Correcting Michael Hudson

Economist Michael Hudson has posted an article that warrants some translation.

Hudson also lapses into severe error, which I shall correct.

Hudson correctly notes that orthodox economics (the kind taught in today’s schools and textbooks) pretend that (private) debt does not exist. For example, when textbooks discuss the supply and demand of goods and services, textbooks pretend that (private) debt is irrelevant, when in reality, (private) debt is crucial at all times. This omission is intentional, and is part of today’s climate of rampant neoliberalism.

By contrast, classical economists (e.g. Adam Smith) were fully aware of the catastrophe of (private) debt, although today’s textbooks omit that part of Smith.

Unfortunately Hudson fails to clarify the difference between private debt and public debt, thereby making his readers falsely think that the two are the same thing.

Private debt includes mortgages, credit card debt, student loan debt, car loans. “payday loans,” and so on. These have reduced most people to debt slaves, and are crippling the U.S. economy. When Hudson speaks of “debt,” he means private debt, although he fails to clarify this.

Meanwhile public debt (the so-called “national debt”) is not a burden on anyone. It consists of money that investors deposit in Fed savings accounts when investors purchase T-securities. These deposits have no bearing on the U.S. government’s ability to create money out of thin air, and they have little or no effect on the economy.

The public debt is trivial, whereas private debt is catastrophic. Neoliberals pretend that the reverse is the case. Neoliberals want you to think the public debt is a disaster, and that private debt is trivial. Are you crippled by lifelong student loan debt? Quit whining about it, since the public debt is “much worse.” Each of us supposedly “owes” $500k on the “national debt.”

It’s all lies. The “national debt crisis” consists of private debt, not public debt. Neoliberals want you to think the reverse.

As you read further, always remember the distinction between public and private debt. Hudson  fails to differentiate between the two.

By the way, if a city, county, or state sells bonds, they incur private debt, since the money to buy bonds comes from private sources (e.g. Wall Street) and not from the U.S. federal government.

The U.S. government does not issue loans. It does not indebt. The U.S. government creates dollars out of thin air, and spends them into existence. The entities that create loans are private banks.

Could the public debt ever become a problem? Not for the USA, since the U.S. government creates dollars out of thin air, and since U.S. dollars are accepted worldwide.

However public debt can become a problem for nations whose currencies are not accepted outside their borders, and in nations that have racked up debt in foreign currency. Greece, for example, has a huge public debt problem, since Greece cannot create euros out of thin air. Since Greece has a huge trade deficit, Greece must borrow euros in order to buy imports. The U.S. government borrows from no one.

Neoliberals and the corporate media outlets claim that Venezuela has a national debt problem because of socialism. Nonsense. The Venezuelan government creates as many bolivares as it likes out of thin air. Venezuela’s national debt problem is strictly in foreign currency, which Venezuela must borrow in order to buy imports, since Venezuela is not self-sufficient. (If Venezuela was self-sufficient, then the Empire would consider Venezuela to be a “threat,” and Venezuela would have been bombed to rubble years ago.)

Let’s move on to Hudson’s article…

Neoliberal economics is a pretend view of the world. Its glib mathiness is a gloss for its unscientific “don’t worry about debt” message. The refusal to recognize that debt matters is at the heart of U.S., British and southern European inability to achieve economic recovery.

Hudson says that neoliberal economics pretends that debt doesn’t matter. And yet, we constantly hear neoliberals scream about the “national debt crisis.” What gives? Neoliberals mean the public debt, which is trivia. Hudson means private debt, which is disastrous.

Incidentally Hudson has a poor understanding of monetary sovereignty, and the role of government money creation. More about this below.

Mainstream models are unable to forecast or explain a depression. That is because depressions are essentially financial in character. The business cycle itself is a financial cycle – that is, a cycle of the buildup and collapse of debt.

Mainstream models are unable to forecast or explain a depression because they [1] pretend that private debt does not exist, and [2] pretend that government spending does not exist.

Below, I shall insert the word private for clarification…

The mathematics of compound interest cause the volume of private debt to exceed the rate of GDP growth, thereby diverting more and more income to the financial sector as debt service.

The growth of private debt cripples society, as more and more human energy is siphoned off by creditors, and is not used to buy and sell goods and services. With the growth of private debt, everyone and everything exists to serve the bankers.

If private debt grows faster than GDP, the debt/GDP ratio will rise. This stifles markets, and hence employment. Wages fall as a share of GDP.

NOTE NOTE NOTE: When mainstream economists refer to “debt-to-GDP ratio,” they mean the public debt-to-GDP, which is meaningless for nations like the USA. Economists do not mean private debt-to-GDP, which is extremely important, and which mainstream economists pretend does not exist.

Mainstream models ignore the overgrowth of private debt, as if the economy operates on a barter basis. Steve Keen calls this “the barter illusion.”

Hudson then discusses the lie of Paul Krugman, which I shall ignore, since Krugman is a worm.

Economies can prolong a private debt-financed boom and delay a crash by providing more and more credit. This makes the ensuing crash worse, more long-lasting, and more difficult to extricate. For this, Keen blames Margaret Thatcher and Alan Greenspan as, in effect, bank lobbyists. But behind them is the whole edifice of neoliberal economic brainwashing.

Crashes and depressions can be eased via increased government spending. However politicians want to reduce government spending (on things that help everyday people) in order to maintain mass slavery to the bankers.

Keep in mind that banks create credit (i.e. loans) out of thin air, just as the U.S. government creates dollars out of thin air. Financial bubbles consist of banks creating more and more credit out of thin air until the debt cannot be paid, at which point the bubble pops. This is how the “business cycle” operates. When an unmanageable debt load causes the “business cycle” to crash, the damage can be eased via government “counter-cyclical” spending. But neoliberals and their puppet politicians don’t want government spending. They want to keep us enslaved, even if it destroys the real economy.

Steve Keen shows how stable UK private debt/GDP was for a century, until Margaret Thatcher deranged the UK economy. Private debt soared, and mainstream economists applauded the boom. (Steve Keen suggests that instead of referring to neoliberal “reforms,” we call them neoliberal “deforms.”) Mass privatization forced the population deeply into private debt to afford their basic needs. The financial City of London ended up the big winners, while industry and labor have suffered a private debt squeeze.

Neoliberal brainwashing is so deep that even people who call themselves “anti-neoliberal” often attack Keynesianism, which is the antithesis of neoliberalism.

Steve Keen’s model shows that a long buildup of private debt creates the appearance of prosperity until the crash comes. And when the crash comes, voters blame the party in power, not the earlier promoters of nationwide private debt peonage.

Everyone is happy as long as the bubble is inflating. Then Wall Street insiders bet that the bubble will pop, and they make it pop. In this way they make money on the inflation and on the deflation, while the rest of us sink into a depression.

By 2008, the financial bubble was due to burst sooner or later. Therefore top-ranked insiders on Wall Street and in the US Treasury intentionally caused the financial bubble to burst by allowing Lehman Brothers to collapse. They had bet that the bubble would burst, and then they made it burst so they could collect a fortune. 

The needed escape from the private debt deflation is a private debt write-down.

Coupled with a reversal of gratuitous austerity via a massive increase in U.S. government spending.

And now Hudson screws up…

The problem is that the public is brainwashed to imagine that it is the banks that need saving, not the indebted economy. Keen proposes a “Modern Debt Jubilee” that is essentially a swap of equity for debt. The intellectual pedigree for this policy to keep debt within the ability to pay was laid two centuries ago by Saint-Simon in France. His solution was for banks to take an equity position in their clients, so that payments to backers could rise or fall in keeping with the fortunes of the enterprise. Keen urges that this become the basis for future banking. 

NONSENSE. The only solution for the endless cycle of credit bubbles and crashes is to make all banks publicly owned. Banks are an essential public service, like police, fire departments, utilities, schools, prisons, and the military. No essential public service should ever be privately owned.  

As a transition from today’s debt stagnation, Steve Keen suggests that the central banks create a lump sum to put into everyone’s account. Debtors would be required to use their gift to pay down the debt. Non-debtors would keep the transfer payment – so as not to let demagogic political opponents accuse this plan of rewarding the profligate.

MORE NONSENSE. Why give out money to pay the bankers? Why not break up the banks and make them all public? And please let’s dump these meaningless bullshit terms like “transfer payments.”

If this solution is not taken, then most people’s wages will continue to be siphoned off to pay the bankers. The circular flow between producers and consumers will shrink – being siphoned off by debt service and by government taxes to bail out bankers instead of their victims.

Federal taxes do not pay for bank bailouts, or for anything else. The U.S. federal government creates its spending money out of thin air. I have written to Hudson, explaining this, but at age 79 he is too old to lean anything new.

Debt relief should be what today’s politics is all about. It should be the politics of the future. But that requires an Economics of the Future – that is, Reality Economics.

It’s coming sooner or later. The neoliberal Empire cannot withstand the endless growth of the neoliberal debt cancer. Extinction is only a matter of time.

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4 Responses to Correcting Michael Hudson

  1. Simple questions.
    1. Why must “Our government” pay interest on $5 trillion to China and Japan?
    QUOTE, “The U.S. government borrows from no one.”

    “NONSENSE. The only solution for the endless cycle of credit bubbles and crashes is to make all banks publicly owned. Banks are an essential public service, like police, fire departments, utilities, schools, prisons, and the military. No essential public service should ever be privately owned.
    2. IF all banks were “Public Banks” who would issue the “thin air” money that “Our government” uses to spend?

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    • Thanks for your questions.

      Q. Why must “our government” pay interest on $5 trillion to China and Japan?

      A. China and Japan have money on deposit in Fed savings accounts, where it “earns” interest. The Fed creates the interest money out of thin air when China’s and Japan’s T-securities mature.

      Buying a T-security is exactly like buying a CD (certificate of deposit) at a regular bank.

      Interest on T-securities has no effect on the U.S. government’s ability to create and spend money for regular federal operations. The U.S. government creates its spending money out of thin air, and does not borrow it from anyone.

      Q. If all banks were “public banks,” who would issue the “thin air” money that “our government” uses to spend?

      A. The U.S. federal government would continue to create its spending money out of thin air, just as it does now. Meanwhile banks could create loan money out of thin air, just as they do now, but there would be less bank fraud and less robbery of depositors if banks were publicly owned.

      Liked by 1 person

  2. L Kinder says:

    [You seem to be expert, so I’ll copy the following to https://forum.freestateproject.org/index.php?topic=28418.msg300115#msg300115 . My questions and comments are in brackets.]

    Crashes and depressions can be eased via increased government spending. However politicians want to reduce government spending (on things that help everyday people) in order to maintain mass slavery to the bankers.

    Keep in mind that banks create credit (i.e. loans) out of thin air, just as the U.S. government creates dollars out of thin air. Financial bubbles consist of banks creating more and more credit out of thin air until the debt cannot be paid, at which point the bubble pops. This is how the “business cycle” operates. When an unmanageable debt load causes the “business cycle” to crash, the damage can be eased via government “counter-cyclical” spending. But neoliberals and their puppet politicians don’t want government spending. They want to keep us enslaved, even if it destroys the real economy. …

    (Quote) Steve Keen’s model shows that a long buildup of {private} debt creates the appearance of prosperity until the crash comes. And when the crash comes, voters blame the party in power, not the earlier promoters of nationwide {private} debt peonage. (End Quote)

    Everyone is happy as long as the bubble is inflating [What bubble? Do mean the increasing private debt? Why would borrowers be happy that their debt is increasing?]. Then Wall Street insiders bet that the bubble will pop, and they make it pop. In this way they make money on the inflation and on the deflation [How about explaining that too, how they make money both ways?], while the rest of us sink into a depression.

    By 2008, the financial bubble was due to burst sooner or later. Therefore top-ranked insiders on Wall Street and in the US Treasury intentionally caused the financial bubble to burst by allowing Lehman Brothers to collapse. They had bet that the bubble would burst, and then they made it burst so they could collect a fortune. [It’s not clear what a bubble is and what bursting a bubble is. Can you clarify?]

    “The needed escape from the private debt deflation is a private debt write-down.”

    Coupled with a reversal of gratuitous austerity via a massive increase in U.S. government spending.

    And now Hudson screws up… …
    {He spouts} NONSENSE. The only solution for the endless cycle of credit bubbles and crashes is to make all banks publicly owned. Banks are an essential public service, like police, fire departments, utilities, schools, prisons, and the military. No essential public service should ever be privately owned. …

    {Hudson spouts} MORE NONSENSE. Why give out money to pay the bankers? Why not break up the banks and make them all public? …

    It’s coming sooner or later. The neoliberal Empire cannot withstand the endless growth of the neoliberal debt cancer. Extinction is only a matter of time.
    [I guess you’re talking about private debt increasing as a cancer. What or who exactly will go extinct and how? Dave of X22 Report on Youtube says the big banks are ready to crash the economy & so is Trump, but Trump wants to start it up again on a sound footing, while the bankers want a sort of feudal system, I guess. Hudson predicts a slow “crash”. Ellen Brown said anyone can start a bank. So is part of the solution to have local small governments start banks, making the local residents the owners? What’s the solution to getting the military-industrial complex under the people’s control so they stop war-mongering?]

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    • @ L Kinder: Many thanks for your questions. Some answers…

      CLAIM: Everyone is happy as long as the bubble is inflating

      QUESTION: What bubble? Do mean the increasing private debt? Why would borrowers be happy that their debt is increasing?

      RESPONSE: During bubbles, people use debt as leverage. For example, people may take out a mortgage on a $300k house that they know they can never repay, but they hope to quickly sell the house at $330k, and thereby make a $30k profit, even after paying back their $300k mortgage. Now, using that $30k profit, they do the same thing with a larger house, and then a still larger house, hoping to continually increase their profits. This mainly happens during a bubble, when prices are rising. When the bubble pops, the game ends, and average players can lose everything. They had used debt (loans) as leverage, but now their debt is a ball and chain.

      Of course, Wall Street never loses, since Wall Street decides when the bubble shall pop. For example, Lehman Brothers was the fourth-largest investment bank in the USA (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch).When Lehman Brothers’ game went sour in 2008, its stock crashed, its clients fled, and its assets were devalued by credit rating agencies. Lehman Brothers filed for bankruptcy (the largest in U.S. history) but Wall Street and the U.S. government decided not to bail them out. Wall Street knew that the housing bubble was set to pip, so they placed bets that it would pop, and they made it pop by refusing to save Lehman Brothers. (However they gave trillions of dollars to AIG.)

      If you are not participating in a bubble of some kind, then debt is a burden for you. It is not leverage. For instance, student loan debt is a burden.

      I hope this answers a few more questions you had.

      CLAIM: The neoliberal Empire cannot withstand the endless growth of the neoliberal debt cancer. Extinction is only a matter of time.

      QUESTION: I guess you’re talking about private debt increasing as a cancer. What or who exactly will go extinct and how?

      RESPONSE: Yes, private debt. (By contrast, public debt is trivial for the USA.) What will go extinct is America as we know it. The USA will become a “third world” nation, and may break up into regional blocs. We will still have rich and poor, but most Americans’ lifestyles will be primitive and impoverished. The USA will be a shadow of what it once was.

      QUESTION: Dave of X22 Report on Youtube says the big banks are ready to crash the economy & so is Trump, but Trump wants to start it up again on a sound footing, while the bankers want a sort of feudal system, I guess.

      RESPONSE: This depends on what we mean by “economy.” The financial economy consists of rentiers and speculative markets. These are parasites on the real economy, which entails the production, sale, and purchase of goods and services. I don’t know which of the two economies “Dave” says the banks plan to crash. As for Trump, he is a neoliberal who doesn’t care about the economy. He just wants to give everything to his rich cronies so they will like him.

      QUESTION: Hudson predicts a slow “crash”. Ellen Brown said anyone can start a bank. So is part of the solution to have local small governments start banks, making the local residents the owners?

      RESPONSE: Yes. That would help a lot. Banks create loan money out of thin air. Such money, if lent at low interest, would stimulate local economies. Of course, the big banks bribe politicians to prevent this, since the big banks want to protect their monopolies.

      QUESTION: What’s the solution to getting the military-industrial complex under the people’s control so they stop war-mongering?

      REPONSE: That would require a profound change in the collective mind, so to speak. Most Americans are pathologically warlike. They cheer for “the team,” and they hate whoever they are told to hate. They pay to see movies that praise imperialistic war, and which portray the CIA as heroic. Even the “anti-war” types call foreign resistance members “militants and “terrorists.” They refer to aggressive imperialistic war as an “intervention,” and proxy wars as “civil wars.”

      Thanks for visiting and commenting.

      Like

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