Michael Hudson explains what’s really going on

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Michael Hudson is an economist whose books make clear how the United States exercises financial power over the whole world, and escapes the consequences of government budget deficits and balance of trade deficits.  In his most recent book, The Destiny of Civilization, he explains how the U.S. free ride may be coming to an end.

He laid all this out in the podcasts above.  He said the Biden administration is speeding up the inevitable U.S. decline.   Here’s an excerpt from the transcript: 

My job at Chase was to analyse basically the balance of payments of Third World countries and then of the oil industry.  I had to develop an accounting format to find how much does the oil industry actually makes in the rest of the world.  I had to calculate natural-resource rent, and how large it was.  I did that from 1964 till October 1967.  

Then I had to quit to finish my dissertation to get the PhD.  And then I developed the system of balance-of-payments analysis that actually was the way it had been calculated before GDP analysis.  I went to work for Arthur Andersen and spent a year calculating the whole U.S. balance of payments.  

That’s where I found that it was all military in character.  And I began to write in popular magazines like Ramparts, warning that America’s foreign wars were forcing it to run out of gold. That was the price that America was paying for its military spending abroad.

I realised as soon as it went off gold in 1971 that America now had a cost-free means of military spending.  Suppose you were to go to the grocery store and just pay in IOUs.  You could just keep spending if you could convince the owner, the grocer to use the IOU to pay the farmers and the dairy people for their products.  What if everybody else used these IOUs as money?  You would continue to get your groceries for free.

That’s how the United States economy works under the dollar standard, at least until the present.  This is what led China, Russia, Iran and other countries to say that they don’t want to keep giving America a free ride.  

These dollarized IOUs are being used to surround them with military bases, to overthrow them and to threaten to bomb them if they don’t do what American diplomats tell them to do.

Les Leopold on runaway inequality

I grew up and spent my early working years in the golden age of capitalism, which was from 1945 to 1976.  Almost anybody—as least, any white American man—who was willing to work could get a decent job sufficient to support a family.

Then a lot of things turned bad as once.  Worker pay no longer kept pace with productivity, but the pay of CEOs and wealthy investors grew much faster.   Manufacturing declined and high finance expanded.  Hourly wages declined and debt increased.  What went wrong?

I recently finished reading a book, RUNAWAY INEQUALITY by Les Leopold (recommended by my e-mail pen pal Bill Harvey) that explains what happened as well as anything I’ve come across.

He blames America’s current woes on the adoption of what he calls the Better Business Climate model of economic policy.

This model is based on the argument that the key to economic prosperity is economic growth, that economic growth depends on investment, and that investment depends on business profitability, and that the way to increase business profitability is lower taxes, lower social spending and fewer regulations.

We used to call this Reaganomics.  Now we call it neoliberalism.   Many people thought it was a plausible response to the economic stagnation and high inflation of the late 1970s.  I myself thought it was worth a try (more fool I).  I wouldn’t have objected to making rich people richer if everybody else had benefitted in the long run.

But this isn’t how things worked out.  Instead:

• Wage increases stopped keeping pace with productivity.
• The CEO-worker wage gap took off.
• The financial sector grew at the expense of manufacturing.
• Wall Street profits skyrocketed.
• The income gap between the super-rich and the rest of us widened.
• Corporate debt, consumer debt and government debt rose.

What went wrong?

‘Debt that can’t be paid, won’t be’

The world’s peoples and governments, including us Americans, collectively owe more money than ever can be repaid.  How we got to this point and what it means are the topics of a book I finished reading last week, KILLING THE HOST: How Financial Parasites and Debt Bondage Destroy the Global Economy by Michael Hudson.

Classical economists distinguished between earned and unearned income, between hard-working laborers and merchants and what they called “rentiers,” people who “got rich in their sleep” by collecting income from land or financial assets.

They condemned what they called “rent-seeking,” which was the attempt to set up as toll-keeper for some part of the economy.

A great deal of 18th and 19th century economic thought was devoted to how to shift income away from landlords, monopolists and holders of financial assets, and into the hands of those whose efforts created real wealth.

In his book, economist Michael Hudson told how this distinction came to be forgotten in the 20th century, and what followed.

Operations of finance, insurance and real estate sector of the economy came to be regarded as equivalent to the production of actual goods and services, and the bidding up of prices of financial assets came to be regarded as equivalent to increase in real wealth.

All income came to be regarded as “earned” income.  The result is that more and more of the economy consists of the transfer of wealth from the real economy to the financial sector, but our economic blinkers keep us from seeing it.

There are many ways to increase financial wealth without increasing real wealth.  Corporations that use their profits to buy back stock increase the stock price and enrich shareholders, for example.  But unlike investment in machinery, research and development or new products, stock buybacks do not make the corporation itself more valuable or more viable.  Rather they drain the institution of needed resources.

The passing scene – October 5, 2015

Parasites in the Body Economic: the Disasters of Neoliberalism, an interview of Michael Hudson, author of Kllling the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy, on Counterpunch Radio.  Highly recommended.

More Leisure, Less Capitalism, Thanks to Tech, an interview of Jacobin contributing editor Peter Frase for Truthout.  (Hat tip to Bill Harvey)

The 2016 Stump Speeches: Bernie’s Epistle to the Falwellites by Doug Muder for The Weekly Sift.

How Steve Jobs Fleeced Carly Fiorina by Steven Levy for BackChannel.  (Hat tip to my expatriate e-mail pen pal Jack)

The model minority is losing patience by The Economist.  (Hat tip to Mike the Mad Biologist)

The Second Amendment Is a Gun Control Amendment by Adam Gopnik for The New Yorker.  (Hat tip to Bill Elwell)

Reviving Shinto: Prime Minister Abe tends a special place in Japan’s soul by Michael Holtz for The Christian Science Monitor.  (Hat tip to Jack)

AP Investigation: Are slaves catching the fish you buy? by Robin M. McDowell, Margie Mason and Martha Mendoza.  (Hat tip to Jack)

The real U.S. strategic rivalry with China

Don’t look back. Something might be gaining on you.
==Sachel Paige

The big issue that we Americans have with China is not who controls the Spratly Islands in the South China Sea.

It is the shifting of U.S. manufacturing jobs to China and the U.S. trade deficit with China.

The United States probably does have legitimate economic grievances against China.  Some American economists, for example, think the Chinese government keeps the exchange rate for its currency artificially low in order to make its exports cheaper in world markets.

But the main problems we Americans have with China are due to things we have done to ourselves.

The Chinese never forced U.S.-based companies to give up domestic manufacturing capability. It never forced us Americans to neglect our physical infrastructure—our Internet service, our roads and bridges, our dams and levees. It never forced us to neglect our human resources—our higher education, our industrial research. It never forced our financial elite to invest in debt rather than invest in production.

Trying to substitute a military rivalry for an economic rivalry may or may not hurt China. It will not do us Americans any benefit because our problems do not originate in China.  They originate at home.

China has its own problems—labor unrest, ethnic conflict, corruption, air pollution, suppression of dissent.  Whether any of these problems are potentially fatal, I do not know.   What I do know is that it would be foolish for us Americans to count on China self-destructing.

The limits of an economy based on debt

Source: Charles Hugh Smith.

Since the 1970s, wages have failed to keep pace with productivity, and Americans have maintained their material standard of living by borrowing.   While this enabled Americans to buy good and services and keep the U.S. economy going, the ability to borrow has reached its limit.

This means a more frugal standard of living and slower economic growth.  And, as I see it, there is no much anybody can do about it.

The chart shows the ratio of the total amount of American debt—individual, business and government—and total wages and salaries of workers employed by private industry.  In 1960, total debt was a little over three times total wages and salaries; now debt is a little over nine times total wages and salaries.

What I think the chart shows is:

• Healthy growth in wages and salaries in the 1960s, keeping pace with debt.
• Stagnation in wages and salaries in the 1970s, without much growth in debt.
• A bubble in the 1980s, with the economy fueled by increased borrowing.
• Healthy growth in wages and salaries in the 1990s, keeping pace with debt.
• Another bubble in the 2000s.
• Maxxing out on debt in the 2010s.  Those who can try to pay down their debts; those who can’t go bankrupt.

The fact that Americans are paying down their debts and trying to save is a good thing, not a bad thing.  But it means that the federal government will be less able than in the past to stimulate the economy by stimulating spending and borrowing.

I think it would be a big mistake to try to start another debt bubble.  Instead we Americans need to think about building up the real economy, and putting people to work doing the many things that need to be done.

LINK

The One Chart You Need to Predict the Future by Charles Hugh Smith.

Life in the wired society

Oral-B, a Procter & Gamble company, this year launched its SmartSeries Bluetooth toothbrush — an essential appliance for what the firm calls “the well-connected bathroom”.

It connects to your smartphone, where its app tracks brushing tasks: Have you flossed? cleaned the tongue? rinsed? And highlights areas of the mouth visualized on the phone screen that deserve more attention.

More importantly, as the toothbrush’s website proudly announces, it also “records brushing activity as data that you can chart on your own and share with dental professionals.”

What happens to that data — whether it goes to these dental professionals, or your insurance company, stays with you or is appended to your data already owned by Facebook and Google — is a controversial question.

via Evgeny Morozov: How much for your data?.

The principle of financialization is that if anything can be done, it not only can, but should be done for money, and that the only standard of value is monetary.  Technology in the service of financialization applies this to your personal life.  Any information about you that is worth knowing is worth selling for money.

Now if personal data is a financial asset and nothing else, the individual person should have the exclusive right to sell it, just as the individual person should have the exclusive right to sell his or her own blood.   But is this how we want to live?

The digitization of everyday life, and the rapaciousness of financialization, risk turning everything — genome to bedroom — into a productive asset. 

As Esther Dyson, a board member of 23andme, the leader in personalized genomics, said the company is “like the ATM that gives you access to the wealth locked within your genes”.

This is the future that Silicon Valley expects us to embrace: given enough sensors and net connections, our entire life becomes a giant ATM.  Those refusing this would have only themselves to blame. 

Opting out from the “sharing economy” would come to be seen as economic sabotage and wasteful squandering of precious resources that could accelerate growth.

Eventually, the refusal to “share” becomes tinged with as much guilt as the refusal to save or work or pay debts, with a veneer of morality covering up — once again — exploitation.

It’s only natural that the less fortunate, under the burden of austerity, are turning their kitchens into restaurants, their cars into taxis, and their personal data into financial assets. What else can they do?

For Silicon Valley, this is a triumph of entrepreneurship — a spontaneous technological development, unrelated to the financial crisis.  But it is only as entrepreneurial as those who are driven — by the need to pay rent — into prostitution or selling their body parts.

via Evgeny Morozov: How much for your data?.

 Hat tip for the link to Daniel Brandt.

Financialization at home and abroad

Financialization is a word used to describe the process by which a capitalist economy shifts away from investment, which increases the productivity of the real economy, to usury, which extracts wealth from the many for the benefit of the few.

My e-mail pen pal Bill Harvey sent me links to an article and interviews on financialization by a Marxist economist named Costas Lapavistas.  He shows that the process of financialization is going on not just in the USA, but also in the UK, Germany and Japan.

Households are taking on debt to an extent unknown in previous generations.  Business gets increasing amounts of its profits from finance rather than production; one of the most profitable parts of General Motors is GM Acceptance Corporation, which gives auto loans.  At the same time, individual savings are increasingly hostage to the fluctuations of the financial markets.

What’s going on?  It is not merely a new “greed is good” moral code.  Industrialists and financiers were just as greedy and out of control in the U.S. Gilded Age following the Civil War as they are now, and politicians were just as corrupt, yet out of that the United States became the leading industrial power in the world.

Maybe the advanced industrial nations are reaching limits to growth.   The cell phone revolution is not as big a deal as the automobile revolution, and investment in hydraulic fracturing for natural gas is not going to have the same payoff as the exploitation of the original natural gas fields.

Maybe capitalists have so much capital that there aren’t enough productive things to invest in.  That would be the Marxist explanation, as I understand it, although you don’t have to be a Marxist to think that this is so.

The French economist Thomas Piketty is getting a lot of attention with his book, Capital in the Twenty-First Century, and his simple formula that a tiny elite acquire an ever-larger share of wealth and income whenever R (the average annual rate of return on investment) exceeds G (the annual growth rate of the economy overall).  His extensive research documented that this has often been the case during the past two centuries, and is the case now, but he didn’t theorize as to why this is the case.

But the implications are obvious.  The way to prevent a takeover by a small oligarchy of wealth is to subject a couple of percentage points from R and/or add a couple of percentage points to G.   A financialized economy—an economy based on getting people into debt rather than on increasing the production of useful goods and services—will push R up and hold G down.

LINKS

Finance’s hold on our everyday life must be broken by Costas Lapavistas for The Guardian.

The Era of Financialization: An Interview With Costas Lapavistas Parts 1 and 2 by Dollars & Sense.

The Era of Financialization: An Interview With Costas Lapavistas Parts 3 and 4 by Dollars & Sense.

The financialization of America

The best book I’ve read on the current financial crisis was published right before the crisis occurred.  Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, by Kevin P. Phillips, was written in 2007 and published in early 2008, and it all-but-predicted what was to happen next.

Phillips asserted what I’ve been saying for 20 or so years, but with greater insight and better research – that the United States cannot go on forever consuming more than we produce, borrowing more than we save and importing more than we export, and that a day of reckoning will come.

Simon Johnson and James Kwak in 13 Bankers proposed reforms to safeguard our financial system from recurrent crises. Phillips went further. He said we Americans will lose our material standard of living and our position in the world unless we find a way to recreate an economy based on production of goods and services rather than banking and finance.

Phillips worked in the Nixon White House as a political strategist. His first book was The Emerging Republican Majority in 1969, and he has written extensively since then about history, politics and economic trends.  The theme of his recent books is the shift from an economy based on production to one based on finance and debt, and why such an economy is not sustainable.

During the first half of the 20th century, the United States had the most productive industrial economy in the world and, at the end of World War Two, the world’s only important industrial economy to emerge undamaged by the war. This enabled us Americans to enjoy the world’s highest material standard of living. We came to think of this as permanent and automatic, but it isn’t.

Starting in the 1970s, the United States faced the challenge of other industrial nations – first Japan and Germany, then the east Asian “tigers” and now China and India – who were capable of matching us in productivity. The U.S. response was to hold down the wages of American workers, shift production overseas and facilitate the increase of borrowing and debt.

Wages of American workers have been stagnant for the past 30 or so years. Average Americans have resisted the lowering of their material standard of living by working longer hours and more days of the year, by sending more family members into the work force (increasing labor force participation rates) and by taking on more debt.  This process may have reached its limit.