Front Running

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MAX KEISER: Front Running: 2020 with me, Max Keiser, and Stacy Herbert. As we look ahead to all the excitement of the 2020 elections, every episode we dig deep into something new. This time we’re going to look at the wealth tax, Stacy.

STACY HERBERT: That’s right. We’re looking at all the economic policies being presented by the Democratic candidates. Many of them are very radical. Bernie Sanders, says, “Billionaires should not exist.” And to find out whether or not they should. We have guests with us. Dr. Michael Hudson, and Prof. Steve Keen. Steve, we’ll start with you first.

PROF STEVE KEEN: Well, I have a very complicated position on this because part of my research is into Minsky, what’s called the Financial Instability Hypothesis, that explains where the 2008 crisis came from. Out of that, part of what I discovered from the mathematical modeling idea was that there’s a simple relationship between an increase in level of private debt and a fall in the amount of money going to workers.

As you had a rising level of debt, which is what led to a crisis, that rising level of debt meant a rising amount of money going to the bankers. And rather than the capitalists being the ones who paid for it, in fact, it was the workers. There was a falling income going to the workers. Now look at the empirical data, that’s what’s happened as well. The rising level of private debt has meant more money going to bankers, less going to workers, and capitalists fitting in the middle.

MAX: How come this issue is so misunderstood by the Democrats? They seem to be financially illiterate, and this idea, do we need billionaires should be really rephrased as, “Where do billionaires come from?” In other words, how do you get billionaires? Right? And it seems like there’s a lot of area to examine in the banking system, in the central banking system where they seem to have engineered, if you will, using what in economics is called the Cantillon Effect, where the Central Bank prints billions, hundreds of billions, and somehow it never circulates in the economy and it goes to the same people’s pockets all the time. Where do billionaires come from? That’s the question.

STEVE KEEN: One way billionaires come from is getting too much private debt, through private debt bubble that shouldn’t have been allowed to happen in the first place. That’s the sort of billionaire I want to get rid of. And I agree with Bernie, completely on that front. The billionaires you’re talking about, we have economists, mainstream economists who run central banks who didn’t see the crisis coming, still can’t understand why it happened and the way of rescuing it has been to pump up asset values in the belief that they will get what they call the ‘wealth effect,’ which will lead to more consumption.

And the idea is make billionaires even wealthier by making shares more expensive and they’ll spend that money and stimulate the economy. Now, there’s a very good research paper by the strange little organization called the Federal Reserve, which shows there is no wealth effect from shares. You get very little benefit at all out of that. That’s been artificially created well, so those two I’d like to get rid of, but the entrepreneurial billionaires, I have a different feeling.

STACY: I know the two of you talk about debt and debt forgiveness all the time and there’s a notion of odious debt. Is there a notion, could you say of ‘odious wealth’ as well? If it’s being created artificially for a specific class, I mean, the data point up here that since 1989 the net worth of the top 1% in America went up $21 trillion, while the bottom 50% lost 900 billion in wealth. Is that because the bottom 50% are just dumb and they don’t work as hard and the top 1% are just uniquely smart and entrepreneurial and wealth creating? Or is it an odious wealth situation, Dr. Michael Hudson?

DR MICHAEL HUDSON: If there is such a thing as odious debt or bad debt, then there’s such a thing as odious wealth on the other balance sheet. The billionaires’ assets of the 1% are the debts of the 99%. And the question is, should America keep all of these debts on the books? If it keeps the debt on the books, the economy is going to shrink and shrink and shrink for the 99% and the only people who will be growing is the 1% of the creditors.

The issue isn’t it really should you tax billionaires? Should you just wipe out the overhead to get back to America’s ‘golden age,’ which was 1945 when the economy emerged from World War II, virtually debt free? Nobody owed anything. The result was a takeoff, a golden age. Everybody could buy a house, there was industry growing, but nobody including Donald Trump, who says, “Make America Great Again,” says, make America great again by wiping out the debt and starting off with a clean slate.

And that means wiping out this $4.9 trillion of money that is just held in cash, all this cash is somebody else’s debt and all of this debt is strangling the economy. And Steve and I are in agreement that the problem of wiping out the debt is, there’s all this wealth on the other side of the balance sheet. The good thing is that by canceling the debts you cancel out this huge amount of billionaires’ power to take over the government, to replace it and ultimately to become the government. And that’s what you call an ‘oligarchy,’ that you cannot have a democracy and at the same time have so many billionaires holding the rest of the economy in debt.

STACY: There was a time during the financial crisis of 2008 to 2009 when we had Occupy Wall Street, and there was a scene at the Occupy Wall Street in London where these bankers were actually crumbling up money and throwing it at the poor people protesting, essentially. Isn’t that $4.7 trillion just sitting in a bank account collecting 0% interest rate, almost the equivalent. It’s mocking the economy and all the people who are impoverished in this economy.

STEVE KEEN: If there’s money, money should circulate. Circulating money generates economic activity and if you have this money just locked in people’s bank accounts not being spent, that’s a major part of why the economy is in a relative slump.

MAX: Right, they say money is like manure. It should be spread around for it to work effectively.

STEVE KEEN: And what you had is the accumulation of this stuff rather than spreading it around. And that’s the great problem of a capitalist economy. It works best when there’s massive amounts of circulation. When people get wealthy, they lock it away and they hoard, and they hoard their spend lists, most rapidly you have a lower level of economic performance, so that wealth is correlated with low economic performance, not high economic performance.

MAX: Okay, so this is all very interesting in terms of the flow of money, et cetera. Going back to 2008 we had the emergence of the Holder Doctrine from Eric Holder, former Attorney General, who said that banks are strategic to the economy and, therefore, you couldn’t prosecute them. He established a new precedent that banks and the biggest bankers were above the law. It used to be simply ‘moral hazard.’ The Central Bank would say, “Well, if you keep bailing people out they’ll continue to act poorly.” Here they’ve institutionalized what, looking back now on the prosecution and investigation of JP Morgan, is obvious racketeering. They’ve made racketeering in the banking sector legal. Obviously, that’s going to create a concentration of wealth, if I can steal money with no repercussions whatsoever, I’m going to become a wealthy man.

STEVE KEEN: And that’s what’s happened. I mean, the date of 1989 is really indicative here because I’m talking about trends in a pure capitalist economy with no stuff ups by central bankers. But ’87 began the stuff, I suppose, central bankers with the ‘Greenspan put.’ And ever since then they’ve gone in there to rescue the banks whenever they start to fall over, to rescue the financial institutions when they stuff up, the classic, of course, being Long Term Capital Management.

All of this stuff has meant as well as the capitalist system driving inequality, which slows the economy down, the so-called managers, the central bankers in particular, Greenspan and his followers have accentuated the inequality and accentuated stagnation that comes out of that inequality. This wealth is giving us stagnation, not prosperity.

MICHAEL HUDSON: The problem is, what is a capitalist economy? Most people think that a capitalist economy is billionaires using their money to invest in factories and to employ people. But that’s an industrial capitalist economy. And what we have now is something different. We have a finance capitalist economy, and the idea of a finance capital isn’t to make money by employing workers to make more goods to sell at a profit, it’s to make money from money. It’s to make money by buying real estate, stocks and bonds, not factories.

You can make money fastest by closing down the factories, by outsourcing. You make money if you’re a finance capitalist by closing your American factory and moving to China. By taking all of your income and instead of reinvesting it in a factory, you use it for stock buybacks to bid up the price of your stock, or to pay out as dividends to push up the price of your stock.

MAX: How could it be so difficult for the Democrats to make the observation that when the monopolists and the monarchs, the neo-financial monarchs, are strangling an economy, a company or a country, let’s say in the case of Greece. They strangled Greece, they choked it out. As a result, they rewarded the financiers with a bailout, with more hundreds of billions.

Every time they strangle a company or a country to death, they get more capital, they don’t circulate the capital. Why can’t the Democrats, why can’t the opposition make that observation? Why can’t those who are leading the Democratic Party say, “Look, these guys are choking out these economies, these companies, this economy. Here’s how they do it, it’s a crime wave.” How come they don’t take them to court? Why do they pretend that it’s something other than that?

MICHAEL HUDSON: Because the Democratic Party is Wall Street. The Democratic Party is basically the neo-liberal Wall Street party that believes that if you give more money to the billionaires, they’ll spend it into the economy instead of doing what Steve Keen describes them as doing, spending it back into the financial market to keep inflating asset prices. Wealth today isn’t made by saving money, it’s not made by investing in factories, it’s made by buying stocks and bonds that the Federal Reserve inflates in price by this huge 4.6 trillion of quantitative easing that is all spent into the stocks and bonds, not into the real economy.

STACY: That’s why we’re filming here in Brooklyn. Across the bridge you see the financial center, $14 trillion gone into rescuing them, saving those banks. The millennials, the Generation Z, the next generation that’s going to have to pay all these debts that accumulated by these banksters, they live out here and this is the heart of where all these policies of a wealth tax, of Medicare for all, all these UBIs, all these sort of ideas are coming from out here.

MAX: Front Running is a double entendre for this show, because it’s the political front runners as well as what you just described, which is financial front running. The insiders know what the government’s going to do ahead of time with their bailouts and their money printing, and they front run. They get ahead of that trade and they print profits risklessly and then their wealth skyrockets. Then Ray Dalio, hedge fund manager will say, “Oh, the wealth and income gap is so big. Well, how am I going to save my family and friends from the torches.” I say, “Well, why don’t you turn in Jamie Dimon? Why don’t you turn in your fellow kleptocrats, put them in jail and help do something positive for society.”

MICHAEL HUDSON: Let me clarify something that Stacy said. You talked about the current generation having to pay off the depths of their predecessors. They’re not going to pay them off, these debts cannot be paid off. They can go bankrupt, they can starve, they can die sooner, but they cannot pay off the debts. Mathematically, there’s no way of these exponential growth in debts being paid off. In the end, every economy reaches a point where the debts cannot be paid and it is a choice: either it can wipe out the debts and grow again, or it can leave the debts in place and let it strangle the economy. That’s what the Democratic Party and the Republican Party stand for today.

MAX: And on that note that these debts will never, ever, ever, never be paid back. Don’t go away, much more coming on Front Running, stay right there.

=== BREAK ===

MAX: Welcome back to Front Running. Just learned from Dr. Michael Hudson that apparently the debts can never, ever, ever, ever be paid simply because mathematically it’s impossible, Stacy.

STACY: Yes, the debts have been rising exponentially and I think it’s in an interesting way, the context of Front Running is that we have the Boomer generation dying off and the Millennial generation is now a larger generation than the famous and the infamous boomer generation. It feels like they’re asserting themselves through these economic policies. It’s like, “Hey wait, we’re not suckers like Generation X. We’re not going to pay your debt, we’re not going to ride along in your stream of bad debts.” Is a tax something that should be considered or are you just saying wipe out those debts completely?

MICHAEL HUDSON: The only way to do it is to wipe out the debt. Rich people don’t pay taxes, only the poor people pay taxes. Rich people will declare all of this cash is really in Liberia or Panama, or the Cayman Islands and it’s not really in America at all, so it can’t be taxed. The only thing to do is to wipe out the debts, and by wiping out the debts you wipe out this excess wealth.

And does America really want an oligarchy? That’s the issue, do you want a group of billionaires to run your political parties, to control all of your medical care by saying it should be companies that we own, not the public. Do you want to have a group of billionaires saying, “We are the government,” not a democracy, or do you want democracy? I hope to put things in a broader perspective and in proportion. And that’s, the real proportion is a huge top heavy economy whose debt is burdening it down and crushing it. And if you look at Greece, is Greece America’s future? Is Latin America, America’s future? Are we going to end up as broke as these indebted countries?

MAX: On this idea that the rich paying taxes or not paying taxes, of course, the pushback on this is that the top billionaires will say, “Well, most of the taxes that are collected in the country we pay.” But we have to keep in mind that’s on reported income. Most of the income is not reported. For example, if they pay taxes on all income and not just unreported income, you’d have about three and a half trillion dollars in taxes collected last year and probably be closer to eight or nine trillion collected in taxes last year.

MICHAEL HUDSON: Amazing as it may seem, rich people don’t earn income. Billionaires don’t earn income. If you earn income, you pay on it. Billionaires make capital gains and they don’t have to pay taxes on these, especially if they’re offshore. If you look at other national income statistics for real estate, you find the entire real estate industry, all the real estate in America is paid just about zero income since 1945. As Donald Trump says, “I love depreciation.” They have so many loopholes that they have no reportable income. Taxes are not going to do it. You have to go right to the root of things. It’s assets and debts at the balance sheet. And balance sheets is what they should talk about.

STEVE KEEN: And that’s where we can be clever because taxation is the dumb way of trying to get the wealth back from the wealthy who’ve expropriated rather than earned it, as Michael’s been saying. But we’re talking about private debt by the way, let’s be very careful here. It’s the private debt that’s causes us inequality, it’s the private debt that’s stagnates the economy. The government debt as Modern Monetary Theory argues is something which is like… it’s the government’s capacity to create money is mirrored in the amount of debt that it creates.

The government debt is something which is controllable, it’s not the problem. Of course, all the attention of the Democratic Party and the Republicans is on the government debt. But we can use the government’s money creation capacity to give everybody, let’s say an equal amount of wealth. And what that would mean is you actually reduce the debt burden. You can do it in, rather than trying to take it off in terms of taxation, which they can always evade, you could use the government’s money creation capability to give everybody cash, which could be used to pay the debts down and consequently you’d reduce that debt, that wealth concentration.

MICHAEL HUDSON: I don’t want to pay the debt down. I don’t want to make our billionaires into trillionaires. I want to wipe out the debts and wipe out all of this massive capital that is stifling the economy.

STEVE KEEN: That’s the reason why-

MICHAEL HUDSON: It’s assets that are as bad as the debt.

STEVE KEEN: That’s why I say you can do it using what I call a ‘modern debt jubilee,’ which is you use the state’s capacity to create the money you get on a per capita basis, pay the debts down, and that reduces the power of the oligarchy.

STACY: Just for the tax rates just so you understand, last year, 2018 was the first year in US history where billionaires paid a lower tax rate than the average worker. The average worker in America paid 28% state, federal and local tax, and the billionaires paid 23%.

MICHAEL HUDSON: You’re not counting the wage withholding of 16%.

STACY: Exactly.

MICHAEL HUDSON: Only people who earn up to about 110,000 have to pay it. If you earn more than that, you don’t have to pay any wage withholding for social security. Only the lower income people have to pay for social security and medical insurance. It’s even worse than…

STACY: It’s even worse. And speaking of worse, Max, had mentioned Ray Dalio. Ray Dalio, is of course, part of this financialised world. He’s the biggest hedge fund manager in the world. Bridgewater Capital over in Connecticut, not too far from here. He has been writing these series of blog posts over the past few weeks, few months. And I would say that he seems very, very concerned that the pitchforks and the guillotines are going to come out for the billionaires.

And he himself seems to suggest it’s a lot to do with the Federal Reserve giving people like me free money. I get to borrow at less than 0%, nobody else can. That money being given over and over and over and we see around of all this quantitative easing again, it doesn’t go into the economy, it just goes into financiers-

STEVE KEEN: Into the financiers. I’m going to steal one of Michael’s phrases here. And Michael said Greenspan’s helicopter drops the money over Wall Street, not Main Street. It’s the old parasite saying, “If you don’t feed me, I’m going to die.” Well, it’s the host that’s in trouble, not the parasite, right?

MAX: Right. Ray Dalio, is like something out of a Willy Wonka story. He’s trapped in a chocolate factory eating himself to death on free chocolates and this free money-

I think he complains on interest and that-

And complaining about it. And going, “Oh my God, stop forcing this chocolate down my throat, I can’t stand it anymore.” But they don’t attack the origins of the problem, it’s that they are soaking up trillions in free cash and in some cases they get paid to borrow money. I mean, imagine this, somebody down the street here is going to be charged two to 3000% a year annualized rate for a payday loan. Ray Dalio, he shows up to get a loan and they pay him to borrow the money. Anyone who is, “My God, how did I get so rich and well, will I be burned to death?” Well, if there’s justice, yeah.

MICHAEL HUDSON: That’s because he makes loans to the payday loan maker.

MAX: Exactly. There’s a 360 degree of fraud being committed and perpetuated by, again, the root source being the need to keep the central banks happy by allowing them to print in what I call, interest rate apartheid. They simply give money to their friends and everyone else gets choked out.

MICHAEL HUDSON: To paraphrase President Nixon, when the billionaires do it, it’s not fraud.

STACY: Exactly. But you know, Max, brings up a good point there, is he’s talking about interest rate apartheid and the Central Bank policy. The central bankers are not elected, they don’t serve the people. We elect a government to serve us, to represent us, but fiscal policy is not even a thing in America anymore. We don’t have fiscal policy, we only have monetary policy. The monetary policy can only… they can only give money to Wall Street. How do you tell these young voters looking for radical policies and the most they can come up with right now is a wealth tax, what do they do, Steve?

STEVE KEEN: Well, I’m actually against this that we have a quantitative easing for Wall Street. Let’s have quantitative easing for the people. Nobody paid a tax for quantitative easing. Every year the Federal Reserve is buying a $960 billion worth of bonds off the financial sector. Where did the money come from? Double-entry bookkeeping. They simply said, “We’re going to put $1 trillion in your bank accounts, you give us $1 trillion worth of this paper, your bonds.”

And what that meant was the financial sector had a $1 trillion worth of cash. What did they do with it? They buy shares. What happened to the share prices? They go up. People who own the shares get wealthier just because of that accounting trick by the Federal Reserve. They could do exactly the same thing to inject or put money into people’s bank accounts, not into Wall Street. Anybody who gets the money and he’s got debt, the debt is paid down. We could return back to the golden age of capitalism when private debt was about 40% of GDP. This is the period Michael’s talking about from ’45 to about ’65. Low levels of debt, it didn’t matter that you had credit in demand. It didn’t accumulate too much. Plenty of stimulus, plenty of real economy activity, that’s what we needed to get back to.

STACY: In your world here of wiping out the debts or having ‘quantitative easing for the people’ or stuff like that, what happens to a Steve Jobs or Jeff Bezos or the entrepreneurs, or Elon Musk?

STEVE KEEN: They actually might get some more cash. I mean, whenever you attack financial capital, people defend it by talking about the wonderful industrial capitalists.


STEVE KEEN: Now, I am a fanboy of Elon Musk, and I’m happy to admit that. I think he’s done some incredible engineering and has some incredibly gifted ideas. That’s the sort of stuff that society needs. He had to struggle, he managed to get cash out of PayPal, but he was struggling to get financial provisions on many, many occasions. And it’s because financial capital has taken over.

And as another one of the characters I like, an old guy called Karl Marx, once said, he called the financial sector, “The roving cavaliers of credit,” and said, “every now and then the systems let this bunch take over the real economy and they know nothing about the real economy, and should have nothing to do with it.” When finance dominates, capitalism suffers. We need to get back to the rise in capitalism, the entrepreneurial stuff is dominant and that means weakening financial capital.

STACY: That’s a clever sort of magician’s trick. It’s like they confuse the population’s mind of saying, “Oh, Jamie Dimon, and Ray Dalio, these guys are capitalists. These guys are…” But it’s industrial capitalists that are actually always served up. They never mention Jamie Dimon, they’ll mention the Elon Musks. If you tax the wealthy, you’re going to lose the Elon Musks.

STEVE KEEN: Yeah, the shell and pea trick. I mean, we want to get the people who do the entrepreneurial stuff and take the genuine risks and innovate. They’re the ones that we want. It’s not them getting the money in the system. Now it’s the Ray Dalios, well, Dalio is not so bad, but it’s the Jamie Dimons and so on, the whole financial sector. They’re getting the money and we stultify, we stagnate.

They don’t come up with new ideas, they don’t come up with new concepts we all benefit from. They actually stop at getting to the industrial capitalist. We want to give back to the world where the industrial capitalist get the money and the finance sector are the lubricant to the system, they’re not the dominant, the drivers of the system.

MAX: Well, and by that measure the least productive capitalist in society would be Warren Buffet because he does absolutely nothing. He just collects money from the Fed and he buys strategic positions in insurance and banks.

STEVE KEEN: Well, he’s a classic case of somebody who knew that mainstream economic theory was nonsense. Efficient markets hypothesis . . . and said, “if enough people . . . if that’s what you believe, I’m going to become a billionaire.” And he was right, okay? So he’s shown that the face-

MAX: But he’s never invented anything, he’s never produced anything. He simply hoards cash like an old lady in the attic would hoard old telephone books.

MICHAEL HUDSON: He knows that it can’t go on forever. And if you know it can’t go on forever, what do you do? You play for the short run, and that’s the real problem of finance capital. Finance capital, the long run is the short run for the finance capital and it’s every three months. For industrial capital, you actually have to invest something for the longer term, that’s where the risk is. Finance capital doesn’t take risk, it only wants sure things, when you bought the politicians.

STACY: Final point, is the wealth tax going to happen?

MICHAEL HUDSON: It wouldn’t make any difference if it did. Yes it’ll probably be passed and may bring in $10, maybe $15 a year.

STEVE KEEN: Same attitude. The rich are going to evade taxes. We have to be cleverer than that, and we can be clever by using the mechanism that quantitative easing that the Fed use to actually inflate asset process to distribute wealth instead, and reduce the disparity. We can’t do it by taxation.

MAX: What I learned is, don’t look so much at the income statement, look at the balance sheet.

STEVE KEEN: That’s very much-


MAX: That’s the key-

STEVE KEEN: Definitely-

MICHAEL HUDSON: The balance sheet.

MAX KEISER: Thanks so much fellas, and that’s going to do it for this edition of Front Running 2020, with me, Max Keiser and Stacy Herbert. Until next time, bye y’all.