A Black Agenda Report: The Fictitious Economy, Part 2

July 30, 2008
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Transcript of a A Guns And Butter Interview by Bonnie Faulkner originally broadcast on KPFA radio.

In the second half of an hour long interview with economist Dr. Michael Hudson broadcast on Guns And Butter June 25, 2008, Dr. Hudson explains some of the factors in the price of oil that are seldom discussed in the mass media, and details why the price of a gallon of gas may double again before year’s end. He also predicts a long, slow and inevitable economic depression in the US and in other nations which do not decouple themselves from the US dollar, and talks a little about what to expect from a new US administration next year.

The Fictitious Economy, Part 2, An Interview With Economist Michael Hudson

The following is a transcript of the first half of an hour-long interview with financial economist Dr. Michael Hudson, that was broadcast on the Pacifica Radio program Guns and Butter. The interviewer was the show’s host, Bonnie Faulkner. A link to the MP3 audio of the full hour is provided below.

BF: What is economic globalization really? I mean isn’t it really just an unregulated asset grab that turns over the natural wealth of individual nations to the global financial elite?

MH: No. It’s very heavily regulated. The economy is moving towards central planning by the large financial institutions that are coordinated by the International Monetary Fund and the World Bank. So, [essentially] the globalization is a centrally planned asset stripping of countries outside of the United States. Countries are to give their economic surplus to the United States as exports and they are to serve as markets for whatever the United States can produce in excess, mainly agricultural crops and military equipment. So globalization is very, very tightly regulated.

BF: Why do national governments around the world co-operate with corporate globalization?

MH: There are two reasons: either they’re wittingly pro-American or they are run by oligarchies, which are making money by this process because the essential philosophy of globalization is to strengthen oligarchies. Or they’re just afraid of disagreeing with the United States and passively go along with it. The assumption underlying all political theory and economic theory is that nations and individuals act in their own self-interest and obviously that premise of economic and political theory is not being followed. They’re not acting in their self-interest. China is. A few other countries are and the United States is. But it’s as if other countries are passively going along with a strategy that is undercutting them… or at least was until Venezuela, Cuba, Brazil and Argentina began to break away here and China moved to create the Shanghai Cooperation Organization to make an Asian currency block.

BF: A very pressing question at this time is the massive food and energy costs worldwide, which are causing misery and protests. Do you think speculation at the Commodities Future Markets is the primary cause of skyrocketing prices or is it more a matter of monetary policy… low interest rates, easy credit, and the weak dollar?

MH: Well, neither. Well, speculation is a function of monetary policies and deregulation, so certainly speculation has played some role but at the same time there are many other factors that have been pushing up oil prices. The main factor is the decline in the dollar. Americans have seen oil prices go up but they’re not going up for the Europeans so much. They’re not going up for countries that have hard currencies. The OPEC countries have said the oil prices are going up for [three] reasons:

  1. the dollar is going down and we’re been pricing our oil in Euros, so as the dollar depreciates against the Euro you’re going to have to pay more and more dollars in order to give us exactly the same price in hard currency we were getting before;
  2. the dollar is going down because of the war in Iraq and OPEC says we don’t want to encourage you to have a thriving economy while you’re attacking us all, so we’re not going to support the war in Iraq. We’re going to raise the price. And they say
  3. as the dollar goes down, we’ve lost so much money on the dollar reserves that we’ve held in the past years that we have to make it up by charging more. So [essentially] this is a response to the war in Iraq and the free ride. And that means the prices will continue to go up until the United States cures the balance of payments mainly by cutting back its military spending and reindustrializing the economy.

BF: Well you know I had thought that the rise in oil prices, of gasoline prices for instance for Americans, did have to do with the demise of the dollar and yet when I saw the protests in Europe, the truckers blocking the roads because of the high fuel costs, I began to think, well it’s got a lot more to do with other elements involved other than just the demise of the dollar.

MH: Well, it’s connected to the war as I said. The prices have gone up recently in Europe but nowhere near as much as they’ve gone up for the United States. A lot of these protests have been organized for covert political reasons that… I’m not sure exactly what they are, but they are more than they seem. But again the OPEC countries are saying we want to recoup the dollars losses that we’ve had on our foreign exchange reserves and Europe has not made that connection. They act as if somehow just the government can somehow stop taxing oil. It’s not going to do that. And all the strikes are doing is disrupting the local economies.

BF: Now I believe that you have written that OPEC is cutting back on its oil production, is that true?

MH: There have been mixed messages. Some countries wanted to cut back. Last week Saudi Arabia said it was going to produce more and the other OPEC countries, Iran and Venezuela and others said, “Wait a minute, if you produce more when we’re saying produce less, then we’re going to expel you from OPEC… at the very least.”

And the fact is, producing more crude oil is not going to have any effect at all on the gasoline prices here because there is no refinery capacity. Every refinery in the world is now operating at full capacity. There is no extra shipping capacity. Shipping rates are going way up because there’s nothing to ship them in. So no matter how much more Saudi Arabia says it’s going to produce there’s no means of shipping it to the US or other countries and no means of refining it once it gets here. So this is all basic propaganda. The oil companies are very happy with the situation. For them the Cheney and Bush war in Iraq has been a win/win situation. [Either] if they win the war they get to grab all the oil for themselves and take out the Russians and Chinese that were beginning to develop the oil resources under Saddam. And if they lose the war there’ll be such a disruption in oil supply that prices will go up and create an umbrella for the American producers who make super profits. So they’re very happy both ways and they like to blame foreigners because they don’t want to be blamed themselves.

BF: So now you’ve implied in your writing that the oil companies have consciously and on purpose not expanded their refinery capacity or the shipping capacity, is that true?

MH: Yes, it’s true. It’s not only on purpose. Nobody wants refineries and environmental laws in many countries prevent refineries from being built if they pollute the water and air and are unsafe. The oil companies refuse to build safe tankards. They say it costs more. They refuse to build refineries that don’t pollute. They refuse to use modern technology. China, India and other countries are the only countries that are going to be using this technology. So [essentially] the oil companies have gone on strike and said what we’re going to do is create a bottleneck. We’re going to blame it on the environment because you’re not going to let us dump oil all over your cities. You’re not going to let us pollute the air and act illegally so its all your fault that we have created a bottleneck between crude and the gasoline you get. Remember the oil doesn’t go from a Saudi oil well into your car. It goes from a Saudi oil well into a very expensive refining and shipping operation and if there’s a bottleneck here you’re not going to get the gasoline in your car.

BF: Well, now would the US oil companies be refusing to upgrade their facilities like you say they do in…

MH: Because they’ve been able to increase… by not upgrading their facilities, they’ve increased the price of oil from $20 to $140 for a barrel. They’ve been able to make the largest profits they’ve ever made in history by doing it. All they have to do is not produce and the demand goes way way up. It’s the easiest way to make money there is. It’s a free lunch. And unlike Russia, America has no resource rent tax. So the companies [essentially] don’t even have to pay a tax on their earnings.

BF: So American… well so these oil companies are acting out of pure greed. There’s no other level of anything.

MH: Yes.

BF: Wow. [serious pause] Um…

MH: I should say that I was formerly the oil industry specialist in Balance of Payments for Chase Manhattan. I’ve worked for Continental Oil. I have a long background in the oil industry.

BF: So then simply what do you think that the price of gasoline represents? It’s now at like $4.50…

MH: The equilibrium price is $16.00 a gallon.

BF: Now, what do you mean by that?

MH: That’s the price it’s moving towards and probably should be, will be within about three years.

BF: [somewhat incredulously] Within three years you think that a gallon of gasoline is going cost $16.00.

MH: If you make an equilibrium model, given the fact that the dollar… the rate at which the dollar is going down and the threatened war in Iran, if you factor in all of these, that’s the number that’s being used in Wall Street. If Bush attacks Iran the price will go immediately up to $8.00 a gallon, and from there, probably to $12.00 this year.

BF: Well then what is the role of the US dollar globally today? Will the US be able to continue getting its free ride from foreign economies as the dollar tanks?

MH: As long as the eye can see… Well, there’s no way of knowing when the free ride will stop until other countries push back. And in order for the dollar not to get the free ride that means that other countries would have to band together and create an alternative currency to the dollar. So far they haven’t done it. The Euro is not really an alternative currency. It’s sort of a satellite currency to the dollar. Sterling is undergoing weakness now because the economy has its own real estate crisis going. So foreign countries [essentially] will have to isolate the United States and go their own way. There’s no sign of that happening yet. When countries do go their own way such as Iran, Iraq, Venezuela; the United States threatens to go to war with them.

BF: Right… So at this moment, the rest of the world continues to be so tied in to the dollar and the US economy that you don’t see a breakaway happening immediately?

MH: No. There is no way of forecasting when it will happen. If the United States does attack Iran that would certainly catalyze the break.

BF: So how do you see, let’s say then, that there is no break with this US-globalized-dollar-economy in the foreseeable future, in the near future let’s say, so how do you see this global economic situation progressing? How is it going to go in the near term?

MH: A slow crash. Stocks will go down. More and more foreclosures. The Real Estate market is dead. Things will just continue to get slowly worse and worse and worse.

BF: Now after the Fed’s rescue of the financial system by arranging for the purchase of Bear Stearns, the stock market rebounded for a few months. But now it’s plunging again to its lowest level since March… below 11,900. An analyst at Royal Bank of Scotland just issued a warning to his bank’s clients that the S&P 500 will collapse by over 300 points to around 1,000 in the next few weeks, a plunge of close 30%. Obviously nerves are rattling again on Wall Street and in other financial centers. Do you see major financial instability in the near future as well?

MH: Let’s put it this way, I talk to a lot of money managers who have a lot of their own money to invest. Every single one of them has all their money in short-term treasury bonds. None of them are in the market. So everybody is afraid right now that this might happen. Again you can never tell exactly when the break will come. On paper the banks today are in the position they were in, in 1980. They have negative equity. Citibank is talking about more write-downs on its junk mortgages. Almost all of the banks have a junk mortgage problem today that is very much like the third-world debt problem they had after 1982. The question is, is the government going to keep letting the banks sell hundreds of… billions of dollars… The government bailed out Wall Street by one trillion dollars in April while claiming that there is no money to pay Social Security because that over the next 40 years will run up to a trillion dollars. So here the government says we can’t give labor a trillion dollars for 40 years but we’re going to give our constituents on Wall Street a trillion dollars just in April alone. So the government can keep just printing the money and printing the money to inflate stock and bond prices but its not going to give money for actual employment, actual production, or investment i.e. tangible capital formation. So it’s a question of how long the government can do this, and how many foreigners are going to be willing to let their banks go bankrupt one by one such as Germany’s been letting its banks go bankrupt. And England has been nationalizing its bankrupt banks.

BF: So it sounds like other countries… the world is kind of stuck for the time being and we’re just going to see how fast or how slow this implodes?

MH: That’s right. There is a naïve view that everything is going to be different when the Democrats come into power. But the last time the Democrats were in power they were to the right of the Republicans. Clinton basically was a right-wing Republican and did more anti-labor/pro-wealth policies than [essentially] the Republicans could have done. And that’s basically what the Democratic Party is for. The Republicans are viewed as the anti-labor party so if you’re going to double-cross labor, if you’re going to really hurt the economy, it has to be a Democrat that does it, not a Republican. And so it looks to me like Wall Street is all for the Democrats coming in, hoping that Obama will turn out to be another Clinton and will appoint [Rubin] who sort of bankrupted Russia or someone like Alan Greenspan whom Clinton re-appointed.

BF: Right. Well, it was Clinton who got NAFTA passed, not Bush, and also got through the so-called Welfare Reform.

MH: Right. I’m not sure… I don’t think the rumor is true that Obama is going to appoint [Mark Richens], Secretary of the Treasury, but people are talking that way now that he’s appointed Mr. Rubin as one of his advisors.

BF: Now how likely is a major depression in the United States or worldwide?

MH: It’s certainly inevitable for the United States, not inevitable worldwide. All the other countries have to do is cut themselves loose from the dollar. In this country America has no way of paying for its trade deficit and no way of paying for its military spending abroad. So if something has to give, America would prefer to impose a very deep depression than give up one penny of military spending. So I expect a very sharp increase in unemployment. People are talking that real estate prices have another 30% to fall at least and that’s only as far as the eye can see. Large scale foreclosures. Bankruptcies… while military spending will increase.

BF: Well I know this is probably an impossible question to answer but how likely… do you have any feeling as to whether or not the US government really would attack Iran?

MH: There’s a lot of talk of it. You had the UN specialist for Atomic Energy saying that he’ll resign if America does that next week. By America attacking Iran that includes Israel also because President Bush just got back from meeting with Israel and the discussion in the press is that he was mainly discussing how Israel could act as an American proxy and attack Iran.

BF: So I imagine that eventuality is not out of question.

MH: Well that’s why the stock market, that’s why oil prices went up on Friday. Because you don’t need to be a speculator to force up prices, all you have to do is read the paper. And the Wall Street Journal and the New York Times both said because of people’s fear that America will attack Iran, that would interrupt oil supplies so much that oil prices would soar and that is what is pushing oil up–not speculation, the threat of America’s sabre-rattling about Iran.

BF: Well now, in the near term we’ve talked about how the economic situation looks pretty bad, particularly for the United States. Assuming all of this happens as… Assuming the future unfolds in the ways that we’ve been discussing, sort of a slow crash, let’s say, what is the world going to look like in the next couple of years do you think?

MH: It’s very hard to see. A lot of it depends on the military situation. It looks like there is a fragmenting of the world into regional blocks. One block will be Russia, China and India and other Asian countries together. One block may be the Latin America block. Europe will go slowly down hill. In Washington, not only Donald Rumsfeld, but others refer to it contemptuously as Old Europe. It’s going to [essentially] be squeezed and North America will [essentially] be squeezed. So it’ll be a regionalization.

BF: A regionalization. And then of course it’s going to look very differently if the United States starts another war as opposed to just a sort of a slow economic…

MH: Oil prices would go very high up. That would mean really such a crash of the stock, bond and real estate markets that there would be an unprecedented economic polarization between creditors and debtors. The whole world would become a grab bag.

BF: Exactly. And I guess it’s hard to say exactly what that would look like. I mean it could be massive homelessness, right?

MH: It could. The United States usually is the only country that is able to land on its feet in a grab bag. So it’s always willing to play that strategy. Europe always does very badly. And we don’t know what the other countries will do.

BF: Dr. Hudson, describe what you mean by the “New Road to Serfdom”. How does it differ from the “Old Road to Serfdom”?

MH: The old road to serfdom was written by [essentially] neo-fascist writers from the University of Chicago [who said] that the road to serfdom was the government protecting people to promote free markets. They said that promoting free market is the road to serfdom because of government planners. The new road to serfdom is when the financial industry knocks the government out of the picture and centralizes planning in the hands of the banks. As you’ve seen on Wall Street, when economic planning is centralized in the hands of Bear Stearns, Citibank, Chase Manhattan, Morgan Stanley, their objective is to get as many customers for the product they produce as possible. And the product they produce is debt. So the real road to serfdom is the road to debt peonage and it was the same road to serfdom that Rome followed and every country that’s fallen into serfdom that’s followed. [essentially] the wealthy people will only provide food, resources, education, essentials to people in exchange for credit and the credit is extended up to the point where the interest charges absorb the entire economic surplus over and above basic living costs.

BF: Now have you just described the new road to serfdom?

MH: Yes. In other words, the new road to serfdom is what Chicago School Bush Administration free-market policies lead to.

BF: And what about the old road to serfdom?

MH: That was Hayek’s book who was Margaret Thatcher’s hero. He wrote it in 1944 saying any government planning, any consumer protection, any attempts to help people is going to lead to serfdom because that’s fascism. And if you believe that then you’re falling for the Chicago School propaganda.

BF: Well it sounds like the new road to serfdom and the old road to serfdom are both pretty bad.

MH: Not really, because the government, the fact is, that progressive government planning such as the United States had between the civil war and World War II wasn’t bad at all. Every classical economist, every futurist writer of the 19th century expected governments to play the role of the economic planner in society. The role of government was to regulate fair markets, to create a system of equity where they would uplift the poor and enable everybody to become self-sustaining. So [essentially] democratic governments are not the roads to serfdom. An oligarchic government and a military government is the road to serfdom and that’s what we have today ruling under the rhetoric of free markets, which actually is not free at all.

BF: So what you’re terming the old road to serfdom then would simply be more government planning, it would be a better system…

MH: I was referring to Hayek’s book of that title that was a bestseller among the fascist class.

BF: I see. Now our discussion today has been pretty scary to say the least. Do you feel, and of course we’ll have to discuss this in another show, but do you feel that there is a way out for the United States if they took the proper economic steps?

MH: Well [essentially] the path it was going on before World War I was a very good path. That was sort of the progressive era and if you look at the first income tax act for instance, that was passed in 1913, only people who earned more in today’s money than $102,000 a year even had to file tax return. There was a cut-off point. If you didn’t earn in today’s money $102,000 you didn’t have to pay any income tax. You didn’t have to file a tax return. Capital gains were taxed the same rate as normal income because one of the richest men in the country, Andrew Mullen was Secretary of the Treasury in the 1920s and he said that it was unfair to let rich people pay a lower tax rate than laborers did who had to work hard. All of this has been turned upside down today. The richer you are, the more income you make, the higher bracket you’re in, the less you have to pay; the lower your tax rate. All of that can be returned to the direction the country was going in prior to World War I.

BF: But then of course, that would depend upon politicians, elected officials responding to the population rather than corrupt corporate interests, right?

MH: That’s true. And this doesn’t usually happen except in times of severe economic crisis. And the crisis we’re going into may be so severe that people will be willing to back new politicians. It may be that the Democratic Party will finally be split and most of the Democratic politicians will join the Republicans where they belong and a new Party will [essentially] come out. I don’t see much of a recovery until that occurs because the two parties are so similar right now.

BF: So there is hope, but not a whole lot, huh?

MH: That’s right. People would have to act in their self-interest and that’s never happened.

BF: You mean in terms of a mass political movement, something like that?

MH: Yes, economic and political self-interest.

BF: Dr. Hudson, thank you very much.

MH: Well, thank you Bonnie.

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