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

The Slow Crash: When Global Economies are Run by Banks — Bonnie Faulkner interviews Michael Hudson

MH: The price decline is a result of having to pay debts. That drains income from the circular flow between production and consumption – that is, between what people are paid when they go to work, and the things that they buy. Deflation is a leakage from this circular flow, to pay banks and the real estate, called the FIRE sector – finance, insurance and real estate. These transfer payments leave less and less of the paycheck to be spent on goods and services, so markets shrink. Some prices for some products go down when people can’t afford to buy them anymore.…

He goes out of paradigm though:

When you pay a debt to the bank, the banks use this money to lend out to somebody else or to yourself.  

Funny mistranslation.

Look at Ukraine. Its currency, the hernia, is plunging.  

(Should be hryvnia.)

Counterpunch
The Slow Crash: When Global Economies are Run by Banks
Bonnie Faulkner interviews Michael Hudson

Junk Economics and the Parasites of Global Finance — Justin Ritchie interviews Michael Hudson

Financial rent.

Counterpunch
Junk Economics and the Parasites of Global Finance

Justin Ritchie interviews Michael Hudson

Raúl Ilargi Meijer — Debt Rattle February 6, 2016

More global pessimism

The Automatic Earth
Debt Rattle February 6, 2016
Raúl Ilargi Meijer

Ambrose Evans-Pritchard — World faces wave of epic debt defaults, fears central bank veteran William White

There is no easy way out of this tangle. But Mr White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy - call it Keynesian, if you wish - and launch an investment blitz on infrastructure that pays for itself through higher growth.

"It was always dangerous to rely on central banks to sort out a solvency problem when all they can do is tackle liquidity problems. It is a recipe for disorder, and now we are hitting the limit," he said.…

Second leg down?

What happens when China is forced to drop its peg, like Russia?

The Telegraph
World faces wave of epic debt defaults, fears central bank veteran
Ambrose Evans-Pritchard

Larry Elliott — Beware the great 2016 financial crisis, warns leading City pessimist

Albert Edwards, strategist at the bank Société Générale, said the west was about to be hit by a wave of deflation from emerging market economies and that central banks were unaware of the disaster about to hit them. His comments came as analysts at Royal Bank of Scotland urged investors to “sell everything” ahead of an imminent stock market crash.

“Developments in the global economy will push the US back into recession,” Edwards told an investment conference in London. “The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.”…

The Guardian
Beware the great 2016 financial crisis, warns leading City pessimist

Larry Elliott, Economics editor

Ambrose Evans-Pritchard — RBS cries 'sell everything' as deflationary crisis nears

The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman crisis in 2008. “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it said in a client note.

Andrew Roberts, the bank’s credit chief, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings. This is particularly ominous given that global debt ratios have reached record highs.…

Second leg down in the GFC?

Steve Keen has been waving a red flag over private debt, too.

The Telegraph
RBS cries 'sell everything' as deflationary crisis nears
Ambrose Evans-Pritchard

Steve Keen — The Unnatural Rate Of Interest - Ultra Wonkish

Steve takes on Marx's labor theory of value, too. (It's not all that wonkish either.)

Forbes
The Unnatural Rate Of Interest -Ultra Wonkish

Steve Keen

David Graeber — Britain is heading for another 2008 crash: here’s why

Not just the UK. The global economy is rolling over.

The Guardian — Comment is free
Britain is heading for another 2008 crash: here’s why
David Graeber

Raúl Ilargi Meijer — Everything’s Deflating And Nobody Seems To Notice

Debt deflation taking hold globally. Get ready for the second leg down in the GFC.

With Paul Ryan as Speaker of the House, the US is not going to be able to get out of the way using fiscal.

The Automatic Earth
Everything’s Deflating And Nobody Seems To Notice

Raúl Ilargi Meijer

Edward Lambert — Adair Turner: Is it Debt Deleveraging or the Fall in Labor Share?

Decreasing labor share results in contracting demand, which in turn results in a sluggish economy that then turns into debt deflation if private debt levels are sufficiently high. Duh.

Angry Bear
Adair Turner: Is it Debt Deleveraging or the Fall in Labor Share?
Edward Lambert

Michael Hudson — The Paradox of Financialized Industrialization

Congratulate Michael Hudson, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, on his new appointment as Guest Professor at Peking University.

These remarks were made at the World Congress on Marxism, 2015, at the School of Marxism, Peking University, October 10, 2015. The presentation was part of a debate with Bertell Ollman (NYU). I was honored to be made a permanent Guest Professor at China’s most prestigious university.

What follows is a summary of Marx's contribution to understanding the present global crisis in terms of finance capital, which Marx called "fictitious capital," and industrial capital, with workers having largely been successfully suppressed by both preventing them from pursuing the interest of the class or tricking them into not doing so. What he has been saying for a long time summarized in terms of the present in relation to China and the West.

Michael Hudson Blog
The Paradox of Financialized IndustrializationMichael 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

Philip Arestis and Malcolm Sawyer — What if the Euro Area is Led to Serious Deflation?

The economies of the euro area monetary union are close to deflation. In May 2015, the annual rate of inflation averaged 0.3% across the euro area, after six months during which the rate of inflation had been zero or below. The question then arises as to whether the deflation has been internally or externally generated, whether it becomes self-perpetuating, and what the consequences would be.

Triple Crisis
What if the Euro Area is Led to Serious Deflation?

Philip Arestis and Malcolm Sawyer

Johnna Montgomerie — Greece: Political Stress in Debt and Social Justice

The stark reality is there is no future in debt-led austerity. Eventually the money will run out to service the debt stock. Perhaps Greece can make the interest payment to the ECB at the end of May, but it is very unlikely to make the IMF payment in June. It is hard to avoid the conclusion that both the Greek state and Greek households have ended up behaving in similar ways to meet their obligations: squeeze expenditure, sell assets and try to find some extra income. Live hand to mouth.

This is Greece now. You cannot pay with money you do not have and the call from within Syriza to effect a “rupture” with its lenders simply reflects this sentiment. To call this a radical left policy completely ignores the economic reality that austerity is not working anywhere in Europe: growth is always stalled, another financial crisis always looms and the spectre of a debt-deflationary cycle haunts the entire continent.

Greek Reporter
Greece: Political Stress in Debt and Social Justice

Johnna Montgomerie | Lecturer in Economics at Goldsmiths, University of London

ht Clonal

Merijn Knibbe — Bundesbank calls for higher wages across Eurozone

…this is a game changer (via left foot forward): the Bundesbank finally understands. Economic policies aimed at financial deregulation, low wages and asset price increases instead of low unemployment, high employment and high income have failed.

"Finally understands," or getting cold feet at the carnage and prospect of dire potential social and political outcomes.

Maybe it will come to be called "the Piketty Effect."

Real-World Economics Review Blog
Bundesbank calls for higher wages across Eurozone
Merijn Knibbe

But see Bill Mitchell, No fundamental shift of policy at the Bundesbank

INET — Institute Senior Fellow Adair Turner’s Debt Addiction Remarks Turn Heads

Lord Turner, who is the former head of the United Kingdom Financial Services Authority and currently a Senior Fellow at the Institute for New Economic Thinking, pointed to continually rising levels of private debt as a key culprit holding back the recovery of the global economy.

INET
Institute Senior Fellow Adair Turner’s Debt Addiction Remarks Turn Heads

Lars Syll — Why austerity is no solution to economic crises

Why austerity is no solution to economic crises

Lars P. Syll | Professor of Civics, Faculty of Education and Society, Malmö University

Michael Hudson — The Bubble Economy as a 2 part play for Privatisation

In place of a new bubble, financial elites are demanding privatization sell-offs from debt-strapped governments. Pressure is being brought to bear on Detroit to sell off its most valuable paintings and statues from its art museums. The idea is to sell their artworks for tycoons to buy as trophies, with the money being used to pay bondholders.

The same dynamic is occurring in Europe. The European Union and European Central Bank are demanding that Greece sell off its prime tourist land, ports, transport systems and other assets in the public domain – perhaps even the Parthenon. So we are seeing a neo-rentier grab for basic infrastructure as part of the overall asset stripping.

This is a different kind of inflation than one finds from strictly financial bubbles. It is creating a new neo-feudal rentier class eager to buy roads to turn into toll roads, to buy parking-meter rights (as in Chicago’s notorious deal), to buy prisons, schools and other basic infrastructure. The aim is to build financial charges and tollbooth rents into the prices charged for access to these essential, hitherto public services. Prices are rising not because costs and wages are rising, but because of monopoly rents and other rent-extraction activities.

This post-bubble environment of debt-strapped austerity is empowering the financial sector to become an oligarchy much like landlords in the 19th century. It is making its gains not by lending money – as the economy is now “loaned up” – but by direct ownership and charging economic rent. So we are in the “economic collapse” stage of the financialized bubble economy. Coping with this legacy and financial power grab will be the great political fight for the remainder of the 21st century.

Michael Hudson
The Bubble Economy as a 2 part play for Privatisation

Bill McBride — Housing bubble: The "Wealth" is Gone, but the Debt Remains

As Norris noted, the bubble wealth is gone, but the debt remains (still high on a historical basis). This was especially hard on younger households since they bought during the housing bubble.

Calculated Risk
Housing bubble: The "Wealth" is Gone, but the Debt Remains
Bill McBride

Rob Urie — In the Time Between Crises

Critique of contemporary capitalism. Well said.

Counterpunch
In the Time Between Crises
Rob Urie

(h/t Kevin Fathi via email)