation had to be broken and labor bargaining power undermined by mass immigration policies.

    The upshot is the violation of the first principle laid out above. That is, the minimum unit of currency in an economy is the wage necessary to maintain a worker and his family comfortably for the duration of his normal life. All other units of currency are subunits of this. Such a policy is possible only in a Nation/State that has secure borders and which cares for the well-being of its citizen/workers.

    Ergo, the final judgement is that the current crop of financial speculators cares not a whit for its workers nor for the long term health of the economy over which it exercises power. The solution is to forcibly remove them and reinstall an elite who are indigenous and who share the motives and goals of the base population to the extent of realizing that the smallest unit of currency in a functioning economy is that which promotes the lifetime well being of a worker and his family.

    • Replies: @Alden
  22. @woodNfish

    I agree that the jewish ideology teaches it’s followers to circumvent rules and still abide to the letter.
    In countries like India though, with different ideologies, with tens of millions of child-slaves now working the fields, also wealth is accumulated by few.
    China, you have to be connected to the communist party to be able to make serious money and keep some of it. Hundreds of millions are still scraping the land for food.

    It is the human condition to want more. And more can only be measured by others having less.

    On a more upbeat note: In the end, it is all rented.

    • Replies: @woodNfish
  23. woodNfish says:
    @Willem Hendrik

    more can only be measured by others having less.

    Only if you think it is a zero sum game. More can also be measured by what you currently have.

    • Agree: Outwest
    • Replies: @Willem Hendrik
  24. @Anonymous

    I’ll await your (hopefully) MUCH abbreviated synopsis.
    I don’t believe he has ever posted less than 7000 words.

  25. 5371 says:

    Good piece. Put it together with a Friedrich List/Ha-Joon Chang challenge to free trade dogma, and you have a resounding rebuff to neoliberal “thought”.

    • Replies: @Sam Shama
  26. Rehmat says:

    Don’t forget, in the US prosecuting Wall Street crooks is ‘antisemitism’.

    David Brooks in his Op-Ed published in ‘The Jew York Times’ (October 10, 2011), entitled ‘The Milquetoast Radicals’, wrote: “Take the Occupy Wall Street movement. This uprising was sparked by the (Canadian) magazine Adbusters, previously best known for 2004 essay, “Why Won’t Anyone Say They Are Jewish?“, an investigative report that identified some of the most influential Jews and their nefarious grip on policy. If there is a core theme to Occupy Wall Street movement, it is that the virtuous 99 percent of society is being cheated by the richest and greediest 1 percent.

    Kalle Lasn, the editor of Abusters, in the said article, had produced a list of 50 neocons (Zioncons) proving 26 of them being Jewish. Moreover, he stated that neocons have “a special affinity” for Israel and their influence helps to tilt US foreign policy toward Israel. Kalle Lasn was not talking about the obvious Jewish neocons Doug Feith, Richard Perle and Paul Wolfowitz – but the dual-citizen holders like former Attorney-General Michael Mukasey, former head of Homeland Security Michael Chertoff, former anti-Iran Defense Intelligence Agency analyst Larry Franklin, former senior Pentagon official Edward Luttwak, Henry Kissinger, adviser to Pentagon, Rabbi Dov Zakheim, Bush’s Pentagon Comptroller who was unable to explain the disappearance of $3.3 trillion dollars shortly before 9/11, Kenneth Adleman, Lewis ‘scooter’ Libby, Elliott Abrams, Robert Satloff, Marc Grossman and many more….

  27. @woodNfish

    I am afraid I need your help on that one.

    How can I measure with the same measure?
    You need some form of comparison with the past or others.

  28. Anonymous • Disclaimer says:

    Remember in the third grade when the teacher, as part of her demonstration about magnetism, put a bar magnet beneath a sheet of paper and sprinkled iron filings on the paper? And how, with a little shaking, the filings arranged themselves into the characteristic 2-D torus shape with which we are all familiar? All the filings head to toe in column each of which was separated one from another by a regular distance.

    Maybe you remember (or not?) that each tiny filing was magnetized and itself became a miniature magnet with a north and south pole. And that each filing acted on its neighbor head to toe, and side by side according to the laws of attraction and repulsion such that, each being about the same size and therefore strength of field, would tend to act equally with all its neighbors and the result would be a regular pattern.

    One could, with sufficiently fine, accurate tools measure the strength of the magnetic field surrounding each filing and calculate just what the force was that each exerted on each. And, if one were to perturb a specific area, say by flicking a few particles with their finger, one could laboriously calculate the forces exerted on each filing by its neighbor that would act to reform them into a regular pattern again.

    Yes, one could do it that way, but it would be a lot of hard work and calculation that can be accomplished far easier by understanding that the particles are arrayed along dominating, so-called magnetic lines force created by the bar magnet hidden beneath the paper.

    The first way of analysis is characteristic of the English speaking world and is called Logical Atomism. Reality is reduced to tiny bits which are then reassembled by subjecting them to some relational Law which is applied iteratively until a comprehensive whole emerges.

    The second way is characteristic of German thinking and is known as Gestalt thinking. The whole is prior to and organizes the parts.

    Above, I said that the smallest unit of currency in an economy is a lifetime’s wage that would sustain a working family. That is because anything less would result in the self-destruction of the economy.

    This is teleological thinking. Thinking from the final desired end result back towards the now. Thinking from finished product back to specific lesser causes and conditions.

    The lifetime’s wage is the bar magnet. It creates a force field within which all else must align. It is more Real than any other consideration.

    Bizarre, huh? But it is. It is prior to and trumps all else.

    Economists analyze specifics, iron filings in relation to each other and, when there is a perturbation, theorize trying to relate how the filings will affect one another as they struggle to realign themselves. This is why their theories have no predictive value. They mistakenly believe that the locus of causation lies in the filings themselves rather than the field within which they exist.

    So, I’m not speaking metaphorically. The Root Cause is a family’s living wage. It is the Prime Mover. Every disfunction is a consequence of deviating from that Ideal.

    • Replies: @annamaria
  29. Alden says:

    Excellent!!! One thing I have to add is that so many middle class “professional” workers have to accumulate debt just to get to work every day.
    I think that car payments are ok, but if one has to put gas oil batteries tires and car repairs on credit cards that the worker doesn’t earn enough to pay off at the end of the month it’s time to quit work and go on welfare.
    A lot of those equity loans were taken out to buy new cars to drive to work at the job that didn’t pay enough to buy a decent car in good running condition. Many have to pay for their commuter tickets with credit cards they can’t pay off completely every month so the debt increases with interest

    • Replies: @RadicalCenter
  30. edNels [AKA "geoshmoe"] says:

    The worst post from Hudson yet. When Hudson is good is when he uses regular english to make his points. Most of the economists can’t quite do that, because they learned in school that to be an economist is to be an obscurantist. That helps to make you worth something to those who pay the bills, and don’t forget, since you will be getting a teaching credential, there is the issue of job security too…

    Once they start breaking out these fool graphs, it’s a giveaway that either somebody can’t simply say it plain English in a matter of fact way and remain interesting or readable, and even in the best scenario, it is condescending, to think that the reader needs some visual aids.

    I don’t see why Prof Hudson decided to go all pedantic, but he is real good usually. Maybe he has professional reasons to make it harder to comprehend his writings, ’cause, I don’t feel ashamed to not be able to read Economics, I know it’s intentionally cryptic, and is supposed to make mere mortals wilt from boredom and mystification. One is expected to be obligingly overcome, and withdraw, and let the great intellects take care of it. I can just see them in their teachers lounge smoking pipes in tweedy jackets and talk gibberish to each other, it’s a weird art form.

    I complained to a Econ 1b teacher about the ”run on setences” and extraineous language in the text book, and would he paraphrase a random paragraph please, no, but he said: ” well, Economics isn’t for everybody,”, I sped to the book store to turn it back in and drop.

    I hope prof. Hudson gets his promotion, and returns to explaining things to the average geo.

    • Replies: @gwynedd1
  31. Alden says:


    India is an excellent of the nastiest kind of capitalism, agriculture and most of all, horrible usurious money lending

    Untouchables paid less than a slave earned in room board clothes and spending money, child labor starting at age 6 or so, and minstouud 500 percent debt. There are small farmers in India still paying off a tractor their grandfather bought 70 years ago.

    Then there the cultural customs demanded by the religion and way of life that get people into horrible debt such as families whose incomes in US dollars is
    $20,000 a year throwing 5 day weddings costing the $150,000 US dollars

    And those weddings are paid for by borrowing at 500 percent interest from the unregulated money lenders Thosr money lenders have great influence in preventing government regulations curbing their avaricious practices

    When India ends child labor and enforces some health and safety rules and gives workers tables so they do t have to squat on the ground to do their work and get crippled by arthritis by age 40 get back to us.

    • Replies: @MarkinLA
  32. annamaria says:

    “…the smallest unit of currency in an economy is a lifetime’s wage that would sustain a working family. That is because anything less would result in the self-destruction of the economy.”
    Thank you. Excellent!

    • Replies: @Anonymous
  33. “In light of the fact that “debts that can’t be paid, won’t be paid,” the policy question concerns how they “won’t be paid.” Will resolving the debt overhang favor creditors or debtors? ”


    “Will it take the form of wage garnishments and foreclosure, and privatization selloffs by distressed governments? ”

    Of course.

    There. 7000 words later, the inverted pyramid of piffle has been parsed and posted for

    We will not be able to vote our way out of this mess.

    Most will crouch down and lick the hand that feeds them.

  34. gwynedd1 says:

    You must be new to the Michael Hudson effect. One of my favorite essays was Ricardian trade Theory Finacialized. I sent it to several people I know, confident it was going to virally transmit because it answered the question as to why countries with roads, airports , telecommunications etc cannot compete with 3rd world hell holes.

    Nobody cares.

  35. gwynedd1 says:

    I’ve said what the problem is in plain English, pain English and stain English. Nothing gets through. A lot of it is based on Henry George which is the least pedantic economist of the 19th century. Trust me it doesn’t matter how simple one makes it. Nothing gets through.

  36. gwynedd1 says:

    The short statement is land near a work place isn’t industrial capital and productivity does not go up when it rises in price . Productivity falls.

    The solution is to stop taxing wages and capital and shift necessary taxes on land values as well as tight credit standards on real estate, with all risk on the owner not to be put on the public account.

    The short answer is our economy is too dependent on cash flows from real estate and other assets growing in value.

    The other factor is government intervention, if at all. If cash flows are a problem, especially in trying to remove the real estate cash flow addiction, it seems as if Monetarist or Keynesian solutions are the only ones considered. Simply sending money to house holds to pay off private debt in $1,000 increments would do better than either one. The credit system still functions, but savers are still rewarded.

    The most common long term asset we should be able to invest should be capital with perhaps patent protection, not squatting on valuable locations of real estate

  37. Anonymous • Disclaimer says:

    Economists believe that people go into business to make a profit.

    But where have they ever produced a survey that proves this?

    Every survey shows that people want a good life. A nice home, neighborhood, peace and love in their family, decent schools, low crime, nice infrastructure etc. This is why people go to work or start a business. Making a profit is an intermediate goal, not the end in itself. The ultimate teleological goal is to live a good life.

    Imagine two nations/economies.

    In Bratroit, you earn a high wage as do your fellow managers. However, prosperity is not widely shared in your country. The few very rich isolate themselves in gated communities and commute to work in helicopters. There is a large class of unemployed and debt slaves. The streets are mean and nasty.

    Commuting to work is a bitch because cars clog the arterials. Roaming gangs of yoofs hurl rocks through windshields of cars and rob the passengers, often killing them. Your tap water is unfit to drink. Your toilet often backs up because of some down-stream blockage. Raw sewage is pumped into the bay and the beaches are biohazards. Signs warn you against swimming in the bay.

    Your children are afraid to attend public school because of the daily violence. Teachers crouch behind plexiglas shields in front of their desks. The roads are pockmarked with potholes. Public parks are desolate wastelands of broken glass and burning fires.

    Independent surveys rate your country’s government as one of the most corrupt in the world, with bribery and graft endemic. Tax revenue that should go towards repaving roads ends up in the commissioner’s pockets.

    But you, personally, are employed at a very well-paid job and live in a nice home surrounded by an eight foot high wall surmounted by broken glass bottles. You are comparatively and absolutely rich.

    Now imagine another nation, Normark.

    Wealth is evenly distributed because everyone earns a lifetime sustainable wage. This is the non-negotiable condition that all parties have agreed to when they sit down at the table to hammer out economic decisions.

    The schools are models of light, cleanliness and order. The children are healthy, clean-limbed and appear happy. There are very few discipline problems and your children can walk or bike to school without fear of molestation. Your commute is easy because trolleys run every 10 minutes from a stop within walking distance from your house. Sanitary systems function perfectly, tap water is drinkable, the bay is pristine and your family often spends weekends swimming and sailing in your small boat on the bay.

    The prime minister earns the same as a doctor, who earns little more than a plumber. A bus driver can raise a family. Factories are clean, well lighted and offer day care, and showers. Your children’s education is paid for, including books and fees, through college. As college and technical school students they may commute on public buses for free.

    You make an average wage in this country which allows you to own a small car and modest, well built brick house. Your health care is provided for life. Surveys by independent agencies rate your country’s government as the most transparent, least crime-ridden in the world.

    Which would you choose?

    Most people would choose the latter because they don’t want to live in fear of violence and poverty. People are not interested in profit per se. Money is only a means to living the good life. So why do economists focus on profit only? Because their concerns are actually quite narrow. They want to create mathematic models and profit is a number, whereas happiness or life satisfaction is nebulous and difficult to quantify. So how can an economist offer advise as to how we should organize our society? They can’t. Except to tell us how, show us the mechanics or how certain choices will entail or imply certain outcomes. Economists are technicians, not moral philosophers.

    Now, the interesting question is why are a certain chosen people fiddling with the internal affairs of those countries like Normark and attempting to wreck their economy by importing hordes of peoples whose values make them unassimilable? Is it out of envy? Jealousy at those who make the chosen look bad for never having themselves, created such happiness? A desire to undermine through strife and fracture those societies, so that they may step in with their ruinous notions of profit as the end all and be all of life, which creates the conditions that puts them in the 1% and reduces the rest of the population to debt slavery?

    All of the above are true. There is a terribly destructive war being waged by the psychopathic sadists who occupy Wall Street top floor corner offices against the egalitarian societies which place human happiness above profit.

    • Replies: @utu
    , @alexander
  38. @CanSpeccy

    Can’t join you in calling for illegal / extra-judicial violence.

    But we should indeed prosecute the Bushes, Clintons, and Obamas (and their foreign counterparts) for war crimes and for corruption. The sentence should be life in prison without possibility of parole — in a regular prison, with the general population and no special protections, just like any of us here would be placed.

  39. utu says:

    “Now, the interesting question is why are a certain chosen people fiddling with the internal affairs of those countries like Normark and attempting to wreck their economy by importing hordes of peoples whose values make them unassimilable? Is it out of envy? Jealousy at those who make the chosen look bad for never having themselves, created such happiness? A desire to undermine through strife and fracture those societies, so that they may step in with their ruinous notions of profit as the end all and be all of life, which creates the conditions that puts them in the 1% and reduces the rest of the population to debt slavery?”

    Excellent questions. I think of Sweden and people like Barbara Specter. But she is just a low level operative. Is there a bigger plan?

  40. @Alden

    Nice points, except that a person who is not debt-free and lacks substantial savings should never buy a brand-new vehicle in the first place. Buying such a rapidly-depreciating asset isn’t prudent and the common decision to do so holds back tens of millions of Americans.

    Just about nobody “needs” a new vehicle in order to get to work, school, etc., reliably.

    So, the system is indeed rigged against the average person in the USA and elsewhere, but let’s not blame government, bankers, whomever, for so many Americans being foolish, ignorant, or shortsighted enough to buy vehicles they can’t afford (and, for that matter, attend universities they can’t afford).

    • Replies: @Alden
  41. alexander says:

    Anonymous (and Anna)

    For the last two decades rates of productivity, and efficiency(which were quite good) never translated into higher wages for the worker, even though it was THEIR ability to get more done, and more done well, which was the reason.

    The vast majority of profits from productivity and efficiency went right into the hands of the top brass and CEO’s of major corporations, not the workers.

    Comparative ratios of the increase in CEO pay over worker pay, tells this tale most dramatically.

    CEO’s have paid themselves over 200 times what they were making two decades ago, workers wages have stayed virtually the same.(even adjusting for inflation)

    What happened with the vast majority of workers who were homeowners, is they were able to rationalize their lack of increase in income , with the substantial increase in the value of their homes.

    While people were not making that much more money, they FELT they were getting RICHER, because the value of their home was doubling every seven years.

    Perhaps had home valuations increased in a much more modest way, workers would have pressed much harder for fairer wages, to achieve the essential “brick” which you have referred to ?

  42. Alden says:

    I didn’t mean a brand new expensive car. I meant a reliable car. Reliable cars are not all that cheap I also stated that car payments are ok but putting gas oil and routine maintainence on a credit card to get to work means you are not being paid enough.

    • Replies: @RadicalCenter
  43. Sam Shama says:

    Did not know of List, but Ha-Joon Chang has uncommon insight; sort of like Amartya Sen.

    • Replies: @utu
  44. MarkinLA says:

    India is REAL capitalism, the way capitalists want it. It amazes me that so many people are deluded by this ridiculous notion of an illegitimate “crony capitalism” or some other term designed to make people think that capitalism at its base is pure good and is only corrupted by evil people. As long as people have to eat and people have dependents to support, somebody will always be in a subservient position and can be taken advantage of. Capitalists do use this power all the time.

    In the US immigration was used to break the labor movement in the late 1800s as well as the 1980s onward. In the US coal miners were paid in company script that could only be used in the company store or pay the rent for the company provided housing. This too was real capitalism the way capitalists wanted it.

    Things like 40 hour work weeks and the end of child labor didn’t come about because we became more capitalistic it came about because capitalists lost some political power and had to accept some socialism.

    • Replies: @utu
  45. utu says:
    @Sam Shama

    Also Song Hongbing . His bestseller The Currency Wars was not translated in to English.

  46. utu says:

    This “crony capitalism” brought back the story of Michael Fleischer, the brother of Bush’s former press secretary, Ari Fleischer 48, a businessman, has been in charge of reviving the Iraqi economy.

    “Fleischer said he wanted to serve in Iraq because he believes Bush had embarked on “a noble path” in freeing and democratizing the country and he believed he had skills that would be helpful. He said that from his Foreign Service stint, he was already acquainted with Paul Bremer, the presidential envoy who heads the CPA. With an assist from his brother, Ari, who “got my resume to Bremer,” Fleischer landed interviews that led to his appointment. Among Fleischer’s key tasks was training more Iraqi businessmen in the ways of U.S.-style procurement so they can land part of the $18.4 billion in reconstruction aid the U.S. has earmarked for Iraq.”

    “Competitive bidding “is a new world for the Iraqis,” Fleischer said. Under Saddam Hussein, “it was all done by cronies. The only paradigm they know is cronyism. We are teaching them that there is an alternative system with built-in checks and built-in review.” The broad goal, said Fleischer, is to nurture a system that is “friendly to a free market, friendly to private property rights and . . . limited government.””

    No better advertisement for crony capitalism than that.

  47. Anonymous • Disclaimer says:

    Excellent article.
    Thanks to Messrs. Bezemer and Hudson, and to for presenting it.

  48. Art says:

    An excellent comment – thanks.

    In the 1970s, the Oligarchy began the destruction and looting of America’s middle class, by encouraging the export of industry and jobs to parts of the world where workers were paid bare subsistence wages.

    In the 60’s Jewish importers began the destruction of our electronic industry. Next came cars.

    The impoverishment of America’s middle class has undermined the nation’s financial stability.

    This impoverishment kicked into high when Allen Bubbles Greenspan was made FED chief.

    Through ever increasing debt – he engineered one debt bubble after another, until the 2008 fiasco. Junk bonds, savings and loan, the internet bubble, the home price bubble, and now the stock bubble.

    How can anyone not see this – things are totally screwed up. Today we are at ZERO interest rates with the big banks feeding money to the 1%. They use this new debt to inflate stock prices – skimming the profits to themselves – the economy be dammed.

    Of course this about big money making more money, not about actual business creation of valued goods and services.

    • Replies: @Durruti
    , @Anonymous
  49. Durruti says:

    Thanks for the comment/feedback.

    You see what I see.

    The VISION is all we have.

    We must Restore our Democratic Republic! [easier said than done]

    The remnants of our Republic was destroyed on November 22, 1963. JF Kennedy was our last Constitutional President.

    Perhaps some help from our “Decembrists.”

    • Replies: @Art
  50. Art says:

    The remnants of our Republic was destroyed on November 22, 1963. JF Kennedy was our last Constitutional President.

    I agree 100 % – the beginning of the end of America as a free optimistic people began with the JFK assassination.

    Hillary will put a dagger in us. An ethnically divided nation like California is our future.

    Through immigration, we have been divided and conquered by the Jews and their media.

    • Replies: @Sam Shama
  51. Sam Shama says:

    [Through immigration, we have been divided….]

    How could you say that Art?

    Is this the same “Christ-said-all-men-are-created-equal” Christian Art? Or was it a JEW that influenced this momentary bigotry?

    P.S. The Jews love you

    • Replies: @RadicalCenter
  52. @Alden

    Reliable cars are available fairly cheaply. They may not look great, but they’re available and they’re the right choice for someone who has not yet saved up enough for a better, newer vehicle.

    As for putting gas and oil and routine maintenance on a credit card, it can mean that you are not being paid enough for your useful work. But it can also mean that the person lacks the skills, intelligence, or work ethic needed for his work actually to be worth what he wants to be paid. Neither the facile answer of the right nor that of the left is “the” answer here.

  53. @Sam Shama

    Not the Jews I’ve worked for and with, buddy, not at all.

  54. mtn cur says:

    The Company store in a company town,
    mining the miners to keep them down.

  55. Anonymous • Disclaimer says:

    It isn’t easy not to run into a (negative) mention of “Jews” for a ten-comment streak. I had not for 9 and your comment was the 10th I was reading 🙂

  56. Rehmat says:

    British-born Jewish science journalist, author and former columnist at the Jew York Times, Nicholas Wade in book, A Troublesome Inheritance, has claimed that Jews possess a genetic “adaptation to capitalism”. Wade also argues that humans can be divided into discrete races, and that between those races, there are differences in behavior, temperament, intelligence, and even political and economic structures. Although the specifics of the arguments change, what remains constant is the idea that white people of European descent are inherently smarter, better, more “civilized” than members of other races, especially black Africans and their descendants.

    In December 2010, Isaac Stone Fish claimed at the Newsweek magazine that Chinese business community uses Jewish Talmud as a guide.

    Listen to a video below to learn more about Capitalism.

  57. Miro23 says:

    The authors, Dirk Bezemer and Michael Hudson are showing large scale credit creation from the 1980’s onwards, feeding into asset price inflation in what they call the Financialization of the economy (US and much of Western Europe).

    They show the bubble effects in speculative assets such as real-estate, stocks and bonds with the main observation that it puts the “real” productive part of the economy at risk. Speculative investments work on the “Bigger Fool” theory . An asset gain covers the interest payment until it doesn’t , at which point the Ponzi scheme collapses, harming the real economy (demand and scarce bank credit for non-speculative borrowers).

    It’s a good straightforward analysis, but they probably could have explained some points more clearly or with a different emphasis, and they missed a big one completely.

    I prefer Micheal Pettis’s way of simply looking a credit creation as good investment or bad investment. Good investment returns the capital and with interest and is really confined to very special opportunities like opening up the West, rebuilding Europe after WW2 or introducing mass use technology such as electricity, motor vehicles or digital computing.

    Bad investment consumes capital and builds a debt mountain – for instance funding government tax shortfalls, consumer loans, speculative bubbles, or probably worst of all, wars on credit.

    Also they could maybe have put the Financialized economy more in context. The general background is Friedman’s Neoliberal “World is Flat” idea involving deregulation and unrestricted world trade. For example, US industrial production (real economy) is being hit from three sides 1) Higher returns to capital in the Ponzi scheme (while it lasts) 2) WTO/NAFTA etc. allowing mass outsourcing of US manufacturing capacity 3) Accelerating automation of production/distribution with disappearing jobs in many areas, e.g. publishing, travel agencies, factories etc.

    For example, Andy Grove(ex CEO Intel) gets into this, talking about Hon Hai Precision Industries:
    “The largest of these companies is Hon Hai Precision Industry, also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenues last year were $62 billion, larger than Apple (AAPL), Microsoft (MSFT), Dell (DELL), or Intel. Foxconn employs over 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard (HPQ), Intel, and Sony (SNE)”

    Grove applies a 10x rule to production of electronic goods, with each new device creating 10 jobs in Asia for 1 in the US. The idea is that some of these outsourcers could reduce their extra large profit margins and keep some of the $ Billions and 100.000’s jobs in the United States.

    There are also some more subtle points that they could have expanded: If Asian outsourcing is as harmful to US manufacturing/employment/deficits, then the bubble in asset prices came at exactly the right moment with its “feel good factor” hiding the erosion in real wages and employment. Similarly US citizens are not too good at Long Term Austerity.

    Feel Good asset prices also serve to hide spectacular US inequality that they refer to, where 120.000 families ( 0.1%) now have the same wealth as the lower 90% of the population combined (even something the British and Russian aristocracies didn’t manage) – with plenty of 0,1% members being recent arrivals thanks to outsourcing and QE finance.

    The authors curiously only see Austerity or Write-Offs as solutions to imploding bubbles and ignore a third route through higher inflation.

    For example, In the first 6 months of 1975 British inflation was running at 30% p.a. with Sterling bondholders getting wiped out, but from 1971 to 1979 British debt was reduced from 76% to 56% of national income. Or, in a more extreme case, the large scale currency printing of Weimar Germany that evaporated unpayable foreign and domestic government debts (downside that by 1923, the price of a cabbage that had recently sold for 25 pf cost 50.000.000 marks).

    There’s also an important racial aspect.

    Jewish Americans are 2% of the American population but over the period in question obtained through racial patronage most of the top FED and Treasury positions (Janet Yellen, Stanley Fisher, Benjamin Bernanke, Donald Kohn, Jack Lew, Sarah Bloom, Stuart Levey, Alan Greenspan, Lawrence Summers, Robert Rubin, Samuel Bodman, Stuart Eizenstat) and have close connections to the Wall St./merchant banking/hedge fund beneficiaries of Bubble Finance, with the suggestion that QE, ZIRP, the aggressive removal of Glass Steagall, SEC approval of 30:1 leverage and full $ bailouts of their speculative positions in 2008 were policies designed to channel a large part of the$ Billions in rentier gains to themselves rather than the public.

  58. Anonymous [AKA "Patrick Trombly"] says:

    Most classical economists treat the financial sector not so much as invisible – though I understand what you mean – but as intermediaries, between saving and investment. Thus, S equals I. That’s how interest rates came to be known as reflecting the time value of money, plus, in individual cases, a risk premium.

    The problem is that this all assumes a stable money supply.

    The Fed creates money out of thin air and uses it to purchase securities from 23 big banks, and promises that it will do so until it meets a specific short term interest rate target.

    That’s basically legal counterfeiting – and it benefits those who get the new money earliest. The big banks get it first – and the government benefits from the purchase of its securities and support of its borrowing rate. Suppressing government borrowing costs isn’t the only impact, though. Consider the “risk free rate” in the CAPM equation. All streams of future cash flows are discounted to achieve a present value. All other things held equal, a reduction in the discount rate will lift the PV – i.e., support the prices of future cash flows – – – coming from stocks, bonds, patents….. So when the Fed suppresses interest rates, it inflates the stock market. Now, a lot of people think that we’re talking the ten year T, which is only indirectly impacted by Fed policy. But the cash flow is perpetual – and is typically considered to come in years. Moreover, if you look at most firms’ balance sheets, most of them borrow for ten year tenors. Most importantly, the INVESTOR’s holding period is now measured in months, not years. So, use FFR……

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