Michael Hudson — Innocuous Proclaimations

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 Hudson

Innocuous 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

See also

Orwellian doublespeak.

Michael Hudson
Golden Tongues

Sharmini Peries interviews Michael Hudson

Bill Black — Remember When Carmen Segarra Exposed the NY Fed’s Refusal to Stop Goldman Sachs and Banco Santander’s Scam to Inflate Santander’s Capital? How’d that Work Out?

How the US ad world faced financial collapse at the time the Lehman crashed and burned — and could again because the conditions that created the crisis remain in place.

New Economic Perspectives
Remember When Carmen Segarra Exposed the NY Fed’s Refusal to Stop Goldman Sachs and Banco Santander’s Scam to Inflate Santander’s Capital? How’d that Work Out?
William K. Black | Associate Professor of Economics and Law, UMKC

Bill Black — Geithner’s Single Most Revealing Sentence

[Tim Geithner] did vastly more harm to the Nation as the President of the New York Fed than he did as Treasury Secretary. He was supposed to regulate most of the largest (and most criminal) bank holding companies – and failed so completely that he testified to Congress that he had never been a regulator and that the problem in banking leading up to the crisis was excessive regulation. His statement that he was never a regulator was truthful – but you’re not supposed to admit it, and you’re certainly not supposed to be proud of it. Geithner, Greenspan, and Bernanke are the three Fed leaders who could have prevented the entire crisis by being even modestly effective regulators....

Conclusion

The title of Geithner’s book that he wrote to settle these petty personal scores is a sad testament to his abject failure as a regulator while the NY Fed’s President. He relied on the delusion that banks would self-regulate themselves to safety and soundness through stress tests designed to ensure that even the most fraudulent bank could easily pass the faux stress test. In his book, Geithner was unable to present any action he took as an anti-regulator to warn the Nation about the three fraud epidemics, any effective action he took to stop those frauds, or any action he took to prosecute those frauds. He failed each of the three real “stress tests” that confronted him. Had he passed either of the first two tests we could have avoided the financial crisis. Had he passed the third test at least the fraudulent elite bank CEOs would have been imprisoned and their fraudulent proceeds confiscated so that it was clear that crime did not pay.

Bailing out banks is not hard when a nation has a sovereign currency and the banks’ debts are denominated in that currency. Bernanke, not Geithner, delivered the vast bulk of the real bailout that transferred the banks’ losses on the fraudulent assets to the Fed and allowed Geithner to claim that TARP was “profitable.”

Cronyism and corruption through and through. unless the people at the top are complete morons. But if they are morons, one wonders how so much money flows into their pockets.

New Economic Perspectives
Geithner’s Single Most Revealing Sentence
William K. Black | Associate Professor of Economics and Law, UMKC

Jeff Cox — Morning Six-Pack: What we're reading Friday

On Wall Street today the talk is all about former Treasury Secretary Tim Geithner's new book that hits in the stands next week. Among the many admissions is that he was too soft on big banks. Wow, Tim, ya think?

CNBC NetNet
Morning Six-Pack: What we're reading Friday
Jeff Cox | Finance Editor

Randy Wray — What Do You Want in a New Fed Chair? Hint: Larry Summers Doesn’t Have It

Blockbuster.

Economonitor — Great Leap Forward
What Do You Want in a New Fed Chair? Hint: Larry Summers Doesn’t Have It
L. Randall Wray | Professor of Economics, UMKC

Randy Wray — Prospects for the State of the Union: More Risk-Taking, More Crime, and More Crises

I don’t know what President Obama is going to say in his State of the Union address. He’s been trying to “rally the troops”, to press Americans to nudge their elected representatives to govern rather than to simply throw roadblocks in the way. Yet, the President continues to come up short on concrete proposals. It would be too much to say that he panders to the population—I think he’s doing a better job than most politicians in trying to appeal to higher motives. Yet public discourse today suffers by comparison with that of our nation’s past. Keep the following Presidential address in mind as President Obama delivers his. While we like to think that we are evolving—as a species and as a nation—it might be pretty hard to tell.

Economonitor | Great Leap Forward
Prospects for the State of the Union: More Risk-Taking, More Crime, and More Crises
L. Randall Wray | Professor of Economics, UMKC

Geithner out at the end of the month, Jack Lew in at Treasury

Geithner doesn't want to go through the debt ceiling lunacy again, so he's leaving before the shit hits the fan. And replacing him will probably be Jack Lew, who is currently serving as White House Chief of Staff.

Lew ran Citigroup's Alternative Asset Unit from 2002 to 2006, basically overseeing a hedge fund type operation that was betting against the housing market even as Citi was making billions in new subprime loans and mortgages.

Conflict of interest? Unethical? Illegal? Ya think?

Say hello to our 76th Treasury Secretary.

Only on Wall Street, kids...only on Wall Street.

This could be the real reason Boehner cancelled the vote on Hurricane Sandy aid

Hat tip to Matt Franko, a MNE contributor, on this one. Matt does some great analytical work.

Anyway, he brought to my attention the fact that the Federal Gov't hit the debt ceiling on Monday, 12/31. Boehner abruptly cancelled the vote on the Hurricane Sandy aid bill on Tuesday, even though he had promised to hold it. An aide to Boehner said it was because of "everything that was going on," related to the fiscal cliff.

But was the real reason for the cancellation the fact that Boehner spoke to Tim Geithner and was informed that there are no funds for Sandy? Once the gov't is at the debt limit, then any new spending can only come from some other expenditure being cut.

I am sure Chris Christie does not know this, nor does Gov Cuomo, Peter King and definitely not that dunce, Michael Grimm.

Moreover, even if the vote is held, I am not sure these states will be receiving funds anytime soon. How does that happen under the debt ceiling?

While I hate to see the innocent victims of Sandy suffer, their representatives are avowed deficit hawks (with the exception of Cuomo) and have been railing for less spending and telling us the government was broke and out of money for a long, long, time. They've also been against raising the debt ceiling. So guess what guys? Your wish has come true...the gov't is out of money and it's YOUR constitutents who are going to feel it.

Brad DeLong — Department Of "Oh Dear!": Basic Macro Briefing Weblogging

Good one from Brad DeLong debunking the president's false belief in bond vigilantes under the bed. Nice jab at Tim Geithner, too.

Grasping Reality with Both Invisible Hands
Department Of "Oh Dear!": Basic Macro Briefing Weblogging

Brad DeLong | Professor of Economics, UCAL Berkeley
(h/t Mark Thoma at Economist's View)

I would put it rather, "Department of OMG." It's the false religion of Moronism worshipping at the idol of the Bogeyman.

Warren Buffett: Jamie Dimon Is Best Person For Treasury Secretary

'Nuff said.

The Huffington Post
Warren Buffett: Jamie Dimon Is Best Person For Treasury Secretary
Mark Gongloff

Timmy Geithner: “Suppose we have a [Treasury] auction and no one shows up?”

commentary by Roger Erickson

Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis
By Bob Woodward, Published: September 8

Notable quotes from the G-Man, advising President Obama. (There are more, but these are sufficient to prove he has little feet.  Otherwise, how could he stuff so many in his mouth at once?)

“Why would anyone buy U.S. bonds if it’s an open question whether we are going to have the authority to pay for them?” Tim Geithner, to Pres. Obama

Another possible outcome, Geithner said, was perhaps worse. “Suppose we have an auction and no one shows up?” Tim Geithner, to Pres. Obama

Timmy Geithner is either a complete buffoon, or an outright traitor to his nation. He may be both.

He's being paid a lot to be that wrong, in public, on the record.

10yr Treasury hits record low of 1.68%. Oh wait...S&P downgraded our credit rating!

Where are the idiots at Standard & Poor's today? They should be asked to justify their clueless downgrade of the U.S. credit rating last summer. Remember that? Since then, rates have gone nowhere but down and the 10yr Treasury is making a new, record low yield today.

And while I'm at it, where's Jim Rogers, Peter Schiff, Rick Santelli and all the other clueless morons who've been warning of a spike in interest rates because of debt, rating downgrades, hyperinflation, and a collapsing dollar? Or Geithner, with his dumb comment about the U.S. having to earn back confidence to get a triple-A rating from S&P? What about Bernanke, repeatedly telling Congress that we must get our debt "in order" otherwise, we'll lose control of interest rates.

So, so, wrong.

Some more Santelli comedy

It’s amazing how CNBC allows Rick Santelli to rant on and on each and every day achieving levels of cluelessness that have never been seen before. If I were running the network I’d be really embarrassed.

Earlier today Santelli was ranting about a Treasury proposal that is being considered whereby the U.S. would start issuing floating rate notes.

For those not familiar with floating rate notes, the interest rate paid “floats.” That means if interest rates go up, the interest paid on the notes increases.

Santelli was sounding the fire alarm as usual, saying, “If interest rates rise, then the government will have to pay more interest. It will be horrible, terrible, the end of the world, etc. blah, blah, blah.”

The one thing Santelli seems to forget (as he often does) is that the government (the Fed) sets rates. So, why would the rates necessarily rise? The Fed could easily decide to keep rates low like its doing now and the whole question of interest rate risk is moot. Anyway, the whole question of interest rate risk for a sovereign, currency issuing nation like the U.S. is moot anyway because it has a monopoly on rate setting.

But let’s say rates do rise because the Fed raised them. Why would that be so terrible? Since the government is a net payer of interest, a rate increase (which, again, could only happen via the Fed) would be equivalent to a rise in transfer payments (government payments to people) to the private sector. What’s so bad about that? It’s giving people money, and just another form of deficit spending. By the way…the largest component of the Reagan deficits was interest on the debt and…you guessed it…we had an ECONOMIC BOOM largely because of that.

Santelli is totally clueless. He’s ranting about things he doesn’t understand. On the other hand, my 11 year old son can understand this stuff.

By the way, if you think Santelli is clueless, what about Geithner? Presumably, he’s the guy proposing floating rate notes? Can somebody please tell Timmy that the government sets the rate it pays, so floating or non-floating, it’s all the same thing.

I often allow these comments to drive me crazy as you can see. Then I calm down and realize that it's all about television ratings, and it has nothing to do with real information of any kind. Many people don't realize that. They don't realize that it's ALL about ratings. They think it's real information. If it were about real information then people like Rick Santelli wouldn't have a career on television.

Then it hits me...if it's all about ratings, why are we allowing a stupid, ratings-driven business to affect our policy, our country and our lives?

Then I get crazy again.

The phony debt crisis!

At a Treasury auction today of 4-week bills, investors were prepared to give the government over a quarter of a trillion dollars AT ZERO PERCENT INTEREST!

And they keep telling us there's a debt crisis and we need to cut the debt!

If this doesn't show how the whole debt thing is a total farce and a total propaganda lie, then I don't know what will.

Our policymakers admit to problems we don't have

Just heard Geithner at a press conference in Europe "admit" that, "The US has a lot of work to do on fiscal reform." Of course this is code for cutting the deficit.

Since Geithner's been at Treasury we've seen:

10yr Treasury yields go from 3.8% to 2%
5yr Treasury yields go from 2.8% to 0.9%
30yr Treasury yields go from 4.5% to 3.0%
The Dow has gone from 6400 to 12000.
US GDP has gone from $13.8T to $15.2T.

Yes, the debt has increased.
The deficit went from $450 bln to $1.5T.
The debt has gone from $12T to $15T.

But if there were really a crisis, then wouldn't we see it manifest in the markets somewhere?

I am sick and tired of our policymakers "admitting" to problems we don't have.

Robert Rubin, the Puppeteer, still running economic policy.

Geithner, Summers, Orzag, Daly, Jack Lew...the list goes on and on. Robert Rubin puppets, all.

No single individual has had an imprint on American economic policy over the past 20 years more than Robert Rubin. And the man put together an unblemished record of blowing up everything he touched: From Citigroup to the US economy with his late 1990s surpluses (which we're still trying to recover from) and as an encore, the entire global economy with his single minded pursuit of financial deregulation and derivatives.

Rubin is still with us, behind the scenes perhaps, but very active nonetheless by way of his puppets who continue to press for deregulation and "fiscal responsibility."

I recently saw the Puppeteer himself at the Four Seasons Hotel in New York, having lunch with none other than Pete Peterson (another financial robber barron who's been gunning for an end to Social Security for decades and is likely to get it) and--you guessed it--Timmy Geithner, who looked like he was obediently taking orders from his two masters.

But it's the President who has become Rubin's main act. The Puppeteer has taken Obama's message of change and deftly crafted it to Wall Street's interests.

Jim Cramer to Geithner: "Lock in the financing now!"

Did anyone see this on CNBC this morning? While questioning Treasury Secretary Tim Geithner at the "Seeking Alpha" conference here in NYC, Cramer asked why the U.S. Treasury doesn't "lock in" a bunch of "low interest rate financing" now so that the United States doesn't face the same problem as Europe.

Jesus, I can't believe this. It just keeps getting more and more pathetic.

Um...Jim...you mean dollar financing?

In case you haven't heard, the United States Government is the issuer of the dollar and as such, isn't in need of "financing" nor does it have to worry about any rate that it can't pay. It sets the rate.

Bloomberg: Geithner Going?

Bloomberg: Geithner to Consider Leaving After Debt Debate

Treasury Secretary Timothy F. Geithner has signaled to White House officials that he’s considering leaving the administration after PresidentBarack Obama reaches an agreement with Congress to raise the national debt limit, according to three people familiar with the matter.

Geithner hasn’t made a final decision and won’t do so until the debt ceiling issue has been resolved, according to one of the people. All spoke on condition of anonymity to talk about private discussions.

That would be two down with Larry Summers gone.

UPDATE: Geithner denies the rumor.

Geithner: I’m Not Leaving

UPDATE 2: Geithner waffles.

Treasury Secretary Geithner considering leaving post after debt talks

Tim Duy — Unemployment or Currency Crisis

Tim Duy of Fed Watch is a very savvy guy. He has a must-read post on the current thinking at the top, which is how to navigate between high unemployment and, no, not inflation, as many think, but currency depreciation leading to a currency crisis. Current thinking seems to be that unemployment has to be suffered in order to avoid a possible currency crisis.

More on Geithner, Deficit Reduction, and Expenditure Switching

Is Goldman TBTP (Too Big To Prosecute)?

Bloomberg: Goldman Sachs ‘Too Big’ to Face Criminal Prosecution, Hintz Says

Hintz, ranked the No. 1 analyst covering brokerage firms in a survey by Institutional Investor last year, said that the Justice Department’s approach to criminal charges against companies has changed since accounting firm Arthur Andersen LLP’s business collapsed following a felony charge.

A 2003 Justice Department policy document “stated that prosecutors can reward cooperation by offering a negotiated settlement to a targeted company that can range from immunity from criminal indictment to a deferred prosecution agreement,” Hintz wrote. “Ultimately, the targeted company is treated not as a hardened criminal but as the equivalent of a juvenile offender that can be reformed.”

Goldman Sachs’s potential civil litigation risk related to sales of mortgage-backed securities and collateralized debt obligations “is manageable,” Hintz wrote, because the statute of limitations for many of the claims has already passed.

Surprise. Looks like GS will get away with a slap on the wrist, if that.

See also Robert Scheer's Geithner and Goldman, Thick as Thieves