IMMR CoffeeHouse Discussion Forum # 8
Full Transcript (EDITED VERSION)
Thurs. Dec. 19, 2019
Michael Hudson on how debt money has pushed the US and European economies to their financial limit. Followed by an open discussion forum.
About the speaker: Michael Hudson is an economist and economic historian with a PhD from New York University. Dr. Hudson teaches at the University of Missouri–Kansas City and is associated with the Levy Economics Institute at Bard College. Dr. Hudson’s main research focus is on debt, in all its variations and throughout history going as far back as Bronze Age Mesopotamia. Leading questions are how debt comes into being, when and how it creates economic and societal problems, and what measures have been adopted, or can be adopted, in order to deal with debt-generated economic problems. His insight on the connection between debt and economic crises gave him the tools to foresee the 2007-8 Global Financial Crisis. He currently directs the Institute for the Study of Long-Term Economic Trends (ISLET), which also publishes his recent books like Killing The Host: How Financial Parasites And Debt Bondage Destroy The Global Economy (2015) and J Is For Junk Economics: A Guide To Reality In An Age Of Deception (2017).
INVITATION: I’m sure you have many discussions of bank money causing problems. My focus is on how banks create DEBT, and why it’s necessary to annul the “savings” – electronic credit behind this debt – as well as cancelling debt. My focus is on how debt money has pushed the US and European economies to their financial limit, beyond which they can’t grow any further.
IMMR CoffeeHouse Discussion Forum # 8
Full Transcript (EDITED VERSION)
Thurs. Dec. 19, 2019
Michael Hudson on how debt money has pushed the US and European economies to their financial limit. Followed by an open discussion forum.
INVITATION: I’m sure you have many discussions of bank money causing problems. My focus is on how banks create DEBT, and why it’s necessary to annul the “savings” – electronic credit behind this debt – as well as cancelling debt. My focus is on how debt money has pushed the US and European economies to their financial limit, beyond which they can’t grow any further.
About the speaker: Michael Hudson is an economist and economic historian with a PhD from New York University. Dr. Hudson teaches at the University of Missouri–Kansas City and is associated with the Levy Economics Institute at Bard College. Dr. Hudson’s main research focus is on debt, in all its variations and throughout history going as far back as Bronze Age Mesopotamia. Leading questions are how debt comes into being, when and how it creates economic and societal problems, and what measures have been adopted, or can be adopted, in order to deal with debt-generated economic problems. His insight on the connection between debt and economic crises gave him the tools to foresee the 2007-8 Global Financial Crisis. He currently directs the Institute for the Study of Long-Term Economic Trends (ISLET), which also publishes his recent books like Killing The Host: How Financial Parasites And Debt Bondage Destroy The Global Economy (2015) and J Is For Junk Economics: A Guide To Reality In An Age Of Deception (2017).[Intro by Mark Young of “Alliance for Just Money,” USA]
My basic orientation may be different from the usual discussions of Positive Money. I focus on how most money created by banks takes the form of debt, and how its character differs from public banking and money creation. The difference goes beyond the character of money itself. At issue is the purpose for which credit is created. Commercial bank lending tens to push up asset-prices for real estate and financial securities, not to expand the “real” economy. The latter is what public credit and money creation should be for.
This issue became apparent when in 2008, Citibank [in the USA] essentially went broke. Sheila Bair of the Federal Deposit Insurance Corporation (FDIC) pressed for the government to take it over. But before President Obama came into office, he submitted his projected cabinet list to Citibank for approval. Its management team (Robert Rubin et al.) got to nominate Obama’s cabinet and say who could be on it, and who other officials would be. Obama turned out to act basically as a lobbyist for his sponsors and donors rounded up by Citibank. He turned policy making over to the bag man Tim Geithner, who refused to let Sheila Bair take over Citibank and she wrote in her autobiography that she learned it was all about the bondholders.
Imagine how different it would have been if the government would have taken over Citibank and run it for public purposes, in contrast to the bondholders and the existing management team who ran it. In her autobiography describing the 2008 crash, Bair wrote that Citibank was run not only by incompetents but by managers who made fraudulent mortgage loans and reckless loans or made financial gambles on derivatives and corporate take-overs. Almost all of their loans were for what classical economists call “unproductive purposes.” They were not made to create new factories, not to spend into the economy, and not to employ labour, but simply to either finance the transfer of existing property already in place – namely in the form of mortgages (both junk and otherwise) – or for corporate take-over loans, for stocks and bonds, for speculation, derivatives financing and other kinds of loans that basically were so bad that they wiped out the bank’s capital base.
Public banks would have created credit for different purposes. Number one: They would have financed states, localities, the federal government, with government ownership. The government would have got whatever interest was charged. Under government control, Citibank would not have made predatory loans, corporate take-over loans or junk mortgages.
So you can compare what’s happening in China today with what happened to the American economy after 2008. Henry Liu and others have written about why China cannot really go broke as a result of its debt. The reason is that if a corporation in China is unable to repay its debt to the government-owned bank, then the government-owned bank has a choice: It can either write down the debt and leave the corporation functioning, working with its employees and being productive. Or, it can do what a US bank would do: foreclose on the loan, drive the company under, and have it sold at the distressed price to a corporate raider or vulture fund. China doesn’t throw the companies over to the corporate raiders or vulture funds.
Since we have a number of Canadians here, I’ll talk about my experience in Canada in 1977-78. The argument I made that was one of the very first (as far as I know) for Modern Monetary Theory (MMT). Back in 1977 and ’78 when I was the advisor to the Institute for Research on Public Policy (IRPP in Toronto), Canada was urged by the banks – Scotiabank and a number of other big banks – to let them make commissions by helping the government save on its interest rates by borrowing in Swiss Francs and German Deutsche Marks. They said that provincial governments could save a few percentage points in interest charges by doing this. It could borrow it at only 2% or so in Swiss Francs or [German] Deutsche Marks.
I urged against this, and the banks brought in a lot of lobbyists against me. They naturally won because I’m not a Canadian and they were, and I don’t contribute to political campaigns in Canada and they do. Basically, they explained to me: “Look Dr. Hudson: Canada is run by the banks. If you don’t understand that, you don’t understand Canadian politics.”
Here’s what happened. The local provinces (Alberta, a number of others) did indeed borrow Swiss Francs at a lower interest rate than borrowing Canadian dollars would have involve. What happened technically is that the Swiss Francs were turned over to the Bank of Canada. The Bank of Canada then kept these Swiss Francs in its foreign reserves, and issued domestic Canadian dollars against them, because the provinces who took on this debt spent their money in Canadian dollars. The labour they hired was Canadian labour, paid in Canadian dollars, and the goods and services they bought were also mainly in Canadian dollars.
I asked why they needed Swiss creditors and the German bondholders. If the Bank of Canada is going to create the Canadian dollars anyway, why was there any need to involve debt denominated in a foreign currency? The IRPP published my report, Canada in the New Monetary Order: Borrow? Devalue? Restructure! (Toronto, Butterworth 1978). I think it should be on my website, michael-hudson.com.
The counter argument put forth by the banks was: “We’re the honest brokers for what is sound finance. We don’t trust governments to create money, because that is inflationary and politically autocratic.” The banks brought in a Jesuit priest who said that government control was the first step toward the gas chambers. He actually said that. He argued that the government should not create its own money, but should let the banks decide. He said all governments are fascist, all governments lead to the gas chambers, so Canada should let its planning be done by the banks. The members of the government (the Privy Council) were silent and Pierre Trudeau’s government accepted the argument.
What was the result? Two years later, the Canadian dollar had plunged, while the Swiss Franc and German Mark had appreciated by about 20% (this was before the Euro). The result was that instead of saving a few interest points, Canada’s dollar went down toward 80 cents while the money it owed in German marks went up to about $1.20. So Canada had to pay a 50% premium for letting foreigners decide whether its provinces were fit to do what voters had authorized – for domestic spending in money that the Bank of Canada had to create in either case.
The banks said that the Canadian public was incompetent to decide what to spend money for – too incompetent to let its provinces decide what to spend money on, so the Liberal government should just turn monetary policy over to the banks.
There was such a fuss that the people who supported my position (largely financial stockbrokers and others who thought that letting the banks run Canada was crazy), got me appointed cultural advisor to the Department of State, because they decided that Canada had a psychological problem. The problem was not simply one of monetary theory and pointing out that Canada could create its own money in any case (whether it borrowed from Germany and Switzerland or not). It was a psychological problem, a cultural problem and an educational problem of believing that it had to trust the United States, trust foreign creditors, trust banks and almost anybody EXCEPT Canada’s own voters and the officials they elected.
So I worked for the next year for the Department of State writing policy for Canadian self-reliance and what that would take. I finally just gave up. They had given me landed immigrant status but I realized that I didn’t think anyone would be able to do much there. In fact, the Liberal government soon fell apart and the Conservatives took over with an even MORE pro-bank position. So that’s my experience with Canadian monetary theory and government policy as it affects banking and money.[Mark Young, USA] Just to follow up a little bit on your title, you indicated that US and European economies can’t grow any further. Can you elaborate on that a little bit? “At their financial limit” is what you said.
Now we get to the debt issue. That’s what I’ve been writing for the last few years. The United States and European economies are heavily debt-ridden. So much of their income has to go to pay the banks. In America it’s mainly for mortgage debt, consumer debt, car debt, student loan debt and credit card debt. After you take the money that Americans have to pay, not only to the financial sector but to the real estate sector for housing (either in rents or mortgage interest) and the insurance sector, the rest of the economy is squeezed. As you know, 15% is taken off American paychecks at the top, for Social Security and medical care. When you add that to the debt service and the housing (housing costs often over 42% of American consumer income for the lower 50% of the population) If you take the 42%, you add the 15% tax withholding, and about 20% of federal and local taxes, you find that only about a third can be spent on goods and services.
That’s the reason why in New York (and London and other places) commercial stores are going bankrupt. Sears went bankrupt, Toys R Us went bankrupt. If you walk up and down the big shopping streets of Broadway, Fifth Avenue, Madison Avenue, commercial rents have fallen. Stores are closing because fewer people have the money to buy the goods and services that the economy produces.
The result is classic debt deflation. This phenomenon was analyzed already in the 1930’s when Irving Fisher wrote an article on debt deflation. That issue doesn’t really come up in today’s academic economics courses, but the economy was left squeezed after 2008 in the United States. The Obama administration had a choice: Either it could do what it promised to do (write down the bad loans to a realistic value, especially the junk mortgages, meaning fictitious mortgages by liar’s loans for much more than the properties were worth). Or, it could leave all the bad loans in place, bail out the banks, and let them foreclose on 10 million American families.
The latter, of course, is what Obama did. There was a huge foreclosure of homes. These homes were bought out by hedge funds like Blackstone in a fire sale that took these houses off the market. As a result, rents have gone way up. The average rent in New York City is $4500 a month, to give you an example. American wage-earners have to pay so much income – not only to the financial sector, but the real estate sector whose housing costs have been bid up by bank credit (80% of bank credit is for mortgage loans) – that if they got all of their goods and services for nothing, if you gave the Americans all of their clothes, all of their food, all of their transportation, all of their entertainment expenses free, they still couldn’t compete with foreign labour because their debt service is so high, their housing costs are so high, and their medical costs are so high. So essentially, that limits markets for American goods and services.
Pretty much the same thing is happening in Europe now. European markets have stopped growing because so many corporations are debt-ridden, as well as municipalities and governments. You can look at Greece or Latvia to see where all of this, the future of France and other countries are going. In France, as you know from your news broadcasts, the population is striking almost every day because the neoliberals say that a choice has to be made between paying the bondholders or cutting back pensions. Of course, they put the bondholders first, cutting back on pensions and social spending. That’s led to the riots and demonstrations in France.
So, we’re in a position now where the business cycle really is at an end. Business cycles, in textbook theory, automatically recover. But the way they recovered in the past is by a crash. The crash wipes out the debts. It wipes out a lot of banks also, and the economy begins again from a relatively debt-free position. That happened in the West after World War II. But it isn’t happening this time –no crash for banks, no losses for bondholders, no losses to stockholders. The stock and bond markets have tripled in price, while the rest of the economy (for 95% of the American population) has seen no growth in GDP in the last 10 years since 2008. For them, the GDP has shrunk. All the growth has been in the financial and FIRE sector (finance, insurance, and real estate) and it’s economic overhead, not real growth. It should be treated not as GDP, but as a subtrahend.
But financial lobbyists in the United States have re-defined GDP. For instance, when people fall behind on their credit card debt, and their interest rate goes up from 19% to 29%, all the added penalties and fees are counted in GDP as financial services. The pretense is that the banks are performing a service by taking the risk to extend credit to people who now have to pay higher penalty rates. So instead of treating the rising debt service and penalties as an overhead and subtrahend from GDP, it’s added to GDP. There’s an illusion of statistical growth, although the actual economic growth is accruing only to the top 5% of the population – the wealthiest 5% in the financial and real estate sector.[Mark Young] Thank you. One more question…Another thing you said in there was that cancelling debt is important. I wanted to clarify that. Did you mean cancelling private debt [or] do you mean public debt. And if you mean public debt, how do you make bondholders whole? And if you mean private debt, how do you go about cancelling private debt when it’s a private contract between parties?
I mean both kinds of debt. One of the virtues of cancelling government debt and much of the private sector debt is that you wipe out the bondholders. You don’t want to make them whole. Since 2008, they’ve tripled their wealth – the bondholding wealth, stocks and real estate. Some 85% of stocks and bonds are owned by the richest 10% of the population. That’s blocking the economy from going forward, and blocking monetary reform. There’s been this enormous concentration of wealth in the hands of what is essentially a predatory and parasitic class –a class that decides that it wants to make its wealth financially – not by creating more employment or producing more goods and services, or by cleaning up the environment or by getting rid of pollution, but only by financial manouevering. It’s called “financial engineering” or fintech.
The economy and society itself cannot go forward as long as you have a financial oligarchy. You can’t have both an oligarchy and democracy. You have to make a choice. And cancelling the debt can’t be done just by itself. For instance, suppose in the case of real estate debt, you’d create a new feudal type landlord class. It would be the dominant class in the country because most of the commercial real estate investors buy buildings like Donald Trump did, with no money of their own. It’s all debt. So you’ll have a huge giveaway.
If you do write down the debts in the way the Germany did, for instance, in 1948, you would have to change the tax policy. You’d need a property assignment, sort of like occurred in the Soviet Union when it collapsed. Everybody was assigned the apartments they had or the office they had. They were assigned to what they were actually occupying on the assumption that that was the norm. The government could have recouped all of this economic rental value by a land tax.
The whole idea is to tax what is created freely by nature, whether it’s land rent, natural resource rent (whether it’s from the oil and gas and minerals) or other monopoly rent. These forms of rent are what classical economics called “unearned income.” It is what landlords make in their sleep without working. This should be the tax base, not an income tax on labour or on industry.
If you’re going to do something so radical as to wipe out the financial class’s claims on the rest of society, you have to go and finish the revolution that Adam Smith, Ricardo, John Stuart Mill, Alfred Marshall, Marx, and almost every 19th century classical economist advocated.
You have to change the tax system so that you avoid having a financial system that makes its money by taking unearned income and monopoly income or land rent that should be basis of the tax base, for itself.
Right now, finance makes its money by privatization, mainly of rent-seeking opportunities capitalized into stocks, bonds and property rights. Ever since Margaret Thatcher and Ronald Reagan, most of the financial wealth has really taken off have all been through privatization, down-sizing government and shifting the centre of economic planning away from elected government towards a Wall Street or the City of London or the Paris Bourse or the other financial centres. You have to shift the management of the economy and its forward planning away from the financial sector back to governments.[Govert Schuller, USA] Thank you Dr. Hudson, that’s all really interesting and alarming also. I was wondering we have had 4 years or almost 4 years, 3 years of the Trump administration and this administration is very good at diverting the attention to all kinds of political theatre. Meanwhile behind the scenes, there’s a lot going on. I was wondering what your take is on what the Trump administration did to worsen the situation of the American consumer. Of course, we know there were all those tax cuts, they’re pushing for austerity, they’re pushing for privatization, but I was wondering what other insights you had on what someone like [Steven] Mnuchin is doing behind the scenes. And connected to that is, what do you think Democratic presidential candidates should promote, not necessarily full monetary reform, but what might be politically feasible which candidates might have the best position, to do something concrete about this situation. That’s my question. How bad is Trump and how good could possibly be a president from the Democratic Party.
Well, Trump has not done very much in terms of the financial sector at all. He’s been sort of hands off, and continued the Obama administration’s policy of using the Federal Reserve to create credit, essentially to pump up the stock and bond markets. For Trump, as for the Democrats, the economy is how much the donor class is making in stocks and bonds. They’re making capital gains thanks to Obama’s $4.6 billion dollars of quantitative easing on the books, but done very little for the rest of the economy.
In terms of the Democratic candidates, we already know who the Democratic candidate is. It’s Donald Trump. The Democratic National Committee already said, how can they select a candidate that is so weak that he’s guaranteed to lose to Trump. They preferred to lose to Trump than to win with Bernie Sanders in the last election.
The Democratic donor class, the billionaires, are overjoyed with everything that Trump has done, because he has continued to push up the stock and bond market, he’s cut taxes on them – and most of all, they get to blame this all on the Republicans and Trump for doing it, not the Democrats.
But Trump is following the Democratic Party policy. And even Democratic National Committee members have said that if either Bernie Sanders or Elizabeth Warren wins, they will back Donald Trump for president. He’s guaranteed to have another term and we’re going to have a continuation of the current policy, which is really just like the 3rd and 4th Obama administration, which was right-wing. Obama was like Tony Blair and Margaret Thatcher wrapped into one – basically right-wing, pushing Wall Street and delivering his voters to the donor class.
Trump just picked up the reaction when Americans looked at Hilary and decided that he probably was the lesser evil. At least Trump said he didn’t want to go to war with Russia (unlike Hilary). They’re now trying to impeach him for not providing arms for Ukraine to fight Russia and draw it into a broad European war. That’s what the impeachment accusations have written. There was really no difference in the economic or financial or monetary policy between the Democratic National Committee and Trump.
Of course, Bernie Sanders has my colleague, Stephanie Kelton, as his monetary advisor, and she’s doing everything she can to say that there’s no reason the government can’t run a budget deficit by creating its own money. In fact, if the government doesn’t run a budget deficit and pump money into the economy, then the economy is going to shrink. But the big money – almost all the money that is coming into the Democratic Party Campaign – is going to Mayor Buttigieg who says that we’ve got to balance the budget. The only way to balance the budget in America while spending more money on war is to cut back Social Security and other social spending. So Buttigieg is like Margaret Thatcher with an exclamation point.[John Howell, USA] Thank you very much Dr. Hudson. I’ve enjoyed reading your books. I struggle to understand them since I’m not an economist. I have a question that comes out of reading another book that you may be familiar with called “The End of Banking,” and in that book it’s argued that banking is out of control and beyond the reach of regulation in this era of information technology. He argues that the problem should be approached simply with a new accounting rule. Namely that financial assets of any company should not be created to exceed its equity. To me, this would seem to eliminate much of what goes on in the financial system. I’m interested to know what your view is. Is this a reasonable proposal or is this nuts?
I don’t know the book or wrote it. What you said simply means that companies shouldn’t have more than a one-to-one (1/1) debt/equity ratio. The aim is to prevent a large debt superstructure from being created. In principle this argument goes back over a thousand years. Islam, for instance, says that the only kind of debt should take the form of equity, so that if the debtor is unable to pay, the creditor has to share in the client’s misfortune and write down his claim proportionally, not as a debt that still has to be paid in full. If it’s an equity obligation, then if the ability to pay goes down, the debt service will also go down.
Steve Keen, whom many of you may know, is a mathematician, and he says on every stock or bond and bank loan is discounted at a given mathematical rate, and if you discount the future value of any stock and bond in 40 or 50 years, it is going to be near zero. That’s how actuaries value stocks, bonds and debts. He said if that’s the case, we can announce now that we’re going to be steadily converting debt into equity and at the end of 50 years, everything will be in equity investment instead of debt. So the idea of replacing debt with equity is basically good, as long as you protect the rights of debtors, renters and leasers, and have a good tax system.
In 2008, if you look at the statistics for all the United State real estate, for the first time more than 50% of the value of all US residential real estate was owed to the banks. So homeowners were actually minority owners of their homes. But they were obligated to pay all of the taxes, not the creditors. The creditor should be responsible for the tax burden in proportion to the value of the debt relative to the overall value of the property pledged as collateral. So in principle, the idea of moving toward this state of affairs is right.
Regarding the banks being out of control, the reason why they’re out of control is that they have engaged in regulatory capture. They get to name the administrators, and most of the regulators have been chosen from the banking sector, so it’s basically a self-regulating sector. But “self-regulating bankers” is an oxymoron, because they don’t regulate themselves. When you have deregulation of the banks, you have a fraud – as my colleague Bill Black at the University of Missouri-Kansas City has pointed out. Basically, you could even say that the financial business plan of the largest American bank is fraud, because fraud pays. It’s easier to make money fraudulently than honestly. That’s why the banks that were found guilty of making the most junk mortgage loans and paid the largest civil fines (while no banker went to jail) were the ones that have grown the fastest. The honest banks have grown the slowest. So, it’s not only that they’re out of control, you’ve turned the economy’s management over to a sector that makes its money largely by breaking the law. That is euphemized as “stretching the envelope.”[John Howell] Let me add one of the other arguments that’s made in this book, by a couple of Swiss. One was a banker and the other a journalist. The argument they make that it’s out of control in part because banks have been able to shed a lot of their transactions off into non-bank organizations which they own (as part of the shadow banking system, a rather amorphous term). The point is, they’ve been able to hide essentially much of what is done financially simply by the complexity that the information technology has allowed them to to use.
This is why Enron people went to jail, for creating misleading off-balance-sheet entities. It has nothing to do with technology. Anyone can consolidate the off-balance sheet with a balance sheet. But I think I know what you mean. The banks have used this off-balance sheet operating through affiliates to an extent that Sheila Bair said when it came down to closing down Citibank, the problem was how to draw the line between Citibank and the other entities in CitiGroup. Well, this tangle became possible when President Clinton got rid of the Glass-Steagall Act. All these off-balance sheet entities that you’ve mentioned used to be deemed illegal until 1999. They can simply be declared illegal again, and banks would have to operate the way they did before this crime wave was made possible in 1999. It took only five years (until 2004) for the FBI (the Federal Bureau of Investigation) to say that the largest wave of financial fraud in American history was taking place. At that point President Bush fired most of the fraud staff from the FBI and put them on anti-terrorism stuff dealing with Saudi Arabia. That gave free rein to bank fraud. The fraud was enabled by the government, largely because politicians were backed and supported by the banking system.
So it’s really not only that the bank regulatory agencies were captured, but that the whole government has been captured. It’s easy to undo – you can simply re-instate Glass-Steagall and enforce it. Any accountant could go and straighten things out, fairly quickly. You straighten out by letting the bank affiliates (the non-banks) go under. AIG could (and should) have let its London affiliate go under instead of paying its derivative contracts to Goldman Sachs – which also should have been cut loose from government support. Instead, the government classified it as a bank and made it sacred, giving it seeming immortality by opening up Fed swap credit for it.
Think for a moment who it is that has the claims on these nonbanks. It’s not normal people. I don’t think it’s anyone on this site. It’s 1% of the population; it’s financial speculators. All of this that’s off the main balance sheet is financial speculation that has no productive economic role to play, so it should be wiped out. And it can be wiped out, almost with a stroke of a pen. You simply have to staff the FBI and the bank regulatory agencies with enough accountants to do to the banks what they did to Enron.[Virginia Hammon, USA] I’m going to need an enormous chocolate bar to lift my spirits after your talk. My question is there are red flags in the bond and stock market. As I understand it, since September they’ve been pouring billions into the bond and stock market in the form of quantitative easing to keep them afloat. I want to know when the “what” is going to hit the fan. Is there something in the system that’s going to stop them from being able to do that forever? When are we going to see the crash?
I’ve had this discussion with a number of former Treasury officials and money managers. None of us have a penny in the bond and stock markets because we can’t see any means of support there. However, none of us can say when it’s going to end. In fact, I was discussing with Paul Craig Roberts who was Ronald Regan’s Undersecretary of the Treasury for International Affairs. He points out that quantitative easing has not been increasing since September. That’s not how the Fed is doing it. What they’re doing, he says, is manipulating the forward market. Banks can promise to buy the Dow Jones Industrial Average stocks, or bonds, in a month or two months at a higher price, and by promising to buy these (to have a put, the right to buy). That means that other people are going to bid up the stocks and bonds to these prices. The banks are doing the opposite with gold: They are selling gold forward, at a very low price. As long as they’re selling it for a low price, gold holders are not going to pay a higher price because they know that somebody can sell it – until they stop. So you don’t need to create money to push up the stock and bond markets. All you need to do is make a promise to buy at a given price, and that will become a self-fulfilling prophecy.
Financial manipulation is what’s keeping the stocks and bond market up. In the final analysis, the government can create any given amount of money to buy the stocks and bonds to make sure that their donor class (the 1%) that own most stocks and bonds don’t lose money. But at some point, of course, there’s going to be a crash. You can never forecast in advance when the crash is going to come. Almost all crashes in the last 150 years have occurred either because of fraud or a bad gamble by somebody like the London whale of Chase-Manhattan, or England in the 1890’s when its big banks went under. Somebody makes a bad decision and a bad bet, they lose money and go under, like AIG’s London office lost money and let Goldman Sachs foreclose. You never know when some bank is going to make a mistake.
There’s such a huge superstructure of derivatives making bets over whether the market will go up or down, or whether interest rates will rise or fall. There’s such a big superstructure of bets and gambles that have been made, that somebody’s got to make a wrong bet. The Japanese frequently make bad bets. The people who bought Lyft and Uber, they’ve lost money. At some point, there’s going to be a break in the chain of payments, but we don’t know when. We know that when that occurs, the government is going to bail out the big banks, the big bondholders and the 1%. It’s going to let the pension funds go under, the insurance companies and corporate business. So it’s going to be that point when the healthy parts of the economy are sacrificed, and all the government support goes to the predatory overhead.[Virginia Hammon] That’s kind of jaw dropping. Who is creating the additional money in the system for the people in the bond and stock markets to pay the higher and higher prices? Are they the banks?
You don’t need to create more money. Suppose you have a piece of furniture behind you. And you say, “Well, I’ve got a promise here from the government that it’s going to give me $100,000 for that piece of furniture.” All of a sudden, either I or other speculators will say, “Well, gee, I’ll give you $90,000 and I can sell it to the government for $100,000.” Someone else will say, “I’ll give you $95,000 for it.” The government simply has to make the promise to pay and the price will go up. The bondholders don’t pay any more money. The stock companies don’t pay any more money. But the price of the stocks and bonds go up. Nobody pays anymore at all. The government is manipulating the market.[Virginia] So when you use the term “government” right now, you’re talking about the Fed [Federal Reserve]?
Yes, the Fed, backed up by the Treasury.[Virginia] Where does that backup for the Treasury show up on the government’s financial statements?
Nowhere. It doesn’t show up on the money supply, it doesn’t show up anywhere. After 2008, Randy Wray at Levy and Kansas City was able to use the Freedom of Information Act to find out all the bailouts that the Federal Reserve did with quantitative easing. But it took the Freedom of Information Act to get it. The most important monetary phenomena and income/wealth phenomena are not recorded at all. Because the financial and rentier sector doesn’t want it recorded. If you’re going to be a billionaire and make money and not pay taxes on it, you want to pretend that you’re not making any money at all. You don’t want it recorded. You want to draw a cloak of invisibility around it. That’s what’s happened.[Caroline Whyte, Ireland] ….I’ve been listening very carefully to your arguments about the relationship between high levels of debt and GDP shrinkage over the last few years, and also the triggers of the 2008 crash. I was wondering if you would see any relationship with your argument (which makes a lot of sense to me) and the argument which I’ve also come across that there’s a relationship between energy use (and the energy sector and the use of fossil fuel energy in particular) and GDP. Historically, if you look at charts, as you’re probably aware, there’s a strong correlation between fossil fuel energy use and GDP growth. And of course, now we’re living in an era where we have to eliminate fossil fuels… and our access to high quality fossil fuels is getting harder and harder. I wondered if you had come across that argument first of all, relating the energy sector to the financial sector.
Yes, I have followed statistics on this since the Neolithic. We have 4,000 years of statistics. I wrote my dissertation on E. Peshine Smith, who in 1853 said all [inaudible] is energy and the increase in output and productivity is directly attributed to the increasing productivity of energy – from water power, to wind power, to wood burning, to coal, to the electric engine. In the 1930’s, Technocracy Inc. made published charts every year on energy and GDP showing the increase in labour productivity to be closely correlated with energy throughput per worker. So yes, the increase in GDP can be attributed to energy use, because it’s energy that does the kinetic effort. My dissertation is on my website, and I have a chapter on this in my book America’s Protectionist Takeoff: 1815-1914. Protective tariffs were developed largely to implement this energy linkage with national income.[Caroline] Thank you very much for that. I’ll have a look for that on your website. [Edgar Wortmann, Netherlands] My question is: you said that decision making planning should go more towards politics in a democracy instead of to finance (which currently makes the decisions). But now there is a strong effort – you see it in the IMF, you see it in the ECB, and maybe in the New Green Deal in America – where you see finance take the lead in certain kind of politically driven investments: financial policy for saving the climate. What’s your opinion about that?
I don’t think you would want finance to manage anything. Almost everything it touches, it untracks, because the financial time frame is short-run. Financiers are into making a very quick profit. Do you know how long the average stock is held in the United States? I think it’s like 28 seconds or something like that. That’s the average because of all the quick turnovers by computers taking microseconds, but you get the idea.
[Edgar] My follow-up question to this was that they want to make a profit out of collective foolishness, so that was my conclusion from your response to my question.
The financial mindset is to make money quickly, and their way of turning over the global warming and the climate crisis to the financial sector is to make it a market transaction, so they can make money speculating on the market without stopping global warming at all. That just makes global warming an opportunity for financial gambling. So you want to keep finance out of as many decisions as possible because of the mindset of the financiers.
Financiers claim that they’re smart, and smart people make money; dumb people lose. If they make money by pure zero-sum exploitation or fraud, they say that’s because the people who are defrauded are dumb and the fraudsters are smart, and that’s just how the world and survival of the fittest works. So it’s all a logical vicious circle.[Edgar] Yeah. Then I have another question. I think you are familiar with the work of Steve Keen and his modern jubilee… What’s your opinion about his proposal?
Steve Keen is one of my best friends. We’ve gone around the world together giving lectures. He’s a mathematician originally. We’ve never had a disagreement. His proposal would work, of course. Here’s the problem, though. He would have the government give a certain amount of money, say $1,000 or $10,000 to everybody. That could enable many debtors to avoid defaulting on their loans. They would use this $10,000 (or whatever is given) to repay their bank loans. Of course, that would help bail out the banks. But paying the bank loans will make the banks and the bondholders richer. Steve and I may be writing an article with two good Turkish friends of mine, Ahmet and Sabri Oncu along these lines. They say that this can prevent a debt crisis, in a way that is politically feasible. It’s indeed politically feasible because the 1% is going to clean up and make a huge amount of money. Anything we give to 50% of the population will be given to the 1%, so it’s politically feasible because the 1% will gain. My point is, yes it will defer the crisis. But do you really want to create yet more money for the 1% at the top of the pyramid?
So Steve has an elegant mathematical solution that would work, but I’m more radical when it comes to the political solution.[Edgar] You want the creditors to lose in the Jubilee.
Yes, it’s one great advantage. It’s just as important to wipe out the wealth of creditors as it is to wipe out the debt. If you leave the post-1980 gains with the creditors, you’re going to have a ruling class much like the feudal landlords. You’re going to have financial feudalism. If you leave all of this financial wealth intact, while the rest of the economy has so little wealth…[Edgar] Well, we already have that.
Yes, and I want to reverse it by wiping out the financial wealth. It’s really overhead, because it’s owed by the bottom 99%, siphoning off their income and ultimately depriving them of property.[Edgar] Yeah, yeah. So the jubilee is not only about getting rid of the debt, but it’s also about getting rid of the creditor. That’s your view.
Yes. That is exactly what underlay the German currency reform in the financial miracle of 1948. The Allied Powers were willing to cancel the creditors’ side of the balance sheet as well as the debtors side. Most of the debts were owed to the Nazis. And you wanted to wipe out the Nazis who came out of the war with financial savings. Well, today I want to cope with the financial sector that’s made its money since 1980 by mismanaging the economy, by privatization, by Thatcherism, by Reganomics. I want to go back to the original status quo as it was in 1980, or even better, as it was in 1945.[Edgar] But that’s a revolution because you have to cut off the head of the creditor.
Yes, and that’s why Steve and his solution is more politically likely than mine.[Edgar] More by stealth. You have to offer them also something, otherwise you will have to fight and it will be bloody. [laughter]
Okay. I will offer them their life. [laughter] [Govert] Quick question, Dr. Hudson. You were talking about the manipulation of forward markets – that is one of the big mechanisms to keep afloat what is going on now. And you’re saying that if there’s a really bad bet going on, the system will crash. And then you mentioned Paul Craig Roberts, and I think from him I got the idea that this manipulation of the forward market is done by something that got its name from the Plunge Protection Team and that it was started under Regan just after the 1987 crash. Is that plumbing team still working and is that the really the kernel of this manipulation of the forward market?
That seems to be the consensus. I don’t see any other way of doing it.[Govert] The mechanism is forward buying, but is it based in this plumbing team that is kind of behind the scenes doing this manipulation.
He called it the Plunge Protection Team, and that’s what it seems to be.[Govert] And that’s a government or a quasi-government entity?
It’s government working through the banks, and in conjunction with banks handling the forward bets.[Govert] Or is then by the banks also, as part of their self-regulation?
It’s a symbiotic relationship.[Govert] I hear you. Do we know more about who is on there and which banks have the most say?
I don’t know. We don’t know because it’s a secret.[Govert] Yeah. It’s something to look into because I believe it was there… If it’s general knowledge that there is this Plunge Protection Team, then expectations will bring that into people’s calculations, so that it becomes less effective.
No! More effective. Paul Craig Roberts thinks it’s so effective that he doesn’t know when there’s going to be a crash. He thinks it can go on forever. If you know there’s a Plunge Protection Team that’s run with government support, why not have faith in it?
The Treasury Bulletin publishes statistics on who owns the stocks and bonds in this country. Small investors (the middle class) basically have been disinvesting. These regular people, normal people, have pulled their money out of the stock market because nobody can understand what it is. Only the big players are in there now, I mean, they’re a huge part of the market.[Govert] Good to look more into. I’m totally intrigued by the mechanism itself.
I can see why you’re intrigued. But needless to say, the last thing they’re going to do is publicize it. Proprietary insider dealing, or something like that.[John H] That sounds like it would help the bankers, in terms of lending, knowing that they’re going to get bailed out. [John H] As you know Michael, a lot of us have come to this (or some of us, including me) interest in the monetary system through Stephen Zarlenga and the AMI [American Monetary Institute]. I’ve heard you talk at those meetings as a matter of fact. One of the proposals in the NEED Act as submitted to Congress by Dennis Kucinich was that there was a recognition that you end the bank creation of money, there could be a problem in terms of banks not having enough liquidity to keep the lending that needs to be done. Now, the question about this is (whether or not this is true or not, I don’t know), if you look at what was apparently done in writing the NEED Act was to set up a “revolving fund” as part of the Act, from which banks could lend money in case they were short of liquidity during this transition.
There are several questions that can be asked about this, but the question that I have is if in such a system banks could essentially continue to borrow from the “revolving fund” under the provision of some friendly person in Washington that would let them borrow whatever they wanted, would it not continue the same kind of thing that is going on now through this leveraging system through the shadow banking system. And if that is a concern, you would almost have to have some of this credit guidance that has been offered by various people at various times. And I remember seeing a paper by Walter Mosler in which he talked about regulations and banks – these are the things that banks should not be able to do. Those were the kinds of things that struck me as appropriate.
So my question is sort of two-fold: Is it right to assume that if there is a transition from private to public creation of money, would there be a liquidity problem for banks? And if there would be, would this solution in the NEED Act essentially perpetrate the problem by letting banks borrow?
We’re talking about a theoretical construct here. That said, the answer is no, there would be no liquidity problem, for the following reason: Of course banks could lend to other banks, but most of the money would be created by the government and lent to the bank as a deposit. That would be money that government creates.
Here’s how it would work. Suppose a bank made a good mortgage loan, and it didn’t have enough deposits to cover it. It would make the loan and draw on credit from the government. The government would supply the bank under the 100% reserves with a deposit or swap arrangement. However, the government would not just create money for you to make any kind of a loan. It would only create credit to make a loan that follows the rules as they existed, say, in 1945. A mortgage loan for the real value of the property, in which the mortgage debt service can’t absorb more than 25% of the residential borrowers’ income. And, it has to be self-amortizing within 30 years. The government would not give banks credit to create loans for corporate take-overs. It would not give them deposits or swaps to finance junk mortgage loans or crooked loans with no documentation, or let them make loans for gambling on derivatives. It would only create this government deposit in the bank for loans that are defined as being in the public interest. I think that’s what Walter Mosler meant by controlling what the credit is for.
The government would continue to create money and deposit it in the banks. Obviously, credit has to be created to finance the economy, and much of it has be created out of thin air. What Stephen Zarlenga wanted to do is to create it without running up a debt to private creditors. And you do that, because the debt ultimately would be to the government, which would receive the interest as a depositor.
The margin between what the government gets and what the bank charges remains to be set, and also the ability of the government to write down the bank loan made with the government funding. That is how China has financed its huge industrial take off.[John] That helps. Thank-you. [Mark Young] This kind of gets back to John’s first point. What do you define as “unproductive uses” of credit. Should those only be allowed with cash or equity (however you want to say it)? So, if I want to take over a company, I have to do it with cash out of my savings if I’m a billionaire or something. Is that the thought process behind it?
Yes, but if we wipe out our creditors savings, there are not going to be that many billionaires to be able to do corporate raiding. The corporate laws will be changed so that corporations can’t take over a company and then wipe out all the pensions that are owed, by using the pension plan’s reserves to repay the raiders and creditors, leaving the workers without pensions. You can’t do that kind of thing. You can’t have a company owned by an off-balance-sheet banking conglomerate like the Chileans did to wipe out their corporate pensions. You can’t do basically fraudulent transactions.[Mark] Do you feel the same about regular stock trades? So if I had a line of credit with a bank, I could go buy stock. Or should that also be cash?
Hmm.. I think it really shouldn’t be done electronically. There are a lot of people over 70 years old that need jobs. I think every stock transaction should not be validated until it’s been done in pen and ink. It should take about a week or so for the paperwork to get done on any stock transaction. I think you have to get rid of the fast electronic speculation.[Lucille Eckrich, USA] ….This is a follow up to your answer to John. The question is: Is the government creating credit when banks don’t have enough for that particular mortgage? Is that “credit” money?
Absolutely. We would still have 100% reserves and the government would create real money to put in a bank. But it’s money that would be created by the stroke of a pen or an electronic computer. If it’s created by government, it’s money, by definition.
[Lucille] So it’s the same as if the government creates money to spend into circulation for the public good, or invest, or whatever.
Yes. Right now, you have banks creating credit, often for dysfunctional purposes. Instead of bank credit you’ll have government money. That’s the message Stephen Zarlenga was trying to get across.[Lucille] What you’re saying is in concert with that.
Yes, in the sense that this is what he was saying. We agree on how the Chicago Plan would work in practice, if it were to become law.[Lucille] Okay. Thank you. [Virginia] I have just a general question about understanding better MMT’s [Modern Monetary Theory] concept of money creation, because it really sounds like you are defining it very similarly to the way Zarlenga does … although now you’re talking about credit, government credit money. I’m confused about asset money, credit money and MMT, and what the role of the bankers will continue to be. Will they still have the power to create debt and credit money?
Not under 100% reserves, which is different from MMT’s argument about money creation to finance budget deficits. We’re talking about apples and oranges here. To understand the difference, first let’s look at the common denominator between the 100% reserve Chicago Plan and MMT.
Both approaches criticize the commercial banking system for creating a dysfunctional debt superstructure that has reached a point where it’s blocking economic growth and is polarizing the economy. And both approaches would like to prevent this dysfunctional credit creation.
MMT focuses on government money creation to finance budget deficits to spend money into the economy. The effect is to pump money into the economy, as long as the government spends it on employment and buying goods and services (not financial bailouts). It’s not necessary for governments to borrow from bondholders at interest. And creating government money to finance deficit is certainly no more inflationary than borrowing from “savers” or banks to spend an equal amount into the economy. In fact, not creating government money will force families and companies to borrow from banks, on bank terms – which as I’ve just said, are dysfunctional.
Steve Zarlenga would have government create money to deposit in designated member banks as needed to extend loans deemed to be in the public interest to help the economy grow. He uses the term “money” for government credit, and “credit” for what banks create. He’s not talking about the government running budget deficits, but providing credit into the economy on public terms. The effect is to make money and credit creation a public utility.
But MMT doesn’t talk about the Chicago Plan. That’s simply another topic. So there’s no conflict here, but little overlap either, except for a recognition that the private banking sector has become dysfunctional and that government needs to shape the credit market as a public utility and main creator of money and credit for the economy’s necessary operation (but not to fuel asset-price inflation or financial gambling, debt leveraging or similar fintech).
The best way to understand this is to look at the economy and its financing in terms of a balance sheet. Money is an asset, but there’s always a liability on the other side. I think economics should begin by teaching economists balance-sheet accounting. It’s a way of thinking.
I’ve been a professor of economics at the MMT center, Kansas City for over a decade, and I was a friend of Stephen’s from before he even founded the American Monetary Institute. I don’t think there’s any real disagreement between the two approaches; they’re just talking about different things. For that reason, any fight between the Chicago Plan and MMT seems needless. But an attempt to insist that MMTrs follow the Chicago Plan would be a non sequiter, because the Chicago Plan is not MMT, and vice versa.[Virginia] So just to clarify those three principles of removing the power of private bankers to create money.
That’s right. Under the Chicago Plan of 100% reserves, the government would decide who can afford to borrow on the terms that it says that banks are allowed to lend. Banks can do credit assessment, marketing and find customers for loans, but they can’t just create the money on their balance sheet without having reserves – deposits either by private depositors or corporate depositors or the government as the depositor. So it’s ultimately government money, not bank credit.[Virginia] Then how would the government now create new money – only by giving it to the banks?
Governments can create money in this system the same way a bank does. When you go to a bank, the bank will say, “Sign an IOU and we will create a bank account of an equal amount. If the IOU is $10,000, a bank account will be credited with $10,000. Think in terms of a balance sheet. The government will create a $10,000 reserve account of the bank which it holds as an asset in the Federal Reserve, and the government will have a $10,000 depository IOU from the bank. So the government will do just what the banks do today, but it will be the government doing it, not the banks.[Virginia] So you really are talking about continuing a debt-credit money system.
There’s no way to create money (or credit) without a debt. There’s always a balance sheet.[Virginia] When we create coins right now, that goes straight onto the balance sheet as an acquired asset.
And as a debt, a debt of the government. All the money in your pocket is a government debt.[Virginia] Well, that’s not the way it’s recorded.
Yes, it is. You have assets on the left-hand side and you have liabilities on the right-hand side. But also at the bottom, you have net worth or equity — the extent to which the assets exceed the liabilities. So, I had a conversation with Michael Kumhoff a year or two ago, and we decided to call this “equity money”. We don’t want to call it “debt money” because it’s debt that is never expected to be repaid. So we’ll call it “net worth money” or “equity money,” if that helps clarify the language. Really the only problem here is one of language.
You can take your $10-bill and go to the government and say “You owe me $10” and the government will give you ten $1-dollar bills if you want. If you look at the government balance sheet, just like there are two sides of a coin, there are two sides of a balance sheet.[Edgar] I think you’re overlooking something now. This is regarding cash money, the notes and the coins. Yes, they are recorded as a liability, but that’s not because they are a claim on the issuer. So for instance in the Netherlands, since 1984, with banknotes, you cannot go with your banknotes to the Dutch central bank and ask for gold and silver anymore. So since that year, 1948, banknotes was not a claim anymore, it was not a promissory note anymore.
It’s a claim on other banknotes.[Edgar] Yes, but that was decided in a German court case and they said that this was not a monetary claim…
That has nothing to do with the accounting. The government stopped converting it into gold and silver. But that has nothing at all to do with how the debt, how the liability is going to be settled.[Edgar] But the important thing here is that the reason that they keep on accounting as if it is a debt, is because they neutralize cash money that way. By handling it this way, cash money is not used as a tool to increase the money supply. So cash money is only put into circulation as a substitute to credit. So 100% of the whole money quantity came into existence as credit, and then you can take out a little bit, withdraw it in cash, and then you can have it debt-free. But this is not important for the money quantity.
The problem is using “debt” as a synonym for “liability”. There’s an accounting concept that is larger than the debt issue itself. And that’s what I said: The liabilities side of the balance sheet has net worth or equity as well as debt. So it may only be a terminological issue, not an issue of reality.[Edgar] But it could be a thing of reality, and it could be a thing on the balance sheet. If you start using money, what Virginia called “asset money”—money that has value in itself, and start accounting for it as if it is a silver coin, as if it is money in itself, so there’s no backing, there’s no underlying value on a balance sheet. Under the current money system, that would actually be the thing that [Stephen] Zarlenga was after. Do you think there’s really a difference in his view and the MMT view? So it was not only his temper, but it was also his insight, his insight that credit and money are now confused, but should be different things.
I don’t think if we sat down there would be any difference at all. Stephen said that only governments create money; banks create credit. That was his distinction. I think that in Europe, they wanted to get a concept of money that could be related to price changes. In Germany and Holland, they’re very concerned about prices. But they realized that money in the form of coinage (that people have in their pocket) isn’t going to affect prices very much. They just wanted to focus on credit. So it’s a theoretical model that was behind this, not what actually was happening.[Mary Sanderson, USA] My question is a follow up on Virginia’s…. I wanted to ask you to clarify then that you would support the NEED Act that Kucinich introduced and you do not see a conflict between the contents of the NEED Act and what MMT proposes?
Right. I’m one of the MMTers. Stephanie, the other guys and I go around the world together giving lectures on this.[Mary] But you don’t see a conflict.
No. They are simply talking about different things. I can understand what Stephen Zarlenga way saying, and it’s not what MMTers are talking about. But it’s not a head-on conflict. It’s just a different set of topics. I don’t think that MMTers support the Chicago Plan, because it’s not politically likely, and they don’t want to distract attention from what is likely: public approval of money creation to finance federal budget deficits.[Mary] Okay. Thank you. [John H] I’m still trying to get my mind wrapped around the preceding conversation, because there’s something here that doesn’t square with my understanding. I may be wrong about this, but what my understanding is in the case of coins in this country [USA], as these appear on the Treasury books, the coins represent a revenue that then the government spends.
[John] Yes, that it’s listed and I’m hearing this from Joe Bongiovanni and I remember him saying that it appears as a revenue. That the amount the government creates in coins exceeds its cost of production and that’s a revenue to the government.
It’s called seigniorage. Is that what you mean?[John] Yeah, exactly. But that is not debt-money. It has nothing to do with this business of credit.
That’s right.[John] It seems to me that’s the difference between money as money and money as credit.
It’s the difference between coinage and credit. But suppose you have what MMT suggests, a trillion dollar platinum coin. We’ll say that’s a trillion dollars and we’ll hold that in our reserves to fund government spending. I mean how are you going to treat that? You can call it credit, you can call it revenue, you can call it whatever you want. Meanwhile, the government gets to spend a trillion dollars out of this trillion dollar coin.[John] Right, but that’s not of course how money is created in the current system in terms of bank money. It’s created very differently.
I just gave you an extreme, to give you an idea of the terminological problems that we have.[John] Right, so these are two different systems of money creation. One money is credit and one money is not credit namely as seigniorage, but essentially a government revenue by what they create.
It can be coinage, and electronic or paper credit, that’s true. What is important for what we’re talking about is that in a country like China, you have everything done electronically. So coinage plays little role. I just got back from Hong Kong and Macau, and I didn’t spend a penny of cash.[John] [laughter] Sounds like a bargain. But what I’m getting at is, for instance, my understanding was that the Bank of England created both its pound notes as well as its coins and that was a source of seigniorage…
Yes[John] … and so with the essentially government-owned bank creating money in this way, that was money created not as debt money but as money.
That’s right, in the sense that the government did not issue money that it borrowed from bond buyers at interest..[John] This is different from creating money as credit. So this distinction seems important to me, but not to you.
Okay. It is important intellectually. Quantitatively, it’s not that important anymore. I want a quantitative importance.[John] You’re right. But that could be changed. It used to be, in the case of the Bank of England that a significant fraction of their money that was being created as bills. This was a long time ago, back in the 1930’s or whatnot. What they saw is that the banks were outstripping their creation of money by their own system. So these two systems were in competition. So quantitatively, you’re right – coins don’t amount to much now. But it doesn’t have to be that way.
I just don’t see a coinage future. I think it will be an electronic and paper credit money balance-sheet future.[John] But the model that you use for thinking about digital money can fall into either one.
I’m not in favour of digital money at all. I know it sounded like that. I’m not into cryptocurrency. That’s something I don’t even discuss. I see your point, but it’s not what I focus on.[John] It’s important for me, but not for you. Okay, fine. [Edgar] Look at money from a legal point of view, then I see two different types of money. One is contractual money, and that’s the kind of money that dominates the world now. Contractual money is created out of contract, so you need two or more parties that have a contract, and this can be monetized. So that’s contractual money and that is the money system that dominates finance. But the other kind of money (that I am after) that does not come out of contract, but comes out of sovereign will. So as put in the NEED Act, it’s an expression of sovereign will. This means it’s a unilateral act of the sovereign, not directed at anyone, just to create something that you can use to redeem debt, to pay off debt. It’s like, let’s go to Athens in the classical period, and there, the Athenians could get silver coins by participating in society and then pay off debts with that. And this is not contractual money, this is not credit, but this is what Virginia called the “asset money.” In a legal sense, it’s just money that comes into existence by a legitimate unilateral act of the sovereign. This is how I look at it.
That would be like the trillion dollar platinum coin.[Edgar] Yes, but you do not put it in a safe and then construct contractual money on top of it. But [instead] you bring that into circulation. You bring the “debt-free money,” the “not contractual money”, the “sovereign money” I call that into circulation.
Once you circulate it, there has to be a counter-party.[Edgar] No, you can have it in your pocket and only have it in your pocket. There’s no counter party.
The government doesn’t have a pocket. The government has people. I guess the President could carry a trillion dollar coin in his pocket, but I don’t know what he’d do with it.[Edgar] In a digital system, you can keep track of the digital coins in circulation, so you don’t need to have this relation in a creditor-debtor relationship. You can just have it in the control of a system relationship.
Any money the government spends, there has to be a record of. Otherwise, you’re going to have fraud.[Edgar] Well, yes, but you didn’t want to mention Bitcoin. Bitcoin is a debt-free thing but it’s still transparent.
Let’s not discuss it. This is not about Bitcoin, this has nothing to do with money or credit. It’s nonsense to say that there’s no balance-sheet relationship there. The Bitcoin bank owes its depositors bitcoins. I’m not going to discuss it, because it has nothing to do with the topic of this interview.[Edgar] It doesn’t have to do anything with credit, but people see it as money.
I’m not going to discuss it.[Govert] I just have a little request to Dr. Hudson. You’re on the advisory council of the newly created monetary reform organization [called] “Our Money”. Spencer Veale is one of the major promoters there in the organization. I have discussions with him and he seems to be very down whenever I bring up the 1930 Chicago Plan. He basically thinks that it’s passé, it’s done, should not be discussed. He even threatens me to throw me off his little platform to discuss, because he thinks that it’s only government that can create debt-free money already. That is the focus of the “Our Money” organization seemingly. But there is no incorporation of anything that Zarlenga was promoting or the 1930 Chicago Plan was promoting, even to the tune that it’s bad. In the new year, I’ll be talking with Spencer again, but as you’re on the advisory council, my request is for them to re-think the positive parts of the Chicago Plan and what Zarlenga and the NEED Act have been promoting.
Well, I sympathize with the philosophy behind the Chicago Plan. But I don’t think it’s going to be implemented politically. There are a lot of ideas I like (including the debt cancellation and wiping out the creditors) that I don’t think are very politically realistic right now. So, the Chicago Plan is worth discussing as a theoretical model and that’s why I worked with Stephen Zarlenga so many years. But none of us really expected it to take off. Dennis Kucinich did what he could, because he thought it was the right thing to do. But the odds are stacked against us.[Govert] That’s only a question of political feasibility then.
Yes. I patiently answered all your questions about it as an intellectual exercise, because I was asked how the Chicago Plan and the Need act would work, not as an advocate.[GOVERT] To underplay the NEED Act or the Chicago Plan or anything like that. Because they are really promoting still the concept that we are in favour with; that is, the issuing of debt-free money by the government.
I don’t like the word “debt-free money”. I can guarantee you that I have never advocated for “debt-free money” because it is impossible. If you know accounting and have taken an accounting course, then you’re not going to get pulled into that trap of using a bad vocabulary. Every debt has the other side of a balance sheet. You have to look at all of this stuff in terms of balance sheets.
It’s been a year since I spoke to Spencer.[Govert] I have the website in front of me, and you, and Dr. [Stephanie] Kelton and a lot of other, Rowan Gray, are on that…. I don’t know if you know you’re on that advisory board.
I have a vague memory of saying yes to Spencer. I know that Ellen Brown just put me on her board. There are too many boards that have wanted to put me on.[Govert] I could ask you to be on the advisory council of, if we set that up for the Alliance for Just Money, here in the United States.
Just Money?[Govert] The Alliance for Just Money
Just Money sounds good. I’m for justice. But I don’t know what Just Money means in practice.[Mark] It’s 4:06. Bo, did you have any closing remarks. [Bo-Young Lim, Canada] Yes, I just wanted to thank Dr. Hudson once more. But I just had a final request. On this call are activists changing the monetary system. I’m wondering if you had any words of advice or anything you’d like to share with this particular crowd of folks?
Well, I think you should transcribe it in addition to posting the spoken interview, If people can read it, there can be back and forth emails about it because we’ve summarized everything very quickly.[Bo-Young] Yes, it will be transcribed.
Fine. That’s the best thing. All you can do is keep discussing it, and involve as many people who actually have experience in the banking or political field as possible so you get over vocabulary problems. That’s why I wrote “J is for Junk Economics”. Vocabulary is very important in how we perceive reality and I think a lot of the arguments are about vocabulary. Much confusion can be fixed by making balance sheets of what you are trying to describe.[Mark] Great discussion everybody!
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