Do we need a 21st century debt jubilee?

“AND FORGIVE THEM THEIR DEBTS”: Lending, Foreclosure and Redemption From Bronze Age Finance to the Jubilee Year by Michael Hudson (2018)

Michael Hudson is an economist who says that the chief economic problem in the world today is that individuals and nations owe more debt than they ever can repay.  And “debt that can’t be repaid, won’t be repaid.”

He has written in many books and articles that, unless there is a writedown of debt, lenders will grow richer and richer and the indebted public will grow poorer and poorer until there is an economic collapse.

In this 2018 book, he argues that debt write-downs actually were economic policy in the ancient Near East, and are supported by the Hebrew Bible and the teachings of Jesus.

The saying on the Liberty Bell in Philadelphia, “Proclaim liberty throughout the land,” is a quote from Leviticus 25: 10.   According to Hudson, this refers forgiveness of debts and freeing of slaves (who are enslaved because they can’t pay their bills) in the periodic Jubilee year.

Such language is now interpreted as an aspirational goal, but Hudson maintains it was intended as policy.

There is reason why, in the Ten Commandments, there are separate commandments for “thou shalt not commit adultery” and “thou shalt not covet thy neighbor’s wife.”

It meant it was a sin to try to acquire one’s neighbor’s wife as a bondservant in return for payment of debt, along with his ox, his ass, his manservant or maidservant or anything else that is one’s neighbor’s.

When the Lord’s Prayer said, “Forgive us our debts, as we forgive our debtors,” Hudson says, it meant literal debt forgiveness as well as forgiveness of sins.   The word for “debt” in many European and Near Eastern languages is the same as the word for “sin.”

This goes against the grain of present-day thinking, in which debt repayment is regarded as an absolute moral obligation.   True, bankrupts normally don’t have to fear debtors’ prison, as was the law in early 19th century England, let alone be sold into slavery, as was the case in ancient Greece and Rome.

But student debt is not dischargeable in bankruptcy and debtors’ prisons are coming back in the form of sentences for contempt of court.  Debt slavery still exists for individuals in some parts of the world, and the international banking system does not show mercy for indebted poor nations.

If an obligation is absolute and unlimited, it is equivalent to a religion.  Debt repayment is regarded as an absolute obligation, and compound interest makes it a potentially unlimited one.  It really is a kind of religion, the service of Mammon.   And the Bible teaches that one cannot serve God and Mammon.

Michael Hudson on the clash of capitalisms

THE DESTINY OF CIVILIZATION: Finance Capitalism, Industrial Capitalism or Socialism by Michael Hudson (2022)

When I studied economics as a college undergraduate, I was taught there are three factors of production – land, labor and capital. And three sources of income – the rent of land, the wages of labor and the profit or interest from capital.

Land includes not just the soil itself, but all natural resources.  Labor includes all productive effort, whether of brain or brawn.

Capital, as I was taught, is the force multiplier. It includes everything that increases the productivity of land or labor – farm tractors, railroads, computers, steam engines, electric power plants, research laboratories, anything that increases or improves production.

So the landlord is a parasite, the worker is a contributor to society, but the capitalist supposedly is the driving force for progress.

Here’s the rub.  Financial capital is productive only when it is used to create physical or human capital.

But there’s no law that says financial capital has to be used productively.  In fact, most so-called “investment” consists of buying assets and collecting the income, with no value added. 

Michael Hudson, in his brilliant new book, The Destiny of Civilization, says that’s what’s happening in the U.S. specifically and also the broader world today.  Industrial capitalism, which, for all its faults, is productive, is being replaced by finance capitalism, which is parasitic.   

So much of the world’s resources go to paying off debts—government debt, business debt, mortgage debt, student debt—that too little is left over to provide for the wants and needs of ordinary people.  

So much of the world’s income goes to holders of debt that too little is left for those who do the actual work of society.

According to Hudson, the classical economists, from Adam Smith to John Maynard Keynes and including Karl Marx, thought that the chief economic problem was the rentier – the person who draws income from ownership of assets, without producing anything of value themselves.

The French economist Thomas Piketty has written massive tomes that show how the income from ownership of assets – whether land, government bonds, corporate stocks or something else – over time exceeds the rate of economic growth.

This leads to an ever-growing concentration of wealth, which ends only when some event – usually revolution, war or an economic crash – wipes out the value of the assets. This is the process that the Austrian economist Joseph Schumpeter called “creative destruction.”

In the United States and countries that follow its lead, classical economics has been replaced by the so-called neoliberal economics.  Its guiding principle is that financial capital must be preserved at all costs.

This is why, just as one example, the Obama administration bailed out the banks following the 2008 financial crisis, but did not use authority granted by Congress to help the struggling mortgage-holders.

Karl Marx was fascinated by industrial capitalism’s power to increase productivity and increase wealth.  This form of capitalism, as he saw it, laid the foundation for a future utopian worker-ruled socialist state.  Finance capitalism, in Hudson’s view, leads nowhere.

Hudson says that today civilization is today at a fork in the road: 

• one path leading to a neoliberal neo-feudalism dominated by a rentier oligarchy ruling over the indebted many.
• the alternative path is broadly mixed-economy industrial capitalism leading to socialism.

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.

The search for truth in the Ukraine war

I think the world is at a major historical turning point.  China and Russia, with their allies and vassals, have begun an attack on a system of economic and military power dominated by the United States, which probably will succeed.  The Russian attack on Ukraine is a ramping up to that larger conflict.

That is why I am so obsessively focused on the war in Ukraine.  Trying to understand the conflict allows me to overcome my feeling of helplessness in the face of the coming catastrophe.

This video interview of Scott Ritter from last Wednesday is a good summary of the situation in Ukraine, which is different from the propaganda version in most U.S. newspapers and broadcast networks.  The meat of the interview begins at the seven-minute mark.  You don’t have to watch the whole thing to get something out of it.  

I think that Scott Ritter, Michael Hudson and the Naked Capitalism bloggers have the best handle on what’s going on.  Both Ritter and Hudson are giving video interviews to virtually anybody who will talk to them, and these interviews should be easy to find.  

Of course what they (and I) say is based on uncertain and incomplete knowledge.  The verdict of history may be different from what I (or you) think now.  But time spent trying to learn and understand is not time wasted.

LINKS

Russia’s invasion of Ukraine in Perspective by Scott Ritter for Energy Intelligence.

The American Empire Self-Destructs by Michael Hudson.

How the U.S. turned being in debt into power

SUPER IMPERIALISM: The Economic Strategy of American Empire by Michael Hudson (1972, 2003, 2021)

You’ve shown how the United States has run rings around Britain and every other empire-building nation in history.  We’ve pulled off the greatest rip-off ever achieved.  [==Herman Kahn to the author, in 1972]

The USA as a nation  consumes more than it produces, borrows more than it saves and imports more than it exports.

All the supposed laws of economics say that we should be bankrupt.  But instead we are the world’s dominant economic power.

Michael Hudson’s Super-Imperialism, written 50 years ago, explained how this came to be.  Almost everything he described is still in place today.

U.S. Treasury bonds have replaced gold as the world’s store of value.  The bonds don’t have to be repaid because they are treated as valuable in themselves.

Americans buy oil from Saudi Arabia or electronics from China, and pay for them with dollars.  The only thing of value these dollars represent is Treasury bonds.  So the dollars come back to the United States in the form of Treasury bond purchases, which makes it possible to sustain the twin deficits—the U.S. government budget deficit, and the trade deficit.

It is as if I could go to the grocery store or hardware store, pay for my purchases with IOUs and get the world to use the IOUs as if they were money without ever paying the IOUs off.

So as long as the world is willing to use the U.S. dollar as its basic currency, there is no upper limit on the United States ability to issue money to pay for its wars or bail out its failed businesses.

This has gone on for 50 years, and counting.  It stands to reason that it can’t go on forever.

∞∞∞ 

Hudson’s book is in three parts.

The first part, covering 1917 to 1946, shows how the United States used its position as the world’s leading creditor nation to undermine its economic rivals, especially the British Empire.

The middle part shows how the United States set up the World Bank, the International Monetary Fund and other international economic institutions so as to lock in its dominance of the world financial structure..

The last part shows how the United States went from world’s leading creditor to world’s leading debtor, but in a kind of economic jiu-jitsu, leveraged its debtor status to maintain its economic supremacy.

There are brief epilogues bringing the story up to date, and an introduction that summarizes the main points of the book.  If you just read the introduction, you’ll understand the gist of the book.

War threat’s purpose is to keep U.S. allies in line

Click to enlarge.

U.S. policy for the past 10 or so years has been hard for me to understand. Our government has driven Russia, the world’s largest nuclear weapons power, into the arms of China, the world’s largest or second largest industrial power.

Since 2014, our leaders have talked about the threat of a Russian invasion of Ukraine, but, as Scott Ritter has pointed out, they never tried to create a military force in or near Ukraine capable of resisting a Russian invasion.

The economist Michael Hudson has an answer.  U.S. war policy is not primarily about Ukraine or Russia.  Rather it is about the need for a war threat to keep U.S. allies in line.

Economic sanctions are not being imposed for strategic reasons, Hudson wrote recently. Rather the geopolitical struggle is an excuse for cutting off U.S. allies from trade with Russia, China and other designated U.S. enemies.

The U.S. is not pressuring Germany to stop Nord Stream 2 in order to block Russia in Ukraine.  It is whipping up war fever over Ukraine in order to block Nord Stream 2.

Here’s how he put it:

What worries American diplomats is that Germany, other NATO nations and countries along the Belt and Road route understand the gains that can be made by opening up peaceful trade and investment.

If there is no Russian or Chinese plan to invade or bomb them, what is the need for NATO?  And if there is no inherently adversarial relationship, why do foreign countries need to sacrifice their own trade and financial interests by relying exclusively on U.S. exporters and investors?

These are the concerns that have prompted French Prime Minister Macron to call forth the ghost of Charles de Gaulle and urge Europe to turn away from what he calls NATO’s “brain-dead” Cold War and beak with the pro-U.S. trade arrangements that are imposing rising costs on Europe while denying it potential gains from trade with Eurasia.

Even Germany is balking at demands that it freeze by this coming March by going without Russian gas.

Instead of a real military threat from Russia and China, the problem for American strategists is the absence of such a threat.

All countries have come to realize that the world has reached a point at which no industrial economy has the manpower and political ability to mobilize a standing army of the size that would be needed to invade or even wage a major battle with a significant adversary.

That political cost makes it uneconomic for Russia to retaliate against NATO adventurism prodding at its western border trying to incite a military response. It’s just not worth taking over Ukraine.

How excess debt stifles economies

Economist Michael Hudson had a good explanation of how excess private debt leads to economic stagnation.

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.

This is precisely what is happening. But mainstream models ignore the overgrowth of debt, as if the economy operates on a barter basis. 

[Australian economist Steve] Keen calls this “the barter illusion,” and reviews his wonderful exchange with Paul Krugman (who plays the role of an intellectual Bambi to Keen’s Godzilla).

Krugman insists that banks do not create credit but merely recycle savings – as if they are savings banks, not commercial banks.

It is the old logic that debt doesn’t matter because “we” owe the debt to “ourselves.”  The “we” are the 99%, the “ourselves” are the 1%.

Krugman calls them “patient” savers vs “impatient” borrowers, blaming the malstructured economy on personal psychology of indebted victims having to work for a living and spend their working lives paying off the debt needed to obtain debt-leveraged homes of their own, debt-leveraged education and other basic living costs.

Hudson has written extensively about debt, and how unpayable debt leads to financial crises.   As he is fond of saying, debts that can’t be paid won’t be paid.

The case for a global debt writedown

Debt that can’t be repaid, won’t be.
==Michael Hudson

Since the 1970s, every economic recovery has been weaker than the one before.  Michael Hudson, in his new book, Killing the Host, said the reason is that, with each recovery, there has been a greater overhang of debt, which drains resources from the real economy of tangible goods and useful services.

The current economic recovery has been a recovery of the financial markets, not a recovery of jobs and wages of ordinary people.   United States and European Union economic priority has been to protect bond-holders and creditors from loss.

Hudson argued that this is unsustainable.   Either there will be a planned write-off or write-down of global debt, or there will be a financial collapse, like the one that began the Great Depression of the 1930s.  Either way, the debt will be wiped out.

His preference is for what he called a Clean Slate, as was done in West Germany in 1947 as part of a currency reform.  Basically, most German debts were canceled, except for employer wage contracts and bank accounts below a certain maximum amount (since wiping out bank debt means wiping out bank savings).

This, together with tax reform, the lifting of wage and price controls and the 1953 forgiveness and restructuring of German public debt, made possible the German economic miracle.

As Hudson admitted, this is pretty strong stuff and unlikely to be accepted.  An alternative is the enforcement of an old New York law, going back to Revolutionary times, against fraudulent conveyance.  This means that a debt is void if the lender knew in advance that it couldn’t be paid back.

If Snidely Whiplash lends money to Mrs. Innocent Goodbody, a poor widow living on Social Security, with her $250,000 house as collateral, with the expectation she won’t be able to keep up the payments and he’ll be able to foreclose on the house—that’s an example of “fraudulent conveyance.”

This applies to the subprime mortgages and “liar’s loans” prior to the 2008 financial crash.  Another concept, “accounting fraud,” applies to the bad loans that were given high debt ratings, securitized and sold to the unwary.  Canceling debt originating in fraudulent conveyance and accounting fraud would have a huge impact.

Hudson said that home mortgages could be scaled back to what is necessary to amortize a property based on its assessed value.  Or mortgages could be scaled back to 25 percent of the borrower’s income, which is what conservative lending practices require in the first place.

Congress in fact authorized a program to do just that as part of the 2008 bank bailout.  But Timothy Geithner, Obama’s Treasury Secretary, declined to implement it.

All this disrupt the financial markets and the economy generally, but Hudson wrote that it would clear the way for a good economic expansion, based on investment in the real economy, as happened in Germany.

Anyhow, he wrote, the alternative is more foreclosures, more economic hardship, more government bailouts until it becomes absolutely clear that that the debts are unpayable.   In the end, debt that can’t be paid, won’t be.

‘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 world scene: Links & comments 7/8/14

Rigged Rules: A Rogue Corporation in the World Bank’s Rogue Tribunal by Robin Broad and John Cavanaugh for Triple Crisis.  (via Naked Capitalism)

The government of El Salvador has denied a license to an Australian-Canadian company, Pacific Rim, to mine for gold because their operations would discharge arsenic and cyanide into streams from which half the population gets its drinking water.

Pacific Rim has sued El Salvador for $300 million under the “investor-state” provisions of the Central American Free Trade Agreement, and the case will be decided by the World Bank’s International Center for Settlement of Investment Disputes in Washington, D.C.

Similar provisions to override national sovereignty are part of the 12-nation Trans Pacific Partnership Agreement and 28-nation Tranatlantic Trade and Investment Partnership (aka TAFTA) now being negotiated by the United States.

Losing Credibility: The IMF’s New Cold War Loan to Ukraine by Michael Hudson for Naked Capitalism.

The International Monetary Fund violates its own rules by lending the Ukrainian government more money than it has any reason to think can be paid back, in order to finance the Ukrainian governments war with eastern Ukrainian separatists.

Economist Michael Hudson says the IMF’s real objective is to force Ukraine to sell off its agricultural land and to open itself up to fracking for natural gas.

‘Why Not Kill Them All?’ by Keith Gessen for the London Review of Books.

Keith Gessen, reporting from Donetsk, described the Ukrainian war as a conflict between fascistic Russian-backed separatists and a fascistic Ukrainian government, with sincere democratic reformers and ordinary people left without any options.

Three Reasons Why Putin Laughs At Impotent America by Eamonn Fingleton for Forbes.

Once the United States was the world’s leading manufacturing nation, the world’s leading creditor nation and the world’s leading trading nation.   We Americans have thrown away all these advantages.

Now American companies have off-shored production to foreign countries, which means that the USA is losing our old American know-how.  The USA as a whole, not just our government, is in debt, which means foreigners are buying up national assets.  And we open our market to foreign companies unconditionally, rather than using this as a lever to gain advantage.

The world still must reckon with our huge military forces and our dominance of international financial institutions, but these are the afterglow of our past power.

It’s not President Obama as an individual who is weak.  It is the USA as a whole.

Only Cool Heads Can Defeat ISIS by Patrick J. Buchanan for The American Conservative.

The tide is turning against the bloodthirsty so-called Islamic State, which has suffered defeats by the Iraqi army and the Kurdish peshmerga militia.  ISIS is vastly outnumbered by the armies of Iraq, Syria and Turkey.

If ISIS is U.S. Enemy No. One, then it doesn’t make sense to be trying to destroy the enemies of ISIS—Syria, Iran, Hezbollah, the Kurdish PKK fighters in Turkey and Vladimir Putin’s Russia.

ISIS would like the U.S. government to unilaterally send troops into another Middle East quagmire war.   President Obama is wise to not play into their hands.

How Obama’s Non-Strategy ISIS Strategy Works by Leon Hadar for The American Conservative.

President Obama is wise to hold back and allow Turkey, Saudi Arabia and other Middle East countries to take the lead in attacking ISIS.  The flaw in Obama’s policy is the idea that the U.S. can wage a proxy war against the Syrian government and the ISIS forces in Syria at the same time.

EU pact makes Ukraine a colony

When Poland and the Baltic states joined the European Union, the EU invested in the infrastructure of these countries to bring them closer to the economic level of other European countries.

Economist Michael Hudson said, in an interview with the Real News Network, that the exact opposite is happening with Ukraine’s association agreement with the EU.

Ukraine will not be a member of the EU, will not get any EU investment and will not get any relief from its financial obligations to the International Monetary Fund and European banks, but will open itself up to have foreign investors buy up its assets at bargain prices.

Supposedly the 28 countries of Europe will be opened up as an export market, but, as Hudson asked, what does Ukraine have to export that European countries want?  Formerly Ukraine’s chief exports were military equipment made in Soviet-era factories for Russia.   Now that market is cut off and Russia will build its own armaments factories.

Hudson said the Ukrainians to benefit from the agreement will be that nation’s ruling kleptocrats.

Qualitative Easting III: bank bailout continues

Michael Hudson, a research professor of economics at the University of Missouri at Kansas City, said the Federal Reserve Board’s Qualitative Easing is a continuation of the bank bailout under another name.

Ben Bernanke, chair of the Federal Reserve, announced a commitment to buy mortgage-backed securities (toxic assets?) while keeping interest rates low.  Pumping more money into the economy will supposedly make more money available for business loans and consumer purchases in the United States.  But Hudson noted that so far the banks have found more profitable things to do with the Fed’s money than to invest it in the real U.S. economy.

At present the rate of inflation is low.  But one cause (or definition) of inflation is too much money chasing too few goods.  If money is created, but the money is not used to produce more goods, then (as I see it) inflation could return.  Moderate inflation is supposed to be a cure for economic stagnation, but I can recall the “stagflation” of the 1970s when there was very serious inflation and economic stagnation at the same time.

Click on Fed to Buy More Bonds in Bid to Spur Economy for the Wall Street Journal’s explanation of the Federal Reserve’s rationale for QE.

Click on QE3 – Another Fed Giveaway to the Banks on the naked capitalism web log and scroll down to the discussion thread for the pros and cons of Hudson’s analysis.

Click on Michael Hudson | On finance, real estate and the powers of neoliberalism for Michael Hudson’s home page.