In this exclusive for Democracy at Work, Paul Sliker and Dante Dallavalle talk with Michael Hudson, one of the world’s six economists who accurately predicted the 2007-2008 financial crisis. His new book, J is for Junk Economics, reveals how the mainstream economic vocabulary has been turned around in an Orwellian way to mean just the opposite of what words used to mean. Michael explains how the corporate media and academia use well-crafted euphemisms to conceal how the economy really works, the economy under Obama vs. Trump, and what might be coming next.
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*Full Transcript: April 2, 2017 [email protected] exclusive interview with Michael Hudson
Paul Sliker: So today we have something really special for our listeners. We recently interviewed Michael Hudson, one of the six economists who accurately predicted the 2007-2008 financial crisis. His new book, J is for Junk Economics, reveals how the mainstream economic vocabulary has been turned around in an Orwellian way to mean just the opposite of what words and concepts used to mean. We talked with him about how the media and academia use well-crafted euphemisms to conceal how the economy actually works, the economy under Obama versus Trump, and what might be coming next.
Michael, before we get into your new book, J is for Junk Economics, which is a sequel to your last book, Killing the Host, I want to explore some current economic affairs and debunk some myths right off the bat. President Obama claimed that there’s been an economic recovery, that all sorts of good new jobs were created under his administration. And that was the message of Hillary Clinton during the 2016 presidential campaign. She largely wanted to extend the Obama presidency to another four to eight years. So if there was such a great recovery since the 2008 crisis, why isn’t Hillary out president right now?
Michael Hudson: That’s really what killed her campaign. When she said there has been a great recovery and aren’t you better off today than you were eight years ago, when Obama was elected—all of the growth in GDP, Gross Domestic Product, all of the growth in America has accrued to just 5% of the population. 95% of the population has seen their real wages shrink and their assets shrink. So 95% of the voters stood back and said, “Wait a minute! We’re not better off. When she’s saying, ‘We’re better off,’ the ‘we’ she means is the 5%! And we are the 95%!”
So they saw that she was completely blind to the situation of labor and workers and the middle class and the upper middle class; that she only cared really about the upper-upper class—that’s her constituency; that’s her donor class. And that just turned people off, because they saw that the people better off were Wall Street and the Military-Industrial Complex, her constituency.
PS: In terms of economic policy, is there much of a difference between President Trump and President Obama?
MH: When they were running for the election, there seemed to be. Clinton and Obama were Russia-haters; they were neocons—they wanted to push the New Cold War. Trump ran on saying, “Why don’t we be friends with Russia? Especially to have Russia fight against what the real enemy is: the crazy ISIS and the Saudi, Sunni terrorists.” But as soon as he got elected, all of a sudden he made an about-face.
Before the election he said NATO is obsolete, and now he has just announced the new military budget that vastly increases military spending, even though the Pentagon is the one government agency that has not passed an audit. He appointed anti-Russian diplomats right across the board, including to the UN. And he seems to be not so much opposing ISIS anymore. He stated that he wanted to remove the tax-deductibility of interest, which would be a great thing, because that would help stop the debt leveraging. There’s nothing of that in his budget.
He is against the EPA and climate change, and Obama pretended to be for the EPA. But Obama was probably the leading opponent in the world of climate change by supporting the Trans Pacific Partnership. And the trade laws that Obama and Hillary were supporting made environmental protection virtually illegal for governments, because any rule that a government signatory would use for environmental protection, they would have to pay the polluters the amount of money they would lose by not being able to pollute the environment at the rate they were for.
So basically, Trump’s anti-environment and anti-labor policy is identical to that of Obama’s.
Dante Dallavalle: So before we even get into the first chapter, you make some really interesting points. Why did you choose to begin your introduction with George Orwell and Confucius, particularly, your reference to our need to “rectify our definitions of crucial economic terminology”? How does this relate to the theme of your overall book?
MH: When I wrote it, I didn’t realize that the very month it came out, George Orwell’s 1984 was going to be on the bestseller list. And that’s because of his concept of doublethink. The vocabulary that you use shapes how you think about the economy around you, and it shapes how you think about politics. And doublethink—using words to mean the opposite of what they really mean—is a tool of deception. It is a tool to persuade people to act against their interest.
For instance, if you talk about the “Great Moderation” that is supposed to have preceded the 2008 crash—that was actually the most immoderate period in recent history. It’s the period where the economy polarized between the 1% and the 99%. The only thing moderate was that the working class didn’t really fight back and say, “Wait a minute! The economy has been hijacked!” One reason they were made quiescent was the use of vocabulary telling them that there is no such thing as unearned income. There’s no discussion of economic rent as unearned income. If you look at the national income and product account, it shows the economy is growing, when actually what’s growing is simply overhead. It’s not real wealth. The real economy is actually shrinking.
If people not only believe what they are told on the news, but if they use the vocabulary that the newscasters use, they’re going to live in a kind of parallel universe instead of seeing reality.
DD: Another really prominent distinction that I want to make right off the bat is this: You’re technically a financial economist, so one would naturally expect to see lots of economic and mathematical jargon filling the pages of your book. But a really refreshing dimension of your work, Michael, is the integration of sociological and historical references. Reading the book, I find that maybe a little of this has to do with your respect for the Institutionalist school of thought. What was this vein of theory focused on? Who were its main proponents?
MH: People don’t really hear of the word “Institutionalist” anymore. I don’t know when you will find that work in a popular publication. Institutionalists were people who said, “Wait a minute! Marx talked about the means of production and the material world and what was necessary to produce.” They looked at the technology. And if you look at technology and productivity…the Institutionalists were writing in the 1890’s and early 20th century. Thorstein Veblen; Simon Patten. And if you look at technology a century ago, you’d think the whole world would be living in prosperity now. You’d think we would have a three day week with five hours a day. The Institutionalist said, “There’s a reason why we’re not achieving what’s technologically possible. And that reason is economic rent.”
Capitalism, according to Marx, was supposed to fulfill its historic destiny of getting rid of the landlord class, getting rid of the monopolists, getting rid of the banks—making them public in character—and evolving towards socialism. And instead of evolving toward socialism, industrial capitalism has retrogressed towards feudalism, and you’ve had a resurgence of the financial sector, the real estate sector, the monopoly sector, the privatization of natural resources, and instead of socialization, you have privatization. And the Institutionalists looked at Why is this happening? Where does the actual wealth go if it’s not going to producers, if it’s not going into the production system? And it looks at the whole superstructure of wealth and debt that the technology economy is wrapped in.
DD: So now, let’s get into the book. Although we hear economic terms being used in our daily news cycle, I think it’s important and appropriate—especially in terms of your book’s format—to define some concepts in a very clear and very concise way. What is a bubble or a bubble economy, in simple terms? Why are they inherently deceptive and unsustainable? And why do we see them occurring in history—especially our recent history?
MH: A bubble economy is where you make money not by producing more and consuming more, but actually just by inflating the prices of stocks and bonds and real estate on credit. And in a way it’s a Ponzi scheme.
A Ponzi scheme is where you say you have a wonderful way of making money; they’re all going to get rich. But the only way that you can pay off the investors of the Ponzi scheme is by economic fraud. And the fraud is you convince other people to join and instead of investing their money to make this fantastic 10% or 11% return that Bernie Madoff promised, you simply pay off all of this output as current income to the investors. And in order for a Ponzi scheme to keep growing, it has to grow exponentially. They have to keep doubling the number of investors every so often. Once new investors stop joining the scheme, all of a sudden there’s no money to pay anybody. Because all the money people thought was creating wealth has already been paid out to everybody.
So essentially, that’s how the whole economy is worked. By 2008, people had hoped that they could keep solvent by borrowing the interest. And Alan Greenspan told people, “Look, if you borrow the interest and pay the banks, the banks can lend even more money on real estate and that’s going to build up your housing prices, and your house will be worth more and more. And you can treat it like a piggy bank and you can borrow against this value and pay the interest at no cost.” So you can just watch the price rise, hoping for a capital gain.
And the result is that all of the rental value of people’s homes—everything that it would have cost to rent a similar place—was being paid to the bank. And finally, nobody could afford it anymore and default rates begin to rise. And when default rates rose, all of a sudden the speculators withdrew from the market—that’s about 1/5 of the market—and the prices all collapsed and it turned out that the banks had been making fraudulent loans.
So basically, a bubble economy requires not only increasing debt, but it requires massive bank fraud. And Alan Greenspan deregulated the banks. And when the FBI in 2004 said already there’s the largest wave of bank fraud in American history, the Federal Reserve refused to do anything about the fraud all around it. And the newspapers by 2007, 2008—you pick up the New York Times or the Wall Street Journal—everybody was talking about “liar loans” (the liars were the banks and the brokers), “NINJA borrowers” (No Income, No Job, no Assets) getting loans. Everybody knew there was a fraud, but all the investors thought they could get out in a hurry or they could have their guy in the government bailout the banks and make sure that all of the investors are repaid totally by leaving the economy debt-ridden and shrinking and bringing on what’s really a financial depression.
And that was what Obama did. He’d promised to write down the debt—he didn’t. He wanted to keep the bubble economy going. And so the Federal Reserve kept the bubble economy going by lowering interest rates to one-tenth of one percent—just about zero—so that people could borrow enough money to keep buying stocks that yielded more than one percent or buy foreign currency or buy bonds yielding. And there’s been a gigantic bubble really since 2008 even more than there was before 2008 because of Obama’s policies.
That’s what people don’t realize. The zero interest rate policy is creating all of this bank credit—none of this goes into financing new production. None of this goes into creating new means of production or output or living standards. It’s all gone into the stock and bond market and the real estate market to prevent a bank crash, to save the 1% or the 5% from actually losing on their investments, and to pay them by cutting back Social Security, by trying to privatize it, by cutting back social spending, by cutting back government spending in the economy—by making the 95% pay for the 5%.
PS: So in a little bit, Michael, I actually want to get into what happened in 2008 with President Obama and Larry Summers, but just to drive the point home further for our audience: In your new book, you claim that mainstream economics has turned into what you call “junk economics,” and that (like we discussed a little while ago) academia, politicians, and the media have inverted the economic vocabulary in an Orwellian way to mean the opposite of what the language used to mean when used by classical economists like Adam Smith and John Stuart Mill. I think the most stunning example of this is on page 105 of your book, when you define the term “free markets,” a term we hear celebrated every day by people who believe that deregulation and small government leads to prosperity.
Explain the evolution of the term “free market” as a way of introducing what junk economics in the book is all about.
MH: That’s the perfect example of doublethink—using a word to be the opposite. For Adam Smith and John Stuart Mill and all the classical economists of the 19th Century, their idea of a free market meant the free market from economic rent, to free it from the landlords, to free it from the monopolists, and to free markets from the banks so that you’d really have, in effect, Say’s Law. You’d really have what people earned would be earned by producing goods and services, not from just adding empty prices on—not from property claims; not from credit. The idea is that everyone would earn what they produce, and that would be a fair economy.
But after around 1890, you had the rentier class—the rent recipients: the landlords, the monopolists, and the banks—all fight back. For them, a free market was one free for them from the government, free from government regulation, free to charge monopoly rent, free for landlords to shift the taxes off themselves and onto the economy and make the working class and the middle class pay, and to make sure the bankers could continue to engage in fraud and reckless lending and all get bailed out.
So the idea of freedom and of the free market, has been turned into the exact opposite—to unfreedom, to neo-feudalism.
DD: Expanding on what you just said, can you talk a little bit more about the term “Rentier Capitalism” and its relationship to what you call the Counter-Enlightenment?
MH: A hundred years ago, people actually used “rentier” in the vocabulary. A rentier was a recipient of economic rent. The meaning of “rent” originally was a French word for a bond—a government bond was called a rent—and they were coupon clippers, essentially. You would live on what your ancestors had been able to take from the economy.
As Balzac said, every great fortune really originates in a great theft—like privatization, as we’re seeing in Russia today and in the neoliberal countries. Landlords got their land originally by primitive accumulation. They were warlords that seized the land, and their ancestors got it. So a rentier lives on money they’ve inherited, basically, or on a monopoly privilege that they’ve bought from the government by backing politicians who let them be free of government regulation, free of prosecution, and charge whatever they want and gouge the economy—like your cable companies, your electric companies, your phone companies and whatever they want to charge.
So we’re retrogressing back into a rentier economy, which is the opposite of what Adam Smith, John Stuart Mill, and other people talked about as an economy free from this unearned income.
PS: So I really want to do some investigative journalism here, so to speak, and get to the bottom of this. Are politicians and even orthodox or mainstream economists aware of the history and this inversion when they use such vocabulary in their creation and implementation of policies and programs?
MH: When I went to school, they still taught the history of economic thought instead of mathematics (and you mentioned earlier that right now financial economists talk about mathematics). These are all just on quick one-minute deals. The average holder of stock in America holds it for one minute—maybe not quite—because they’re all quick buying and selling on computerized robot programs. So the mathematics they use isn’t the mathematics of economic growth. It’s the mathematics of a quick trade at a given moment of time within the status quo—not using mathematics to say, “Wait a minute, where is there going to be a crisis? Where is there going to be an intersection between two different trends.”
So the whole role of mathematics has changed. Economic students are forced to spend so much time with this complex calculus so that they can go to work on Wall Street that there’s no room in the course curriculum for the history of economic thought. So all they know about Adam Smith is what they hear on CNN news or other mass media that are a travesty of what these people really say.
And if you don’t read the history of economic thought, you think there’s only one way of looking at the world. And that’s the way that media promote things, and it’s a propagandistic, Orwellian way: war is peace, prosperity is only for the rich. That’s why I called the book J is for Junk Economics because the whole economic vocabulary is to cover up what’s really happening and to make people think that the economy is getting richer, while the reality is they’re getting poorer and only the top is getting richer—and they can only get rich as long as the middle class and the working class don’t realize the scam that’s being pulled off on them.
PS: We obviously saw this in our recent election—the tension between the media and working class voters, and some would argue that that’s how we ended up with Trump. To me, the obvious conclusion is that the media particularly is complicit in using junk economics rhetoric because it’s owned and controlled by the same financial elites who have taken over the economy. That might be one symptom for sure. Or is it more a symptom of the fact that the financial press simply regurgitates what they’ve been fed from Wall Street bankers, corporate executives, and neoclassical mainstream economists that they use for sources and information?
MH: The mainstream press is an echo chamber for Wall Street. I don’t think the press was favoring Trump—the press universally favored Hillary! And that’s why all of the fake surveys pretended that Hillary was going to win—trying to convince people, “Why don’t you vote for the majority and be a conformist?” When every single poll that was taken in May or June showed that Hillary was going to lose to Trump, but that Bernie could beat Trump. The real enemy of the press wasn’t Trump; the enemy was Bernie Sanders. And they would much rather lose overwhelmingly with Hillary than win with Bernie, and Trump, for them, was the lesser evil.
I think that the average voter, that everybody knew that Trump was what he is, but he was the lesser evil compared to Hillary, who wanted war with Russia. Atomic war is probably the most evil thing you can do. And she was so much on the side of the 1%, so greedy, such a scam artist, so deceptive and just a liar, that people said, “No matter how bad Trump is, he’s the lesser evil.” So when Hillary came out in speech after speech and said, “Vote for the lesser evil,” the voters said, “Okay! I will vote for the lesser evil! I’m going to vote for Trump!”
PS: So this brings me to a deeper question, Michael, about the economics profession—about the flawed state of mainstream or orthodox economics. I think it was your friend, Steve Keen, who blurbed your book, who said, “I’ve spent 40 years dealing with neoclassical economists. They sincerely believe they’re doing good, which is why they’re so dangerous.” In studying more closely the theoretical framework and processes that mainstream economists use for measuring the health of the economy, you realize that for the most part, they don’t include money, banks, or private debt in their analytical models. That seems absolutely insane—you don’t have to be an expert to realize that banks play a huge role in the economy or that high levels of private household debt is what threatened our entire financial system in 2008
So what’s happening here? Are they just innocent and stuck in their flawed models and modes of practice, or did they know that they’re flawed and are just unwilling to admit it?
MH: They’re what’s called “useful idiots.” Most of my best economics students in the 70’s, by the time they got an MA in economics, they decided not to go on for the PhD because they said, “What a minute! This is all garbage!” Some of the most imaginative ones wanted to be economists to make the world better, to promote economic reform, and to help things. And then they found that economics was simply a question of the status quo, and it wasn’t how the real world worked at all. It was really just propaganda and had nothing to do with understanding the world. So they found out that, “Well, gee, we registered in economics to understand how the economy works, and instead we’re talking all sorts of nonsense
For instance, one friend of mine went to school with Paul Krugman, and Krugman told him, “The one thing we’re told is don’t question money; don’t talk about money; leave that to someone else.” And Paul Krugman said that banks don’t create credit. Banks are like savings banks. All banks do is relend the savings to borrowers. And that’s the opposite of what reality is—modern monetary theory knows that banks do create credit
Krugman would never really talk about any individual and finally he found this Australian that to him was on the other side of the world, and that was Steve Keen. And he got in a debate with Steve Keen where Steve said, “Look, banks create credit—it’s what we call endogenous money.” And if you Google “Keen and Krugman,” it’s like Bambi meets Goliath, and was absolutely crushed.
And the response in Australia was so furious that here was somebody that said money matters, that they thought, “How do we get rid of Steve Keen?” Well they can’t fire him, because that’s against academic freedom, so they closed the entire economics department at the university he was at and said, “I’m sorry, we don’t teach economics anymore.” It ended up they had to pay him $1 million something like that and he went to England. It’s reminiscent of what the Romanian dictator Ceausescu did when his daughter got engaged to a mathematician that he didn’t like. So what did Ceausescu do? He closed every economics department in Romania so that the daughter would be marrying somebody without a job.
The mainstream economists are totalitarian, and what the University of Chicago people realized is their definition of free market, which is one that I didn’t give before—they realized you can’t have a free market in Chile, for instance, if you’re not willing to kill everyone who disagrees with you. The first thing the Chicago Boys did in Chile after assassinating the labor leaders and having the assassination program of land reformers, the closed every economics department in Chile except for the Catholic University that taught Chicago School economics.
Unless you have totalitarian censorship, you cannot have the free market of the form that the mainstream economists talk about—free only for the 1% and unfree for the 99%. You can only have junk economics if you censor and block any discussion how the economy is actually working. And that’s why the Washington Post came out with the “junk news” list of sites. The “junk news” sites that they cite are things like Counterpunch, Naked Capitalism, Paul Craig Roberts—all sites that I write on. You have to go to what the fakers call “junk news” to get reality, and if you go to the mainstream, you get junk economics and junk news. You can’t have more Orwellian doublethink than that!
DD: Going back to terminology now, you discuss alienation for a brief period in the first chapters—how debt has been used as a tool to obtain dependency, but a really elucidating variation to alienation in capitalism is emotional alienation. Talk a little bit about Thorstein Veblen, the Institutionalist economist we referred to earlier, and his concept of the instinct of workmanship and the impact of how we structure our relations of production under capitalism.
MH: Alienation is a Marxian term—it’s a loss of control over your working conditions. When you’re afraid to complain about working conditions because if you complain or if you go on strike, you’re one paycheck away from losing your credit rating and having your credit card interest rate go up to 29%, and you’re three paychecks away from homelessness—defaulting on your mortgage or not paying your rent. So alienation is where you have to take whatever you’re given. It’s a loss of self-support, and it’s a loss of production that you create. You’re told what to do, and you become a cog in a machine. You can have a bad manager and a bad office and you know it’s exploitative, but there’s no better job anywhere.
Veblen said the antithesis to alienation is what he called the instinct of workmanship: Now that you have robots do the work in your mechanizing production, people should be able to have a role in production where they actually use their brains, use their creativity—they can design. We’re supposed to be living in a leisure society, so they’re supposed to have enough free time to be imaginative and creative and to be more productive and self-fulfilling.
What we’re having is not the instinct of workmanship, but the financialization of industry that squeezes more and more money out of the workforce, that increases productivity by not hiring new workers when old workers leave the job or quit—by just working the workforce more and more and more, longer and longer days without paying. And Alan Greenspan talked about this before the Senate committees and he said, “This is what makes it the Great Moderation—that even though productivity is going up and we’re squeezing workers more and more, wages are not going up, because they owe so much money on their paycheck, they’re afraid to go on strike; they’re afraid to fight back; they’re afraid to complain.” That’s what real alienation is—it’s powerlessness.
DD: Can you explain what junk bonds are and why they are dangerous vehicles for what passes as wealth creation in our status quo?
MH: In the textbooks, you have pictures of banks issuing bonds, and the bondholders will give banks money to build a factory and hire more workers, and you’ll have pictures of workers carrying their lunch pails into the factory now that all this credit is coming forth, but that’s not what happens at all.
The junk bonds really were begun seriously in the 1980s by Drexel Burnham. They're bonds, not to finance new production but simply to take over existing companies, to take over existing means of production, and you can say well, a company is now paying, let's say a five percent dividend. To pay a five percent dividend it has to earn ten percent because there's a fifty percent tax rate. If we can borrow money, we can take over the company, and we can pay out 10% to bondholders because interest is tax deductible - I hope I'm not losing the audience here - but a junk bond is really for corporate raiders. They raid the company, they break it up, they grab the pension fund, and tell the workers I'm sorry, we've just created a holding company for our company and our company is really bankrupt, our financial holding company has everything. It's a trick they learned from the Chicago Boys in Chile. And if you don't let us cut back your pensions, we're going to have to go bankrupt and leave you without pensions or depending on the government for its kindness to pension defaulters.
So the junk bond people were basically corporate raiders, predators. I knew them very well. And their personality was "Well, its up there for the grabbing", and they were financing political campaigns of people like Alan Greenspan, people that said the economy is getting richer because the only important thing is the stock is going up as a result of this. The junk bonds basically are when you issue credit without increasing the means of production at all but just transferring ownership out of the hand of equity owners and workers and into the hands of creditors.
DD: How is the miracle of compound interest in fact a disaster for the 99% who must borrow in order to meet the necessities of life. I mean, how does it affect the overall economy generally?
MH: The miracle is that any rate of interest has a doubling time. And you can look at the rate of interest with what is called The Rule of 72. If you take 72 and divide it by a rate of interest...8….or at 5, then the doubling time is 14 years, if you divide it by 8, it's something like 9 years. The miracle of compound interest is that if you keep reinvesting the interest in new loans, it will keep doubling. But the economy doesn't grow that way, economies don't grow exponentially. Even though the mainstream models project GDP is growing at X % per year, economies really grow in S-curves, and the more that interest rises, the more that the debt overhead rises, the more the economy slows down, because you're diverting money away from spending on goods and services - as we talked about at the beginning of the show - you're diverting that to pay the banks, and the banks don't spend this money back into the economy. The wealthiest 5% simply use their money to make more loans, to get the economy even more in debt, and that's really how the 5% and 1% get rich: by indebting the 95% or indebting the 99%. Having this interest just grow and double and redouble, while the economy grows less and less, and that is exactly why every western economy is polarizing these days.
PS: So Michael, to get back to current events, the stock market has been booming under President Trump. Working and middle class people, even if they don't own stock, still believe the stock market is some sort of indicator of the health of the real economy, or somehow connected to their economic well-being, or their pocketbooks.
In the book, you constantly bring up the term "stock buybacks" - an act that I can't believe hasn't been talked more about in progressive circles today. Basically CEOs who can be paid in stock options, use corporate profits to buy back their own stocks to artificially inflate the price of them and cash out, instead of using profits for capital investment in new factories and equipment, research and development, or to hire more labor and expand production. Explain how this became the norm today and help us understand what's going on with the stock market today and why ordinary people should or shouldn't be concerned with it.
MH: The stock market is going up because companies are being looted to pay stock owners. Basically, professor Lazonick did a study recently: 92% of corporate profits are spent either on buying back the stock - which means that you're bidding up the price by having less and less stock, so the earnings per share rise - or by raising dividend rates. Only 8% of corporate profits are plowed back into the business. So that means that the economy is not replacing itself. It's like a farmer that's eating the seed corn, instead of redoing it.
The industrial economy in America is essentially being emptied out in order to pay the stock owners. About 75% of stocks are owned by the richest 5% of the population. If you look at who owns the stock, it's not the working class, its not the middle class, it's the super rich, and the super rich are saying "We're willing to use all the corporate income just to run it down." Basically, the 5% have decided that industrial capitalism's over. And it's time to take the money and run. And you take the money and run by just paying out all the income just to yourself, leaving the corporation an empty shell.
That's how The Chicago Boys introduced free markets into Chile after 1974 when Pinochet took over from Allende. It's the neoliberal model. It's what happened in Russia after the neoliberals convinced Russia to go along. It's what's happening in Greece, where you're just emptying out the economy to pay the bondholders. And it's economic shrinkage, and the trick is to get the middle class and the working class to think the stock market is them, when the stock market isn't them at all, it's the 5%.
DD: So since your book is a dictionary of sorts of economic terms, the Federal Reserve system and interest rates are two things you cover in the book. The Fed recently raised interest rates a quarter of a percentage point - how does this affect the economy and ordinary Americans? And maybe explain more generally for our audience the role of the Fed, central banks, and how expansionary monetary policy and things like quantitative easing impact the economy and how these terms are maybe used to mislead us.
MH: The quarter percent rise, to make a long story short, there's no effect on the economy at all. Zero. A teeny, marginal squiggle. Because if you look at any chart of interst rates, you'll see them plunging after 2008 right down to the bottom, to zero. So, the fact is, only the rich people can borrow, only corporate raiders can borrow, only the parasites can borrow. You can't borrow to create a new factory, you can't borrow to create new means of production, you cant borrow to employ people. You can only borrow to take over an existing asset and empty it out and pay the creditors. So the interest rate is so low that corporate raiders can still afford to borrow at almost nothing and take over any corporation for mergers, acquisitions, etc… And the role of the fed is then to make sure - they're supposed to be to regulate the banks but instead they're clients for the banks.
And the Federal Reserve was created in 1913 as an alternative to what was managing the economy at that time, which was the US Treasury. The Federal Reserve is privatizing what should be the Treasury's function of public money creation and of public credit. The Fed's job is to make sure that there's no public option in banking and to protect the big banks, especially Citibank - which is the most crooked bank - Wells Fargo, to make sure that banks continue to engage in financial fraud against consumers, the fraud of selling junk mortgages that have AAA ratings, and basically they're a part of what my colleague Bill Black in Kansas City calls the criminogenic sector. The fed is the public relations department for Citibank and for Wall Street and for Goldman Sachs.
PS: Speaking of banks and mortgages, I'm immediately recalling when President Obama and Larry Summers convinced the American people that hundreds of billions of their own taxpayer money was needed to bailout the banks after the financial collapse in 2008. It was pitched as some extraordinary populist program to help ordinary Americans, which, unless you've been living under a rock, didn't do anything of the sort and instead handed over instant cash to Wall Street with no strings attached. Are there specific examples in that story of how the language of economics was used to deceive the American people?
MH: Well, the whole idea of "bailout" - who was bailed out? The people who were bailed out were the banks who had been raiding junk mortgages. Not a single penny of this went to the American people, really. It didn't have to go. The solution that was called for - what has happened for the last five thousand years - when debts go beyond the ability of people to pay under normal conditions, the debts should've been written off. You could've let the bank bondholders essentially lose the money. They were bondholders for a bad bank that had been engaging in massive fraudulent lending: making loans to mortgage borrowers, to corporations, to speculators that they knew could not be repaid. I mean, I knew that when I was working for banks on Wall Street. So they knew they couldn't be repaid. The solution was to rate down the debts and to get rid of the debt overhead so that there would be a crash of the rich people instead of the economies.
Obama and Summers had a choice: either you save the economy or you save your campaign contributors and the 1% and Obama said "Well, my constituency, my campaign contributors, are the 1%". And he called the banks to the White House and said "I'm the only guy standing between you and the mob with pitchforks. Don't worry, I can lead them along, I'm protecting you guys." And his job was to be a demagogue supporting Wall Street and his constituency, using Larry Summers as a …[inaudible]... to say the host needs the parasite, the economy needs the banks to take their money, we need the crooks because without the crooks and without the banks and without the monopolists and without the cable system charging whatever they want , and without the phone companies charging whatever they want, the economy would collapse. Well, it wouldn't collapse at all.
Well you had Sheila Baer at the Federal Deposit Insurance Corporation saying "Wait a minute - let's take over Citibank. Citibank's broke, and not only is it broke, it's corrupt. And it's hopelessly incompetent. And a free market would be that the incompetent bank gets wiped out." But Citibank was where Robert Rubin, Clinton's Treasury Secretary had taken over. Citibank was the root of where all of the Clinton crime family was centered - not only with Ruben but also his protege, Tim Geithner. So the whole economy was sacrificed in order to save the Clinton crime group at Citibank and Goldman Sachs.
All of this was concealed by not explaining to the people where the money was going. There was very little discussion - except in my group, and Randy Wray did a wonderful analysis for the Levy institute showing where all the money had gone to really, to bail out the fraudsters - to bail out fraud and to make it appear as if the economy was rich enough to survive without the fraud by making industrial workers pay, by shrinking the economy, by shrinking the middle class, by shrinking the working class. And you'd think that this would be the center of a political discussion.
But when Bernie Sanders tried to raise it you saw what happened to him: the mass media just kept saying "Oh, it's unthinkable." Well the reality is that Sanders made socialism into a good word, like it was a century ago. A century ago, the whole political spectrum, from Christian socialists to anarchists to industrial capitalists in business schools saw capitalism as evolving into socialism. And now - until Bernie Sanders - socialism was identified with Soviet Russia, with totalitarianism, but now finally, people are realizing that it doesn't have to be this way, that the only alternative to neo-feudalism IS socialism. Either you're going to have barbarism, or you're going to have a renovation of the economy which means a debt write-down, and anti-monopoly legislation and prosecution of crooks.
PS: So that answer leads me perfectly into my next question actually. Since we've only been talking about the depressing aspects of the status quo of our economy today, let's highlight one of the major positive themes running through your book: the historical significance of a clean slate. What does this mean in history first - a clean slate - and secondly, how could this idea really guide a more rational more humanitarian, and dare I say, a more efficient economic policy.
MH: Well, take the case of what's happening in Greece right now, a perfect example. Crooked banks were helped by the Greek government's falsifying it's statistics, by hiring Goldman Sachs to give fake numbers and convince other banks in France, Germany and elsewhere, to buy bonds. The problem was, by 2010-2012, it's obvious that Greece couldn't pay the debt. The IMF said "We insist that you do pay the debt, and it's worth pushing you into the worst depression" Greece now is in a worse situation than the Great Depression in the 1930s. They're cutting back pensions, they're forcing huge emigration - you're having the same thing in Latvia. So if you don't cut back the debts that have grown so exponentially, through the miracle of compound interest, that they can't be paid, then you're going to absolutely devastate the Greek economy.
And the IMF and mainstream economics says that devastation is actually good because the economy is bankrupt that we'll have to privatize. And privatization is what we want. Privatization means they're going to sell the land, the ports, the railroads, the electric utilities have already been sold to German investors. So everything that the Greek economy owns is now being sold off to foreigners, largely on credit, because it can't pay the debt. It's like a family that falls further and further behind, loses the home, runs into debt, ends up homeless, and is destroyed by having taken on too much debt. That's how entire economies are being run today by the IMF and the world bank, and by mainstream economics that says it's "unthinkable" to write down debts.
I've written a number of books about the whole history of debt cancellation. Adam Smith said that no government has ever paid its debt, although some have pretended to, and the IMF and modern economics says maybe we can show that Adam Smith was wrong. Maybe we can show that governments can pay their debts, even at the price of impoverishing the economy, and making the US economy look like Greece. Greece is the future of where America is going now, under the policies of Clinton and Obama and Trump.
PS: And that leads perfectly to the next question I wanted to ask you. You were one of the few economists to accurately predict the 2008 financial crash. Can you dare to give us some predictions for both the American and global economies? Or at least some sort of indication about where we might be headed?
MH: For the American economy, it's a slow crash. Until people fight back, until people think there's an alternative, until they think "It doesn't have to be this way", the economy is going to shrink and shrink and shrink, and there are going to be more and more empty stores for rent on the big streets, and wages will go down, and people are going to have to borrow more and more, on their credit cards, just to get by, and spend less and less eating out at restaurants, less and less on goods and services, and it'll just shrink until there's a pushback. And the same thing in Europe.
At least in the United States, America has the ability to run a budget deficit that will spend money into the economy and try to slow the economic shrinkage. But in the Eurozone, the euro isn't allowed to run budget deficits. The Eurozone says that all growth in credit has to come from private banks and private interests. And when you reply on private banks instead of public banks, you rely on what banks make loans for. And they only make loans - as we discussed - to take over existing companies, not to help the economy grow at all. So the Eurozone has already turned into a dead zone, which is shrinking. You have the world outside the United States shrink more and more, except for countries that are withdrawing from the neoliberal orbit - China, Russia, the Shanghai Cooperation Organization, basically Eurasia is the only part of the world that's withdrawing from all of this. Which is why the neocons wanted to back Hillary so much; to try to force - to destabilize them, to try to overthrow their governments and make them as neoliberal as Greece or the United States or Europe.
PS: So Michael, at Democracy at Work, we advocate for worker-owned cooperatives ( that is, worker owned and controlled enterprises where the workers decide democratically - one member, one vote - what to produce, where to produce, how to produce, and what to do with the profits) as sort of a key part of transitioning to a better economic system. We believe you can't have political democracy without first having economic democracy. What can normal people do, in addition to what we do, who feel helpless and powerless and want to achieve economic democracy? Would one example be to nationalize the banks? Or create some sort of political movement to nationalize the banks?
MH: Here's the problem: once the financial managers have emptied out corporations, there's nothing they'd rather do than turn these big corporations over to the workers. Because they'll say "OK, you operate US steel company or you operate the broke auto company and see what you can do" - as long as they leave the debts in place. But as long as the existing corporate economy, as long as the car companies and the industrial companies, and the manufacturing firms, and the farms are all left as deeply in debt as they are, it doesn’t matter who owns them or what they can do as long as have to repay the debts. So you do need a public option.
Back in 2008 when Citibank was broke, imagine what would've happened if the government had said "OK Citibank's broke, we're taking it over, we're not paying the bondholders and the stockholders, because they invested in a criminogenic organization, but we're gonna operate this as a public bank." So now that Citibank is a public bank, and Wells Fargo and Bank of America and the other banks that have paid tens of billions of dollars for fraud. Now that they're public banks, they can issue credit cards at cost, at 2% interest of what they borrow. They won't make loans for corporate takeovers, they'll make loans to actually help companies grow. You need a public option for this and you need public banking for this, because the existing financial model is extractive, not productive. What would be the basis for public banking? Well one way of getting away from the payday loans that people have is to use the post offices as the germs of banks.
When I worked on Wall Street, three percent of American bank deposits were in the post office banks, which is why the banks wanted to drive them under. Maybe 15-20% were in savings banks and savings and loans -they were mutual savings banks - they don't exist anymore. They were looted by the commercial banks taking them over. In order to change the ownership structure and the function of industry, you need a financial system that actually promotes industry. All of this is what Saint Simon in France wrote about 200 years ago in the 1810s-1820s. That was the basis for Saint-Simonian socialist reforms, French socialist reform. Marx accepted this later, he admired Saint-Simon. You have German banks in the late 19th century following this new public banking model with a unity between government, banks, and industry. Everybody expected that this would become the basis for worker-owned, for socialist industrialization. World War One changed all of that. You had a retrogression. And that's what both Killing the Hosts, and J is for Junk Economics are really all about. To describe how history was turned into a detour, into a financial detour that is leading to neoliberalism and to neo-feudalism, making the kind of world that you want to see - an economy run for the producers - impossible.
PS: So, for our audience, there's definitely going to be a lot of different types of activists who are listening, from climate justice to what we do here, mainly economic justice through worker-owned enterprises, as we mentioned before. Do you think the solution is then for there to be some sort of political movement, essentially focused on changing the financial system - is that our only way out of this? I mean, does it have to come from the grassroots?
MH: It has to be a political movement and that requires breaking up the Democratic Party. The Democratic Party now is the party of Wall Street and the neocons. You have to have some political party that is going to work, and if you're a third party, as Ralph Nader found out, the media are just going to ignore you, and you're not going to have much effort. So you have to say, what party can you take over? Well, the Tea Party people tried to take over the Republicans and you can see where they are: they're way outvoted by the Koch brothers and Donald Trump has just surrendered to Paul Ryan on the budget.
So really the most demagogic, double-think, Orwellian party is the Democratic party, and you've got to take it away from Wall Street, you've got to get rid of Hillary Clinton and her gang. Forever. And that requires a fight. And it's ok if the fight means that the Bernie supporters and the socialists are expelled from the Democratic Party, then you want to leave the remaining - Wall Street is only the 1%. They'll have the donors but they won't have any voters at all. And the party that's expelled - the socialist party in effect - is going to become the Democratic Party, the real Democratic Party. And you've got to have a political fight. Without a political movement you're not going to be able to achieve any change in the economic system.
PS: So we just want to really thank you so much for your time today. Can you give us an idea of where we can get your book, and purchase it, and maybe the name of your website, etc…
MH: My website is michael-hudson.com and so if you Google "Michael Hudson", I'm the economist, not the male model. And the books are all available on Amazon. I couldn't get a regular publisher to publish the economic book because they say "This is enough bad news!" Saying that the economy is going to go down is like telling people "You're going to have bad sex after 30" - people won't want to read about - they want to indulge in the fantasy that they can get rich by investing. Can you tell them what stock to get rich on as the economy is shrinking and destroyed? So Amazon publishes the book, and my institute - for the Study of Long-term Economic Trends finances most of it and handles...Basically we're funded to do archeology and the history of debt cancellations and the jubilee years in antiquity and most of our writing is on Sumer and Babylonia actually, but now we're doing the modern economic books, almost treating the modern economy as an archeologist would treat it from the future, saying "How did the economy ever get into this mess? How are we ever going to explain it? It doesn't seem to make sense." So J is for Junk Economics and the other books are available on Amazon.
PS: And one last question for you today Michael: you just have such an interesting background. I think when a lot of people hear leftist or heterodox economists talk, one of the main criticisms is that they haven't worked in the business or finance world, that they're sort of trapped in the academia world. Can you give us a brief rundown of what got you interested in economics, where you started out and your role as a Wall Street financial analyst?
MH: Well, I wanted to see how the economy worked, and the way of finding out how it worked was to go to work on Wall Street. So I went to work on Wall Street and I found out - I went to work for banks as basically a statistician. Not as a mathematical economist, but actually doing statistics. And I wanted to find out - I became Chase Manhattan's balance of payments economist. I wanted to find out, "What is the deficit stemming from?" and the entire balance of payments deficit in the 1960s when I was working there came from the military spending abroad. So I found out it was really the Vietnam War and allied military spending. And I was hired for a year by Arthur Andersen, the accounting firm that was closed down for fraud in the Enron scandal - was going to publish it but McNamara at the World Bank apparently called them and said "If you publish this, you'll never get another government contract." So I published it through NYU, the Solomon brothers Economic Institute, and then went into academia.
I figured, well, I did have a PhD but that didn't tell me anything about how the real world worked. So I tried to sit and talk about trade theory and financial theory. And there was really no way that I could fit it into the curriculum. So Herman Kahn of the Hudson Institute offered to hire me - he was the model for Dr. Strangelove - and he said "Don't call yourself an economist. An economist tells people 'You're gonna save the economy by giving more money to rich people.' Call yourself a futurist." So he became a friend of mine, Arthur, other futurists became friends of mine. And I really called myself a futurist until I got interested in archeology, where I've been spending much of my efforts for the last thirty years, trying to see how the ancient near east and classical antiquity and medieval Europe all solved their debt crises, basically writing a history of debt crises, showing that every economy has had to cancel debts. So you could say all my work in economics since the 1960s - for more than 50 years - has been on seeing how society handles its debt crisis.
PS: Thank you so much. This was an exclusive Democracy at Work production. We were speaking with economist Michael Hudson. Please give us a like on Facebook, if you haven't already. Check us out on Twitter, and of course, at democracyatwork.info. Special thanks to our production and editing team: Tito Valentin and Christopher Lombard. I'm Paul Sliker.
DD: And I'm Dante Dallavalle.
Note: Karina Stenquist participated in the process of editing the transcript of this interview for clarity and length.
Showing 6 comments
I also believe historically progressive struggle advances more when gains are made than when backslides happen. Intermediate progressive gains like a living wage, debt forgiveness, universal health care, tuition free education… remove people from precarious positions and frees up precious time for learning and understanding and becoming more politically involved, enroute to a more egalitarian, inclusive, caring, empathetic, cooperative and participatory society. We must struggle to understand the world as it really exists and IMHO economics, the financial world and particularly money are best understood through the teachings of what has become call MMT. For people working towards the above stated progressive advances there are some simple truths about how money actually functions that need to be clearly understood:
THE ANSWER TO THE QUESTION “How are we going to pay for all these progressive gains”? Is simple. The same way the federal government pays for everything.
BY ISSUING THE CURRENCY!!
That is what the federal government does, By law. (as do all sovereign governments that issue their own currency like the USA, Canada, Japan, the UK, China etc but not the European Monetary Union countries like Greece who are destroying their society largely because they don’t issue their own currency and have un-democratized their currency issuance and given it over to a bunch of elite technocrats)
The USA federal government ISSUES THE US DOLLAR!!
Where else could US dollars possibly come from?
The US federal government CANNOT RUN OUT OF US DOLLARS, THEY CANNOT GO BROKE IN US DOLLARS.
THE US FEDS ISSUE THE US DOLLARS!
THE US FEDS DO NOT NEED TO TAX TO SPEND!
THE US FEDS DO NOT NEED TO BORROW TO SPEND!
THE USA FEDERAL DEBT IS SIMPLY AN ACCOUNTING OF ALL THE MONEY THE US GOV. HAS ISSUED MINUS THE AMOUNT IT HAS COLLECTED BACK IN TAXES.
This is simply a fact of how the current money system works.
There are of course many other issues in economics and society (inflation, employment, production, consumption, decision making, class warfare, divide and conquer etc.) but IMHO progressives MUST GET THIS BASIC UNDERSTANDING OF HOW MONEY IN THE CURRENT SYSTEM WORKS.
I highly recommend the following MMT sources
http://www.neweconomicperspectives.org for those interested in
more information, and particularly for people new to this information, to their MMT primer
http://neweconomicperspectives.org/modern-monetary-theory-primer.html or the book
“Modern Money Theory – A Primer on Macroeconomics for Sovereign Monetary Systems” by professor Randall Wray available here
http://www.levyinstitute.org/publications/l-randall-wray Writings of Randall Wray at the Levy Economics Institute.
http://bilbo.economicoutlook.net/blog/ by economics professor Bill Mitchell
http://moslereconomics.com by Warren Mosler.
A concise and straightforward explanation in video by economics professor Randall Wray ofthe University of Missouri Kansas City (UMKC).
or Warren Mosler
For a longer treatment of money and debt David Graeber’s “Debt The Last 5000 years” may be of interest.
This is not meant to be an exhaustive list.
I would also like to add to my previous lengthy comment the all important issue of how do we take these understandings and implement them, organize around them and begin to make real changes in the real world. I also think we need a vision (not a blueprint) of where we hope to be headed. I am sympathetic to Participatory Economics and Participatory Society by Michael Albert and Robin Hannel
Lance Roberts… https://seekingalpha.com/article/4099999-great-disconnect-markets-vs-economy?page=2