Economic Policy Deception

Another in the series of interviews on the Renegade Economists radio show (Australia), a wide ranging analysis of the advantages to wealth that money printing and poor tax policy produce. Topics include land and housing policy, German gold repatriation, Occupy, Bradley Manning, Iran, Obama and Kruegar.

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Transcription 06.03.2013:

Karl Fitzgerald (KF): It’s seems that the most exciting things happening around the planet are not happening in a democracy, they’re happening in China. The new Premier there Xi Jinping has a real reformist agenda.

Michael Hudson (MH): I think there’s a whole new generation coming in. I think they do things collectively in China, and then I was there a few years ago I was really happy to see how there’s a feeling of, uh, there are people in their 20s and 30s that they can really change society. That they really can get the reforms that they want to make it a really fair and prosperous society and I haven’t seen that degree of optimism in any other country. When I go to Russia for instance all the people could say is “Can you get me out of here? Can you get me to the United States?”. When I go to Germany they’re very down. But in China they’re very optimistic that they can change the whole structure of the system. And they just announced they’re publishing something later this month called “China in the next thirty years” where they have my article leading off, I’m told, and it’s about the need now to begin to tax land. The one thing that they haven’t done so far is address the tax problem.

What are you going to do to prevent Chinese putting all their money into real estate and just turning China away from a productive factory-based economy producing things into a speculative economy like the United States? They realise that’s what they’re trying to avoid. There’s been a shift in emphasis away from Shanghai which was sort of Thatcherite Marxism, if you can imagine that, towards Beijing and towards the west and there’s an attempt now to begin reviving or building up the western regions and the southern regions and they realise they don’t want this to become just a real estate promotion project, they want it to enrich the entire people and they want the tax basis basically to fall on the value of the land the government is building up by it’s enormous expenditure on transportation, it’s capital investment in roads and railroads, in new buildings. And so it’s what the followers of Henry George used to dream about! And in fact in China they’re aware of the fact that it goes back all the way to Sun Yat Sen, although they’re doing it they realise in the last hundred years there’s been a symbiosis between banking and real estate. And they certainly don’t want real estate to be bid up in prices by borrowed money and just meaning more debt and more debt for society as occurs in the western nations.

KF: Well they are opening up their financial sector there and there has been some concerns about these new developments. What do you see there?

MH: I don’t see them opening it up. There’s talk in America, the accusations by the Obama administrations that China has artificially been keeping its currency down and urging them to open their capital markets. But there’s so much liquidity in China, so many savings that if China did open there would be a huge outflow, of a diversification of investment outside of China, especially away from Chinese real estate into Western stocks and bonds, real estate, mining and Chinese currency – the RNB – would actually go down, rather than rise. So I don’t see their loosening these controls any time soon.

KF: One of the things they doing is really jacking up the deposits required for anyone buying a second home so that maybe is putting some dampener on the market. But really you can’t help but wonder just how easily they’ll be able to work their way around it. All of a sudden their kids and grandkids’ll be buying properties before they know it.

MH: Well, that’s the fight between Western China and Eastern China especially Shanghai, as I mentioned. The banks would like to find their major market in real estate but that’s a distortion of industrial banking. So the question is whether you’re going to have banking in China evolve to Industrial banking or whether industry itself is going to be financialised as it is in the west and turned into a financial operation instead of an industrial operation. That really is the decision that China’s going to have to make and of course it is the same choice that is having to be made in the western countries, including the United States.

KF: In terms of their reforms to housing, they’re talking about a 1% capital gains tax, there’s also been increases in sales taxes on some fronts as well. But with all this hot money being printed up in America and zooming around the world it seems like Asia is really facing the brunt of this sort of currency overflow.

MH: Well the reason is because most American military spending is in Asia. The source of all of these dollars that are being pumped into the global monetary system is basically the balance of payments deficit of the United State and the balance of payments deficit is largely military and Mr. Obama is now reorienting his whole military towards China. He’s announced that China is our number one enemy and he is trying to do a lot of mischief in the China Sea. And Mr. Obama is turning out the be more right wing than Dick Cheney and in fact his administration instead of being the hope and change that they talked about is the Bush/Cheney number three, it’s the third term of that. Obama decried the fact a week ago that now that we have sequestration limiting the amount of money that can be spent, that America cannot put a second atomic destroyer near Iran. Nobody thought that Obama could be such a vicious war monger.

KF: So, talking about Obama, we haven’t heard much about his new chief economist Alan Krueger.

MH: All of the people that Obama is appointing are the same followers of Reuben at Citibank that dominated the Clinton administration, so he is sort of reappointing all the most predatory right-wing economists who emerged under the Clinton administration to de-regulate banking to break up Glass-Steagall and enable banking to do the gambling it’s been doing. So whoever he appoints has been part of the Citibank/Wall St nexus and it’s not good news. The [indecipherable] in business, and the most recent move on the legal front occurred yesterday in the trial of Bradley Manning the army officer who turned in the reports of America’s illegal murders in Iraq. Obama is now saying that any person who leaks or is the recipient of a leak can be thrown in jail without charges and tortured without any charges.

KF: So at the same time as we’ve got unemployment at 9% we’ve got record US corporate profits storming ahead, we’ve got huge cash balances held by everyone from JP Morgan to Apple. Is this possible the most deceiving period of economic policy ever?

MH: Yeah, I think so, most of the corporate profits are actually financial profit. They’re Wall St and they’re the large monopolies that Wall St is backing. So they’re not profits from industrial production, they’re no profits made by producing things to sell on the market. They are financial profits in and rentiere profits, that is monopolies, real estate and they’re speculative profits. So what is being left behind if industry and the employment sector. There are entire cities now that are near going broke. Detroit used to be the fourth largest city in America and that’s more than half of it’s population and is emptying out and is facing bankruptcy. So you’re having shopping malls here empty out, you’re having the big retail stores and streets empty out. You’re having economic shrinkage. The student loan debt is burdening many graduates so that they are having to live at home with their parents rather than buy a new home for themselves. Marriage rates are declining, family formation is declining. Student loan arrears are up to 20% now. Defaults are rising on houses, homes. It’s not good financial news here. But, as you say, the financial profits are soaring.

KF: And there’s the Dow Jones at a new record high.

MH: Well, part of that is sequestration, they realised that what Obama has done is declare war on the poor. He’s very sharply increased taxes on the poorest, the lowest incomes groups, by increasing the social security set-asides from the wages. That happened on January 2nd. And Obama intends to use the sequestration budget crisis in order to cut back social security, cut back Medicare, and Medicaid, cut back social spending so as to leave more funding available for the banks. And, of course, for the US government to do what the European governments are doing. To finance their deficits by borrowing from the banks and governments run deficits mainly by cutting taxes on the financial and real estate sectors. So again you’re having just a continuation of the Clinton administrations pro-real estate and pro-financial give-aways.

KF: Michael, we had the Dow Jones at record levels, QE4’s well underway and many countries around the world are feeling the brunt of what’s been seen as a currency war and it’s almost like with Japan declaring they’re going to join the money-printing race, that it’s a race to the bottom in terms of the worst economic policy, so they can push down their exchange rate, and now that the GATT rules are outlawed as a form of protectionism, this seems to be the latest way to do it, to push your currency down so you have some sort of export advantage.

MH: Flooding the economy with money – the effect is not so much to give industry an advantage. It raises stock and bond prices. The lower the interest rate, the more money there is – most money is used to buy stocks and bonds and packages of real estate mortgages. Every day an entire year’s national income or GDP goes through the New York clearing house and the Chicago Mercantile exchange and I think it’s probably the same in Australia. Probably every day more money is spent on Australian stocks, bonds and securities than is spent on goods and services in an entire year. So all of this monetary easing in Japan, the United States and Europe is an attempt to just flood the capital markets so that the one per cent who own about 60% of the stocks and bonds can make a killing and take their money and run.

Lower currency values don’t right away change trade patterns, because it takes time to build a factory, it takes time to hire people, it takes time to produce more. And also people tend to stick with the same suppliers and prices go up. So what’s going to happen when a currency goes down, its going to raise the cost of imports to it’s population, it’s going to raise the living costs and it’s going to squeeze labour even more, causing even more defaults, and lowering the government budget, pushing it more into deficit, forcing more privatisation sell offs, again to the stock and bond markets that are being flooded with money. So basically what we’re seeing is a financial grab, not so much an attempt to rebuild trade and exports and employment.

KF: Industrial banking, that seems to be one of the angles that’s had quite some popularity online (for you) and particularly in Germany, looking at this Saint-Simonian-type banking frontier. Are you seeing any small banks – there’s a peer-to-peer banking movement that’s building up now – is there anything that’s opening up to allow small business and industrial producers to access some of this credit? Or is it all just being locked off and thrown into the financial markets.

MH: Almost all small business in the United States is in real estate investment. So the small business administration makes loans mainly to buy real estate. The community banks in America, the small, local banks, basically provide mortgage money for businesses, not any other forms of loans. So I don’t see much of the banking moving beyond the finance and insurance and real estate sector. The fire sector.

KF: Can you explain how insurance fits into your (FIRE) finance, insurance and real estate analysis?

MH: Insurance has always been part of the banking sector, providing large amount of money. In the United States, certainly, it’s a monopoly. Health insurance has been growing more rapidly than any other sector, and it’s a bonanza, because they have a captive audience they can charge whatever they want. Real estate insurance, you had AIG moving it’s insurance largely into insuring default risk for junk mortgages and packaged bank loans. So the insurance has always been basically a financial operation, but in the form of a company, and companies have always been closely associated with banks and real estate.

KF: It seems like they would be the weak link in the trifecta of powerful interests there (FIRE) because they must be feeling so much pain because of these climate change events coming through. $60-odd billion for New York’s Hurricane Sandy and the list goes on and on each week. Is there much talk of reform in the insurance industry?

MH: Not at all, in fact as a result of the climate change they’ve been sharply raising their premiums, so it’s a bonanza for them. The more risk there is, the higher the premium they can charge, and they haven’t paid out a single claim, I don’t think, on Hurricane Sandy or the others yet. The insurance companies insist that if you’re collecting a claim in America, certainly in my case, you have to sue them. And there are so many insurance companies that are not paying claims, that the courts are all backed up. So if you’re suing an insurance company trying to collect your claim, then you have to wait five years before you even get into court. And during the five years the insurance company, as soon as you make the claim, the insurance company’s allowed by the tax authorities in America to write it off as if it were a real expense. So they get to show that they’re low-profits, as if they’ve paid claims and then they hope not to pay the claims, but just to be in the jerk-around business. The insurance industry is probably the most hated industry in the United States.

KF: We’ve seen the uprising of concern with the occupy movements. eighteen months to two years ago now. Are you seeing anything positive from that or are people just bunkered down reading so we actually get some policy alternatives on the table the next time that people raise their heads?

MH: Well the FBI has claimed that the Occupy Wall St movement is a threat to national security. They’ve sent policemen around to begin beating up the Occupy Wall St people. They’ve made Occupy Wall st look like Tahir Square in Egypt. For instance in New York they came in at one o’clock in the morning they descended, they began whacking people over the head with billy clubs. They would take their computers, put them into the garbage truck and crush them and then give them back the crushed computer. There were some musicians there with guitars they’d take the guitar out of the case, they’d smash it into a hundred pieces in the compactor, they’d give it back. In New York they let the criminals out of Riker’s Island, which is the jail, and told them go to Occupy Wall St. They sent the homeless people to Occupy Wall St. So there’s an attempt to treat them as if they’re the enemy and most people don’t want their heads smashed in or their computers wrecked and they don’t want to be beaten up by the police.

KF: It seems like a race to the bottom in terms of economic policy. Are we just going to take it?

MH: Greece is the experiment, they tried the experiment in Latvia of saying “how much can you lower a population’s living standards and raise the taxes before they fight back?”. And in Latvia they didn’t fight back because they were told it’s much better than communism and Russia. And now they’re trying in Greece and the Greeks are not going as quietly. In Spain you have the indignants protesting, so we’re seeing really how Portugal, Greece and Spain’s dress rehearsals are going to go. I don’t think there’s going to be much of a fight back in America.

KF: It sounds like the only form of protest left is with our dollars. Our dollar is our vote and we must make sure that we move our money out of these major financial banks, out of these insurance companies and start supporting the small, ethical-type movements that are billowing around the world.

MH: Well, I don’t know many and there aren’t enough movements to absorb all this money that’s being created because literally an infinite amount of money can be created by the government. Unfortunately the government is not creating this money – all this quantitative easing – they could be creating it for public investment, they could be creating it to build infrastructure, they could be creating it to break down debts but they’re only giving it to Wall St. That’s what people have to realise, the money that’s being created is only going to the banks, almost entirely to the one per cent, not to the 99%.

KF: And what about Germany repatriating their gold, that must have been a big start to 2013? And, seems that with all this money printing, more question marks are coming about for the American way of finance?

MH: Well, this is Germany’s gold that it had left here at the time when gold was used to settle balance of payments suplusses and deficits. And now it decides why leave it here anymore. This is more a techinical movement, I guess the Germans are wondering really why was all that gold there and what had happened to it. So that’s a very positive development. I think every country should have it’s gold and especially I think it’s a good idea to move it out of New York.