Extra Economist

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In Extraenvironmentalist #67 we discuss the implications of the bursting global credit bubble with economist and historian Michael Hudson. Our conversation covers many of the themes in Hudson’s new book, The Bubble and Beyond which covers the process of quantitative easing, neofeudalism and more.

Partial Transcript

Justin Ritchie: “There’s a lot of people on the left and the right who are becoming increasingly critical of Quantitative Easing and the question we have is how does it work? What does it mean that the US Federal Reserve is buying these $85 billion dollars each month of assets even though they are talking about tapering now?”

Michael Hudson: “Quantitative Easing only has to do with the Federal Reserve and the banking system. There used to be an idea that if the Federal Reserve creates money for any purpose, that somehow that spills over into prices and that prices reflect the money supply. In this case, the Federal Reserve is only trying to affect asset prices. It is trying to affect mortgage prices and it is trying to affect bond and stock prices and so the effect of QE3 is only going into the stock and bond markets. You have the press saying, ‘look there is a recovery for the 1%, the 1% is getting richer, isn’t that wonderful, they are the job creators.’ But the 1% use their money not to create jobs but to kill jobs, so more money is being given to financial markets to basically kill the economy.”

“The result is that instead of inflating real prices and especially instead of inflating wages, the effect is to bail out the banks, to save them from having to write down the debts and to impose debt deflation. The results of QE are the diametric opposite of what the Federal Reserve promises they are. This is hurting the economy, this is shrinking the economy, it is helping the banks, it is not helping employment, this is only helping the clients of the central banks which are the banks. The Federal Reserve is supposed to be working in favor of the economy but instead over time, it has began to treat its stockholders, namely the banks, as its clients to be protected and its job is to protect the banks from the economy and we’re in a situation now where the economy is so heavily layered down with debt that either the banks are saved or the economy.

“The Federal Reserve says, ‘save the banks, not the economy’ and that’s basically the result of the Obama Administration’s decision to follow Rubinomics and to follow campaign contributors rather than to follow campaign promises. The Federal Reserve is in effect breaking all of the promises that Obama made.”

Seth Moser-Katz: “Economists tell us that giving money to these banks and to well off people is just going to help with the trickle-down effect, every one will get better jobs and more jobs will be created by printing this money, this doesn’t work though.”

MH: “Trickle-down is a pretense. It would work if there was only one economy and if the 1% spent their money on buying consumer goods. This argument goes back more than 200 years. Malthus said that he was trying to justify what the British landlords got. The British landlords bought good clothes, they have butlers and employ coachmen and that all trickles down. But the fact is that when the banks get money, they don’t spend it on the economy at-large. When they do spend it on themselves, on bonuses and salaries, they do buy Picassos, they do buy a lot of junk art, they give to their favorite right-wing foundations but they don’t employ labor.”

“Let’s look at what happened with Quantitative Easing 2. That was $800 billion dollars. The Financial Times and other financial press noticed the entire $800 billion of QE2 was spent by the banks on arbitrage, mainly for foreign currency and for interest rates. The banks borrowed from the Fed at .25% and it bought Brazilian bonds yielding 11% and it bought Australian bonds that yielded 5.25% and it pocketed the difference in interest rates as income. [Banks] got a foreign exchange benefit as the Brazilian currency and the Austrialian Dollar rose against the US Dollar. None of this money was spent in the real economy. This was all spent in the financial sector. The great lie that you are hearing from the Federal Reserve is that Wall Street and the Financial Sector is part of the real economy. Think of it more as a parasite that’s wrapped around the real economy, sucking the blood out of it.”

JR: “You mentioned QE2 and how this was tied to all of the global bond purchases, could you explain more about how that worked and what the consequences are now. What does this mean that the whole QE policy seems to be reversing, what would be the effects of that [of a taper]?”

MH: The policy itself has not yet been reversed but there’s a threat of ending it at some point. Here’s what happens, if you can borrow at .25% and you can buy any stock that’s yielding dividends, you can buy bonds yielding 10% you can buy junk bonds yielding higher rates and you get to pocket the difference between the 10%, or 5% or 3% and the .25% you are paying.

However, when you gamble on buying on all these bonds on credit, say you borrow $1 million and you buy a $1 million of corporate bonds, 3 year bonds or government bonds at 2%, all of a sudden, if QE ends, then interest rates go up. When interest rates go up, bond prices go down. All of a sudden, you will take a loss on your holdings once these prices begin to fall and so the Fed turns Wall Street into a game of musical chairs. The idea is to jump off before the prices begin to go down so once Wall Street hears that the Fed is not going to be pumping this money into the banks to speculate on bonds, stocks and arbitrage, all of a sudden the bond holders are selling and say, ‘we’re taking our money and running’, let’s take our profits, sell the bonds and leave the suckers holding the bag.

SMK: What do they buy instead of bonds?

MH: Loans. They’ve borrowed $1 million from the Fed and made a couple, $10 or $20k on interest rates. From here on in, there’s only going to be a loss. Let’s sell the bonds, pay the fed. Keep the money we made. The game is over.

JR: “Let’s say Quantitative Easing 3.0 ends and this wave of privatization goes through. What will life be like on the ground for people in this privatized, debt-deflation stricken America in, say, five or ten years? How will their lives change? What can you really see for individual families? How will their lives be different?”

MH: “Well, try reading books about how England was in the thirteenth century. We’re moving, essentially, [to] Neofeudalism to make a long story short. People are going to find that instead of free government services as before, now they have to pay for them. And if they pay for these essential services – and most public services are essential, that’s why they’re in the public sector to begin with; to keep them out of the hands of monopolies— now all of the sudden the public services that were provided on a subsidized basis or freely are going to be privatized without any price regulation for it, and all of the sudden people are going to have to pay market prices that include interest charges, Wall Street underwriting charges, the cost of dividends, exorbitant management fees, bonuses for management, political contributions, buying off judges, buying off the courts, buying off the politicians to make sure that the people are not able to stop your gouging them. That’s how the system is developing.”

“And it’s not democracy anymore. We’re seeing a transformation from democracy into financial oligarchy. And essentially the word that used to be used for these people were rentiers. People living off their rents. Landlords, and now the monopolists.”

“So we’re seeing what used to be profits or public tax revenues turned into monopoly rents. And that’s going to be the word that’s going to be used more and more to describe the coming decade. Everything is going to be monopolized and people are going to have to pay through the nose for essential services, and many people can’t afford it. There’s not going to be much discretionary income and choice left.”

“So people are going to essentially not have much choice as to what they can use their spare income for, because all their income is having to go to pay for the deficit they’ve taken out, the interest on the credit cards, the taxes, the wage withholding, health insurance, medical costs, transportation, electricity; everything that has been monopolized they’re going to have to pay for, and we’re seeing the end of consumerism and the end of consumer choice.”

JR: “So your new book is called The Bubble and Beyond. What really happens as the financial system fails? We’ve been talking about the feudal dynamic. Does the end of our current global economic system as we know it mean the end of our civilization as we know it? How do you see that shaping up?”

MH: “Well, civilization goes on. The Roman Empire collapsed and brought on a Dark Age for almost a thousand years. Civilization went on, but it became an oligarchy and poorer and poorer and poorer. Ecologists have talked about reaching a limit of global warming and of carbon dioxide and of water levels, but you can think of debt as debt pollution, as somehow polluting the economy, and when all of the economic surplus is going to pay the creditors in the form of interest and amortization and penalty fees, then all of the sudden there’s no money for goods and services anymore, and there’s simply a slow crash. And that’s what we’re in.”

“In order to buy a home, you have to go into a lifetime of debt during your working life to work off the mortgage. In order to get an education you have to pay so much student debt that you’re not able to get married and move out of your parents’ house and start a family, so the result that your finding in – Latvia’s a wonderful example, or Greece or Ireland today – you’re finding for one thing population rates decline sharply. President Putin said that privatization and Neoliberalism in Russia has killed more Russians than all of World War Two.”

“Financial war is very much like a military war. The population will decline, people will stop having children, stop getting married, and usually there’s emigration. In Latvia in the last ten years, ten percent of the population, mainly of working age, have had to emigrate. For America, there would have to be thirty million people emigrating in order to keep up with the Irish or the Lativan or the Greek rates of emigration, but they’re not teaching enough Chinese in the schools to enable them to move anywhere.”


JR: Do you think the financial class realizes it is destroying the productive aspects of society?

MH: Everyone in the financial class realizes it is destroying society. That’s why it is taking the money and running and that’s why the bond market is going down. They know the game is over, they know they’ve killed society. Now they are taking their money and buying farmland, houses all over the world, they are going to live nice like lords over the rest of society they’ve killed as that society sinks into poverty.

JR: Is there a case for optimism?

MH: Sure, in the end so many people will die and suffer, there will be a revolution and the system will come to an end. This cannot survive as it is. You could say that a political system that bankrupts society and leads to a dark age cannot continue… certainly an intellectual revolution. Unfortunately, when people get poorer, this is not an optimum time for them to get more intellectual. There are probably going to be demagogues. You could say that fascism occurs when socialism is unable to put forward an alternative. So the choice is: will there be a socialist alternative that writes down the debts and redistribute the wealth and take the public sector that’s been privatized back into the public domain. Or, will there be a kind of neo-fascist movement as there was in Chile?