This is a transcript from Meet the Renegades with economist Michael Hudson and interviewer Ross Ashcroft.
MH: If you’re teaching economics, you should begin with the relationship between finance and the economy – between the buildup of debt and the ability to pay. That should be the starting point if you realize that the problem of our time is how can society cope with the debt buildup that has occurred.Since "money" is a credit-debt relationship, money creation results in the creation of either bank credits in deposit accounts and corresponding debts in loan accounts or in tax credits issued by government with no corresponding debt in the private sector.
The law of reflux states that money created flows back to the creator.
Repayment of bank loans extinguishes the bank credits that were created by crediting deposit accounts. These credits are extinguished the loan is reaped and the corresponding deposit accounts are debited.
Use of tax credits to pay tax obligation or other obligations to the currency issuer extinguishes those credits as the tax credits flow back to government.
The total flow of credit issuance and extinguishment constitutes the money supply available to non-government. That flow is held as various stocks in the interim.
Note that the public debt is non-government net financial wealth and the debt is cancelled with tax collection. When government runs fiscal deficits they increase non-government net financial wealth since there is no corresponding debt in non-government. A currency issuing government can always generate more tax credits than flow back through taxes in order to increase the net financial assets of non-government to meet saving desire.
Therefore, the issue is never public debt in the case of government that is sovereign in its currency and doesn't borrow in currencies it doesn't issue or promise to convert its currency to real assets like gold or silver at a fixed rate.
Governments that either don't issue their own currency, such as US states, or governments that limit their currency sovereignty voluntarily like the nations of the EZ or countries that peg like China, are constrained financially.
Debt deflation pertains to privately issued credit. Debt deflation occurs when borrowers are unable to repay loans and the demand for money rises faster than money creation. Then a financial crisis occurs that spreads to the real economy as demand contracts. Recession sets in. If the situation is not addressed by increasing money flow, then the recession can develop into a debt deflationary depression.
There are also several paragraphs on economic rent.
This was the basic classical economics of Smith, Ricardo and John Stuart Mill. They all looked at what the landlords got – and what banks got – as socially unnecessary overhead. The economy could function technologically without a landlord class, without a banking class.Economic rent is socially unnecessary costs imposed by those in positions of power whose power enable them to do so. "Socially necessary" costs are the costs of factors of production, chiefly cost of labor in terms of labor time multiplied by labor power based on knowledge in skill in work performance in excess of unskilled "brute" labor. Those in positions of power are able to extract more from the economic process than they actually contribute, owing to unearned reward based ownership of means of production and financial resources rather than productive economic contribution. This is financial and economic "rent" that is "socially unnecessary since the same output of production could be obtained in the absence of it.
Hudson is claiming that neoclassical is anti-classical economics in that it denies the role that economic power and economic rent play in modern monetary production economies because neoclassical economics is based on the assumption of a barter economy, where money is neutral and doesn't affect the economic process. In this view, everyone receives their just deserts based on marginal productivity.
Note that Michale Hudson is assuming quite a bit of knowledge of finance, economics, and history economics in these remarks on money and rent. It is a broad brush cursory treatment of two of the most controversial concepts in economics.
Michael HudsonInnocuous Proclaimations
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University
Sharmini Peries interviews Michael Hudson