Functional Finance

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Modern Money Theory and Private Banks
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Stephanie Kelton and Michael Hudson’s speeches at last month’s Modern Money Theory 2012 Summit (Rimini, Italy) have been transcribed by Media Roots. They provide extensive links in their transcription to assist in the educative process.

March 28, 2012

MEDIA ROOTS — Pacifica Radio’s Guns and Butter have faithfully broadcast another potent weekly installment of compelling discussions from last month’s Summit Modern Money Theory 2012 in Rimini, Italy, one of the more salient popular developments and signs of consciousness raising in recent history since Tahrir, Wisconsin, and the Occupy Movement. Join us, as we continue our exploration through the MMT school of economic thought and its implications for the world’s working-class, currently facing the worst economic recession since the Great Depression.

Media Roots previously featured the first, second, and third consecutive Guns and Butter broadcasts reporting back from the MMT Summit in Italy and have archived those broadcasts and transcripts as well. Here we present the most recent coverage of this important and inspiring international and grassroots economic summit.



GUNS AND BUTTER — “MMT advocates a wide range of programmes. The most important is probably the Job Guarantee. Very briefly, the Job Guarantee is a programme that would allow the government to achieve what’s never been achieved before in any market economy—true full employment.

“The basic idea is that the government offers a wage and a benefits package to anyone who’s unemployed, but ready and willing and able to work.”

Bonnie Faulkner: “I’m Bonnie Faulkner. Today on Guns and Butter: Stephanie Kelton and Michael Hudson from the first Italian grassroots economic Summit on Modern Money Theory in Rimini, Italy, February 2012. Today’s show: Modern Money Theory and Private Banks.

“Stephanie Kelton is Associate Professor of Economics at the University of Missouri, Kansas City, Research Scholar at the Levy Economics Institute, and Director of Graduate Student Research at the Center for Full Employment and Price Stability.”

Dr. Stephanie Kelton (c. 1:37): “The next thing I want to do is talk to you about functional finance. It’s not a very interesting sounding topic. In English, the opposite of functional finance is dysfunctional finance. And that’s what, I would argue, most countries in the world deal with today. And I think the reason is because none of us that have sovereign currencies understand exactly what that means. And we act as if we face the same kinds of constraints—governments act that way—that households and businesses face. We’re told all the time that government should have sound fiscal policies, should live within its means, should exercise fiscal discipline just like a household must. But, hopefully, by now you understand that a country that operates with its own fiat currency, that is a non-convertible currency—government does not pledge to convert the currency into gold or into some other country’s currency—it doesn’t have to behave like a household. It can use its powers differently. And that’s what functional finance is all about.

(c. 3:02) “I mentioned this morning the name Abba Lerner. Abba Lerner wrote many important articles and books that influence the work that MMT economists do today. Most of Lerner’s early and important works were written as the world was fighting and battling the effects of the Great Depression. Lerner understood, as Keynes did, that unemployment was a normal feature of any money-using capitalist economy. For Lerner, unemployment wasn’t just something that countries needed to deal with when there was a great depression or a serious recession, but in normal times as well because the economy always operates with some level of unemployment.

(c. 4:03) “Lerner, as an economist, viewed the workings of the economic system very differently from the conventional classical economist who believes supply creates its own demand. Markets, naturally, tend to full employment. Governments just get in the way; intervention by government is unnecessary and destabilising. When something bad happens in the economy, the best course for government is to keep its hands off—laissez faire, let it be. Markets will fix themselves. They are self-correcting.

“Lerner didn’t accept this, and neither did Keynes. They both understood that market economies are complex, that the decisions taken by the producers are different and not coordinated with the decisions taken by consumers, foreigners, other businesses, government.

(c. 5:17) “Lerner did not believe there was a mechanism that would coordinate the spending decisions of all of us with the production decisions of the business sector in a way that kept the economy operating in a healthy manner, in a way that would provide full employment for everyone. Businesses have to produce, today, without knowing what the future demand for products will be. Maybe they produced too little and demand was higher than they expected. In that case, they see their inventories fall. And it’s a good sign to them; people want more output. They respond by producing more. But if businesses produce output and find that the demand is not there; their inventories begin to rise. The signal to them is: You’ve produced too much. What do they do?

(c. 6:24) “Conventional economic theory tells us: This is not a problem. If inventories build up, prices fall until there’s demand for everything produced. But in the real world we know better. We know how businesses respond; they respond when demand for their goods is falling. They respond by cutting back their production and laying off a part of their work force. It gives rise to unemployment. It’s natural. That’s the way market economies all operate. There isn’t a single capitalist economy anywhere in the world that achieves full employment and sustains it. Every market economy goes through a business cycle, an upswing where times are good and unemployment is low. And a downswing where times are not good and unemployment is rising. Lerner recognised that; and he called on the government to respond in a particular way.

(c. 7:27) “The conventional view is that if there’s unemployment, it simply means employers don’t want to hire the workers at such a high price. The solution to unemployment for most of the academic economists in the world is, therefore, lower wages, too much supply of labour. Unemployment must mean the price of labour is too high. So, the solution is to cut wages. If something goes wrong in markets, you let markets fix things. Keep government out!

(c. 8:07) “Sometimes, economists talk about structural problems in the labour market. Well, unemployment exists because the jobs that are available require certain skills that the unemployed don’t have. Therefore, they propose things like training programmes for the unemployed. All we need to do is get the unemployed together, train them, give them better skills, and they will go out and find jobs. The problems are almost always with the worker.

“Lerner and Keynes and the MMT school reject the notion that problem is with the worker. The problem is that there aren’t enough jobs.

“If you took 100 dogs and you buried 95 bones in a field and you told the dogs there job was to go out and find a bone, what’s the very best case scenario? The best you can possibly hope for is that 95 dogs come back with bones. Five dogs can’t get bones. More likely, some dogs will get lucky; they’ll stumble across a few extras. Some may have better skills; they’ll find three or four. So, the number of dogs that come back without bones may be ten or fifteen.

(c. 9:38) “The conventional economist would gather the dogs together, the ones that had no bones, and train them to sniff out bones more effectively. Then they would send those hundred dogs back out into the field and tell them to go come back with a bone. And, again, the best you can get is 95 dogs with bones. What’s wrong is that there aren’t enough bones. There’s nothing wrong with the dogs. The bones are the jobs. There’s nothing wrong with the unemployed. There simply aren’t enough jobs.

(c. 10:20) “Economists actually believe that unemployment is, not just unavoidable, but, actually, beneficial. They think that unemployment helps to discipline the worker because if you’re afraid of becoming unemployed, you’re more likely to work harder, do a better job for fear that you may lose your job. Economists believe in a trade off: We could have lower unemployment, but that would lead to inflation and that’s the worst possible evil in the world. So, we better keep some people unemployed, so the economy doesn’t operate at too high a level, so that we can keep prices from rising too rapidly. So, they actually define full employment, as the level of unemployment that helps you keep prices from rising. We define unemployment into our models. We accept it. It provides an excuse for not striving for more. We enshrine in it in our policies.

(c. 11:35) “The Maastricht Treaty does not place full employment as a goal at all for the central bank, for the ECB. It has a sole mandate, which means there is really only one cruel enemy in the world and that is inflation. The Federal Reserve, in the United States, has a dual mandate, at least in theory; the central bank in the U.S. is supposed to use policy to keep prices stable, but also to try to encourage high levels of growth and high levels of employment. At the end of the day, though, the Fed considers price stability the primary objective, probably recognising that there’s little the central bank can do, anyway.

(c. 12:33) “Employment policy does not belong with the central bank. It belongs with the national government, as part of its fiscal policy. And that’s where Lerner placed it.

“Unemployment is every bit as damaging to a society as inflation. The costs are tremendous. We know, and we talked this morning, about what some of those costs are. The direct costs are obvious. Anyone who is not working, not producing something, represents an economic waste, a loss of output for the whole of society and income that’s not produced. But there are other costs, maybe even more important, indirect costs. We talked this morning about some of these.

(c. 13:27) “What happens when you’re unemployed? Do you feel excluded from society? Your skills degrade. The longer you are employed, the longer your skills break down. The longer you are unemployed, the less employable you are. Businesses don’t wanna hire people who’ve been unemployed for months or, in the case of the U.S., years. Unemployment creates psychological harm, depression, anxiety, suicide rates increase. It may be great for the pharmaceutical companies, who sell anti-depressant drugs and make billions. But it’s very, very damaging for society. People lose their motivation. Family relations, divorce, spousal abuse, all become problems when unemployment is high.

(c. 14:24) “It’s difficult to measure these kinds of costs, but it can be done. Just this year, the White House put out a study that attempted to figure out exactly what are the costs of having a young person unemployed, not in school. What are the indirect costs that are borne by all of us? Crime goes up. You lose your job. You lose your health care. You get sick; health care costs increase because you don’t seek care until you’re quite ill. Spending on various social programmes increases because you don’t have an income to support yourself. The White House estimates that the cost of a single unemployed, out-of-school, young American is almost $38,000 per year.”

Bonnie Faulkner (c. 15:19): “You’re listening to professor and research scholar, Stephanie Kelton. Today’s show: Modern Money Theory and Private Banks. I’m Bonnie Faulkner. This is Guns and Butter.”

Dr. Stephanie Kelton (c. 15:34): “Now the direct costs, the loss of output and income from having someone sit on the sidelines, producing nothing, as opposed to being in a job producing a good or service in the economy. If you see the light grey line at the top it shows you what the path was for the U.S. GDP before the financial crisis and recession. If that had never happened, the estimate is we would’ve been up on that light grey line. But because of the financial crisis and the economic recession our GDP fell sharply. The difference between the blue line and the grey line is our GDP gap. It represents the lost income, the lost production from all of the additional unemployment. How much is that?

(c. 16:33) “Bill Mitchell, who is a major MMD figure has run the numbers. What he did was estimate the daily costs of unemployment in the U.S., the difference between the blue line and the grey line on a daily basis. And he concludes that the U.S. is sacrificing the equivalent of between $6 and $11 billion dollars every single day that we permit our unemployment level to remain elevated. So, Bill says—and he doesn’t mince words—he says, ‘Just say to yourself, every day the U.S. government is allowing 9.7 billion dollars to go down the drain in lost income just because they’re too stupid to create sensible job creation. What is sensible job creation?

(c. 17:38) “If you ask a technocrat or a member of the conservative party in the U.S., they’ll tell you that the key to job creation is creating a better environment for businesses. Okay. I agree. But what does creating a better environment mean? For them, it means lower taxes; it means less regulation. Those are the things that are really holding the employer back. That’s why they won’t hire and invest. It’s why the economy is not growing. But ask an employer what’s holding them back. Survey after survey, in the U.S., tells us that it’s not high taxes or burdensome regulation that’s primarily keeping them from adding to their workforce and increasing their investment spending, it’s poor sales. They don’t have customers. And the reason they don’t have customers is that we had a financial crisis that was fuelled by a huge debt bubble that crashed and left major portions of the U.S. population without the income to go shopping.

(c. 19:00) “The fundamental economics for a person like Lerner, Keynes, or an MMTer is simple. Sales create jobs. Employers hire workers when they are swamped with demand, not when they get a tax cut, not when regulations are eased. Customers create sales. But customers have to have income to spend. So, income creates sales. And spending creates income. Every time someone spends money someone else is on the receiving end. It becomes their income.

“If you think that you’re going to cut your way to prosperity, I think you’ve got your economics all backwards. Fiscal austerity, sound finance, as they call it, means cutting spending. But that means cutting income. But that means cutting sales. And that means losing jobs.

(c. 20:05) “So, what did Lerner suggest? Unemployment exists because there’s not enough spending in the economy. In any economy in the world, spending comes from one of four places: the household sector, the biggest and most important source of demand in the economy; business sector; the government sector; and the rest of the world, whatever they want to buy from you. What’s the problem today? Consumption spending is down because income is down. If people aren’t consuming, businesses don’t have customers, investment spending falls. So, two important components in the demand economy are massively depressed right now. Lerner’s recommendation is that you have to offset that with government spending. Functional finance is the term he gave to his proposal for the way the government should run its fiscal, macroeconomic policies.

(c. 21:11) “You have to have a sovereign currency in order to run functional finance. You cannot do it on a gold standard or fixed exchange rates. You can’t do it with the euro. The U.S. has a sovereign currency, but its finances are dysfunctional. Just because we can doesn’t mean we do. So, it’s not enough just to create the correct monetary system; you also have to create the correct macro policy.

“Abba Lerner wrote a very colourful article called ‘The Economics of the Steering Wheel.’ And in the beginning of the article he talks about this imaginary planet where the Martians drive around on this complicated interplanetary highway system. The cars don’t have steering wheels. The roadways have high curbs. The cars bounce from left to right, meandering around the path. Lerner says, ‘If someone from Earth visited this planet, they would take a look at this highway system and call it crazy. Wow, aren’t we clever? We put steering wheels in our cars. We don’t bounce around from curb to curb. We control our destiny.’

(c. 22:39) “And then he says, ‘Why aren’t we so smart when it comes to our economy? We give up the steering wheel. We let markets push us around. And we assume there’s nothing we can do.’ Laissez faire, let it be.

“So, what does Lerner want? Functional finance. The government’s job is twofold. One, the government has to keep the level of spending in the economy high enough maintain full employment. Two, the government uses its powers to adjust taxes, spending in order to achieve the first goal. You don’t target an arbitrary deficit level. You let the deficit go where it needs to go in response to what’s happening in the economy. Taxes don’t finance the government; they help to drive the monetary system. They get the government’s currency accepted. They give it value, but the government doesn’t need to get money from the private sector to spend. The government spends by issuing its own currency. The government doesn’t even need to borrow to do this. In fact, Lerner said it shouldn’t. Borrowing takes money from those that have it, when the goal is to let people spend as much as they will on their own to get to full employment. With a sovereign currency governments spend by directing their bank to credit someone else’s account. This almost always happens without the government even writing a check. In a modern era, governments spend with keystrokes. And you can’t run out of keystrokes.

(c. 24:31) “We sometimes say the government is like a scorekeeper. If you go to a football match and your team is doing really well, scoring goal after goal after goal after goal, do you sit in the audience and worry that the stadium is going to run out of points? It’s impossible. It’s also impossible for the government to run out of keystrokes. There’s no financial constraint on a government that issues its own currency. The only relevant constraints are real constraints, resource constraints. If you try to use more resources than there are available, you’ll push up the price of those resources and the result will be inflation.

“So, what should the government do? Use its powers to tax and spend to keep the economy operating at the right temperature. Lerner thinks of taxes and bonds, not as financing tools, but like a thermostat in your home. What do you do if it’s too cold? Turn up the heat. What do you do if you’re too warm? Turn down the heat. Same thing with the economy. If the economy is not operating at a high level, you cut taxes or increase spending. If the economy is operating too hot, you raise taxes. Or cut spending. These are tools to use to achieve the goals of the macroeconomic policy.

(c. 26:09) “Lerner recognised that deficits are normal. Government will almost always be in deficit; and that was okay for him. When it comes to the type of deficit, what should the government spend on? If it cuts taxes, who should benefit?

“MMT advocates a wide range of programmes. The most important is probably the Job Guarantee. Very briefly, the Job Guarantee is a programme that would allow the government to achieve what’s never been achieved before in any market economy—true full employment. The basic idea is that the government offers a wage and a benefits package to anyone who’s unemployed, but ready and willing and able to work. This programme acts as a buffer stock. It absorbs workers when the economy is weak; and it releases workers when the economy is strong. They flow in and out of the government employment programme, as the economy goes through natural cycles. The benefits of such a programme are many. And we probably can talk more specifically later this evening. Thank you. [Applause]”

Bonnie Faulkner: “You’ve been listening to professor and research scholar, Stephanie Kelton at the Summit on Modern Money Theory in Rimini, Italy. She is Creator and Editor of New Economic Perspectives. Her research expertise is in Federal Reserve operations, fiscal policy, social security, healthcare, international finance, and employment policy.

“We next hear from financial economist and historian Michael Hudson. Michael Hudson is a Wall Street financial analyst and distinguished Research Professor of Economics at the University of Missouri, Kansas City. Today’s show: Modern Money Theory and Private Banks. I’m Bonnie Faulkner. This is Guns and Butter.”

Dr. Michael Hudson:
“One of the last questions, before lunch, this morning was, how is it that Italians are so poor and work so hard if Berlusconi can have so many girlfriends? [Laughter in Audience] So, just imagine how your world was back in 1945. Suppose you were alive in 1945 and somebody had told you about all of the new technology that would be invented between then and now. What if you were told about all of the computers, the internet, the communications and television, the jet air travel, the super trains, the increased gas mileage, the plastics, the medical breakthroughs? You would’ve imagined that we all would be living in a life of leisure society by this time. And, in fact, all of this was celebrated, as a post-industrial economy. And, indeed, productivity has grown so much that under all of the textbook models the idea was that rising productivity would be passed on to labour in the form of lower prices, so wages would go further or higher wages. The whole idea was: Who was to get the fruits of all of this productivity?

“And in all the textbooks there was what was called Say’s Law; workers had to be able to buy the results of what they produced. And this was a circular flow, the circular flow between producers and consumers. And this idea goes all the way back to the French Physiocrats, just before the French Revolution, who created economics and account keeping. The founder of Physiocracy, François Quesnay was a medical doctor and a surgeon. And he based the idea of national accounting on the circular flow within the body, between producers and consumers.

“So, the idea was that all of this increased production had to increase consumption. So, the idea was, as a variant of functional finance, that production creates its own market for consumption by paying workers, who’d then buy the products they produce. So, the question is: Why hadn’t this occurred? With all of this productivity since the end of World War II and, especially, since 1980, why aren’t you all rich and enjoying a leisure economy?

(c. 31:38) “After World War II, mainly the men worked and the women were at home. Since 1945, women have been forced into the labour force for what are called two-job families. And now there are three-job families. If you project labour participation rates, by the year 2020, every woman will have to work 18 hours a day and her children will have to begin working at age three to sustain their standard of living. If you are going to have children, you had better send them to work at the age of three or you will go broke. [Applause]

(c. 32:24) “Well, obviously, what has happened is that what was then applauded as the post-industrial economy has become the financialised economy. The reason you are working so much harder than you were before is because you are paying off your debts. You’re not buying the goods and services that you produce. You’re paying the banker because you can only maintain your consumption standards and keep on spending what you produce if you borrow to do it. That is the euro plan for you. That is how the euro plan is replacing industrial capitalism with finance capitalism.

(c. 33:13) “Wages and living standards have not risen. All of the gains have been siphoned off by finance. When they call for austerity, it is not the fat that they are cutting—the fat is the financial sector—it’s the bone; it’s the industrial sector. So, the post-industrial economy means deindustrialisation. It means unemployment for you. And unemployment means lower wages.

“In all of the economics textbooks in Economics 101, as you saw on the door, there are supply and demand curves. The idea is that the higher the employment rate, the more you have to pay labour to drive it into the labour force. So, the government officials and the bankers read these textbooks and they say, Ah! Okay. So, the less employment, the more wages go down! And the more we earn! And so we want unemployment in order to maximise the power of our wealth over labour.

(c. 34:34) “150 years ago, this was called the reserve army of the unemployed. You need unemployment to keep labour down. So, despite the fact that you have productivity rising since World War II, the real economy and you’re wages have become an S curve, tapering off. What has grown, in keeping with productivity, is the magic of compound interest. This growth in compound interest has absorbed all of the increase of productivity and it’s accrued to the 1% not to the 99%.

(c. 35:17) “So, when you understand this you have to understand how to answer the questions that were raised before lunch today. The key is to look at how the economy today is different from what occurred in 1945. And you’ll see that we are at the end of a long cycle. Back in 1945, in every country the private sector was relatively free of debt. There was very little for consumers to buy in the War. And companies had little reason to invest, except for the government. So, most families had very little debt, but they had a lot of savings. And today, the economy is the reverse. The savings have been run down. And the economy is in debt.

“It’s important to know how this occurs to stop the process that has taken place for the last 70 years. The reason is not only financial; it’s been fiscal. The taxes have been shifted off banks and their customers—mainly real estate and monopolies—onto labour. In the United States, for instance, in the 1930s, 70% of all state and local tax revenues came from real estate, from the property tax. Today, only 1/6 comes from that. States and cities have been convinced to lower the property tax burden and to take an income tax and a sales tax and the worst, most anti-labour, tax of all—your value added tax. Your value added tax is intruding onto the market and shrinking it and preventing you from buying the goods that you produce. And they are taking your value added tax and they are giving it to the bankers who control your governments and control your politicians. And when even your politicians can’t sell out, they then say, we need a technocrat to impose even more taxes to tax you—labour—more to give more to the banks to ‘bail’ them out because the plan they have for you doesn’t work; and it leaves somebody bankrupt; and it’s not going to be the banks because they are the ones who give us our jobs. [Applause]

(c. 38:08) “So, in the United States, for instance, one problem is that in 1982 Alan Greenspan, a free marketer, headed a social security commission and said, ‘social security should not be a public service. It should be a user fee. We have to make the private sector—the users, the labourers—pay for it. And they, not only, have to pay for it, they have to pay five times as much as they get for the banks because my clients—the bankers—we have overhead.’

(c. 38:57) “The saver in America, the pensions were paid by bankers saving the money in advance, creating a huge budget surplus, giving the budget surplus to the government, so that the government would cut taxes on real estate, cut taxes on finance, cut taxes on the rich, cut them in half, cut capital gains taxes, and then say, now, we’re broke; we have to increase the social security tax further because the workers have not paid enough to social security to give it enough money to fight the war in Iraq, to fight the war in Iran, to fight the war in Afghanistan, and most of all to fight the class war against labour. [Applause]

(c. 39:42) “So, the banks have become part and parcel of this Finance, Insurance, and Real Estate sector that I spoke about. We have what is called Pension Fund capitalism in America where the employees are supposed to become capitalists in miniature by employee stock ownership programmes. In America, one half of employee stock ownership programmes have gone bankrupt by being grabbed by the corporate employers, like I described Sam Zell of the Chicago Tribune today. Banks lend money to corporate raiders and to management buyouts to buy the company, to pledge all of the earnings as interest, to steal the employee pension plans, and, essentially, become a process of looting. So, you have the way to get fortunes today to be essentially by looting. They’ve given a Nobel Prize for the writer who described this, but it basically is what I talked about earlier today. But Balzac said, ‘Behind every great fortune is a great theft.’

(c. 41:08) “Today, the economy is being based on theft and that’s called ‘free enterprise.’ That’s called ‘social democracy.’ That’s called ‘socialism.’ But it’s not socialism and it’s not social democracy, as people were told a hundred years ago. It is a travesty of social democracy, a travesty of socialism. And we’re living in an Orwellian world where the politician’s names for their parties are the exact opposite. No party calls themselves fascist today. No party calls themselves anti-labour. They call themselves social democracy, but I get the idea you realise it’s not social democracy at all.”

Bonnie Faulkner: “You are listening to financial economist and historian Michael Hudson. Today’s show: Modern Money Theory and Private Banks. I’m Bonnie Faulkner. This is Guns and Butter.”

Dr. Michael Hudson (c. 42:08): “In America, in order to get a job, students now, instead of getting free education or low-priced education have to take out loans that put them in debt. To create a family, you have to take on a lifetime of 30-year mortgages in debt to pay a mortgage. You have to take out an auto loan to be able to buy an automobile to get to work. And then you have to take on credit card debt. When you pay this debt and the result is debt deflation, that’s why the workers do not have enough money to buy the things that they produce. That’s why the bankers have ended up with the increase in productivity.

(c. 42:54) “Now, I’ve spoken in generalities and principles so far. But it’s good to give an example of the country that is held out to you, as how you want to be. If Italy succeeds, what country should you be? You’re told: Latvia. Latvia is where the neoliberals had a completely free hand, as they did in Russia, as to what kind of an economy they were going to create. And they created a neoliberal paradise. Angela Merkel, Sarkozy: This is what we want for Europe. What they did in Latvia is have an employment tax of 59% for labour. They have a real estate tax of 1%. When I went there I asked how they got the 1%. They based it on the most recent real estate appraisal they had, which is in 1917 before the Russian Revolution. So, you can imagine that what happened was that with real estate taxed so low and labour taxed so high there was almost no employment. But there was a real estate bubble. People have blamed the real estate interests for making a ton of money and getting rich off absentee ownerships. But the principle of real estate speculation in America is that rent is for paying interest. Whatever the tax collector gives up and relinquishes in taxes, is available to be paid to the banks as interest. So, the banks end up with all the rent that used to accrue to the landed aristocracies of Europe. So, bankers have become the new aristocracy. And it is as hard as if there is feudalism.

(c. 45:04) “So, what you’re seeing today is the same economic grab that gave birth to European feudalism. And that grab is backed by the finance sector on behalf of its clients—the real estate sector, the monopolies, and the legal sector. The result is that 1/3 of Latvia’s population between the age of 20 and 35, either, has emigrated from the country or is planning to emigrate. The population has shrunken by 15% under neoliberalism. Lifespans are shortening. Marriage rates are falling off. Who can marry and buy a house when your wages are taxed at 59% and you have to take on a debt?

(c. 46:00) “Now, in Latvia a year ago I met with bank insurance agencies; and they saw that this was a problem. And they told the banks, you cannot collect from the value of real estate that you’re lending against. Their solution was not to have the government tax real estate more, so that there’s less available to pay the creditor. Their solution was to go to the banks and say, when somebody comes to borrow a mortgage you have to have their parents sign, their children sign, their aunts and their uncles sign, so that when we foreclose, we can not only foreclose on you, we can foreclose on the whole family. And we can make the whole family emigrate or be reduced to poverty.

“The same thing has happened to Iceland. Iceland’s debt, which is much worse, people have spoken to Iceland, as if it were a model of what should be. It was only a model of how the populations should vote against the banks. But Iceland, even more than Latvia, is a banker’s paradise and such a hell for workers that, as I said, 10% of the population—30,000 Icelanders—have emigrated to Norway and other countries. Icelanders have moved elsewhere. What Iceland has is what is planned as a model for you. The index that they owe to the bank of the debt is linked to the foreign exchange and the consumer price index. So, since the credit crash of 2008 from the crooked Icelandic banks that were looted, if you took out a €1,000 euro debt, you now owe €180 euros on it against property that has fallen from the equivalent of €100 euros down to €40 euros. So, you’re in negative equity. You’re personally liable. You’re family is liable. And the debt has gone up.

(c. 48:13) “Now, Paolo asked me earlier to talk about the vulture banks. When the crooked banks of Iceland went under—and they’ve just in the last few weeks begun to arrest the crooks—when the banks went under, the government took them over and, at European advice, saying, no matter what you have to pay the bankers, you have to punish labour, but you have to sell the banks to vulture investors. The vulture investors bought the banks at ten cents on the dollar. Under the constitution of Iceland, they were not allowed to increase the debts by indexing, but they did. Under the bank agreement, their promise was if you write down, if you buy a bank at ten cents on the dollar, you have to write down its debts by 90%. The banks promised to do this; they have not done it. The Icelandic people and economists have demanded that the government apply this. The social democratic government says: We don’t have to do what the people said. The people voted to send the power. And we work for the banks, not for the people. Social democracy means rule by the bankers. It means rule by a small number of families in Holland, in Germany. The social democratic government says: We’re part of Europe. We are not part of Iceland. We are not your democracy. We are the democracy of the European and German and French bankers and English bankers who’ve supported and put us in power. [Applause]

(c. 50:04) “So, when many of you asked, before lunch, what do we do in this situation? We want to do something about it. We want to be active. What can you do when the political system on both ends of the spectrum are so corrupt? To me, what is so amazing is how the social democratic parties that were supposed to begin on the Left side of the political spectrum have moved to the Right wing of the political spectrum.

“Now, I’ve known most of the social democratic leaders of America and the world since I was a little boy. In the 1960s, I was told that the travel and hotel expenses of every member of the Socialist International, the Second International, of which Dmitri Papandreou of Greece was the President, was paid for by the CIA. I watched the Socialist Party in America come to support the Vietnam War and to ban all criticism of the Vietnam War in its youth magazine. So, it lost 90% of its members. The theory was that you could not have Marxism until you freed the world from Stalinism. And to do that, the Social Democratic Party of America, the socialist party, joined the Cold War effort and became the supporters of the Johnson Administration and the Vietnam War. Politics was turned upside down by the triangulation of socialism and Stalinism and the ability of the United States to convince the social democrats of Europe that if it bribed them and paid them enough, they would be willing to support the banks, as a bulwark against communism and Stalinism. So, the Social Democrats sold out with great personal benefit to themselves and really believed that the way to finance industry, to oppose the industrial exploitation, was to support financial exploitation. They imagined that the banks would lead the world into economic progress, not in just the opposite direction of what the progressive era did.

(c. 52:38) “So, the result is that the Social Democratic parties of Iceland, of Latvia, of Scandinavia, and of other European countries, now believe the way to employ labour is by austerity. If you can only lower your wages by 30%, stop having children, and emigrate there will be equilibrium. This is the exact opposite of what industrial capitalism proposed. And, yet, it’s the dynamic that you have today. The alternatives—and I will just hint them for what I will be talking about in the next—not all taxes are bad. Taxes on labour add to the cost of labour. Of course, you want to untax labour, untax consumers, get rid of the value added tax. But there’s one kind of tax that’s good. And that’s the tax on unearned income, on land rent, and monopoly rent. The more you tax—you shift the tax system onto the land and property—the lower housing prices are; and the less you have to tax labour by income tax, the less there is for banks to collect in interest. The bankers are against government because they want all of the taxes that are now paid to the government to be paid to themselves as interest. I’ll expand that in the later versions tomorrow morning. Thank you.”

Paolo Barnard (c. 54:18): “Un applauso per i traduttori, per favore.”

Bonnie Faulkner: “You’ve been listening to financial economist and historian Michael Hudson at the Summit on Modern Money Theory in Rimini, Italy.

“Today’s show has been: Modern Money Theory and Private Banks.

“Dr. Hudson is President of The Institute for the Study of Long Term Economic Trend, a Wall Street financial analyst, and distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book, Super Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank.

“Please visit the University of Missouri, Kansas City New Economic Perspectives blog at Visit the website for the first Italian Summit on Modern Money Theory at

“Guns and Butter is produced by Bonnie Faulkner and Yara Mako. To leave comments or order copies of shows, email us at Visit our website at”

Rush transcript by Felipe Messina for Media Roots and Guns and Butter