Forgetting where to place this but...:
The Private Debt Crisis
China is drowning in it. The whole world has too much of it. History suggests: This won’t end well.
BY RICHARD VAGUE FROM FALL 2016, NO. 42 – 28 MIN READ
Why does the IMF keep badly missing its global growth forecast? And what does that have to do with the 2016 presidential election?
In the years since the 2008 global crisis, when the world’s growth rates tumbled, the IMF has dutifully printed forecast after forecast predicting rebounding growth rates. But in reality, rates have fallen well short of these predictions, as seen in Chart 1.
One of the key and largely overlooked reasons for this disappointing growth is hiding in plain sight: the increasing global burden of private debt—the combination of business debt and household debt. Even though government debt grabs all the headlines, private debt is larger than government debt and has more impact on economic outcomes. In the United States, total nonfinancial private debt is $27 trillion and public debt is $19 trillion. More telling, since 1950, U.S. private debt has almost tripled from 55 percent of GDP to 150 percent of GDP, and most other major economies have shown a similar trend. [See Chart 2.] Since GDP is largely the sum of all the spending, and thus income, of households and businesses in an economy, if aggregate private debt to GDP has tripled, that means that average businesses and households have three times more debt in relation to their income. Both private debt and government debt matter, and both will be discussed here, but of these two, it is private debt that has the larger and more direct impact on economic outcomes, and addressing the issues associated with private debt is the more productive path to economic revival.
Stagnant incomes, underemployment, and job insecurity are key reasons so many voters in Europe and America are now willing to embrace candidates outside of the mainstream. But the now stultifying level of private debt, and the accompanying impact on growth, is an equally important reason.
The second problem it brings is much more subtle and insidious: When too high, private debt becomes a drag on economic growth. It chips away at the margin of growth trends. Though different researchers cite different levels, a growing body of research suggests that when private debt enters the range of 100 to 150 percent of GDP, it impedes economic growth.
When private debt is high, consumers and businesses have to divert an increased portion of their income to paying interest and principal on that debt—and they spend and invest less as a result. That’s a very real part of what’s weighing on economic growth. After private debt reaches these high levels, it suppresses demand.
Because interest rates are low, some economists have dismissed this impact. However, most middle- and lower-income households (which is where the highest rate of debt growth has been), as well as most small- and medium-size businesses, pay interest rates much higher than money market rates. In the case of low-income households and small businesses, the rates for some types of debt can be very high, often an APR of 20 to 30 percent or more. And in addition to interest, all these borrowers have to pay down the principal balance of the loan. High debt makes these borrowers more reluctant to spend or take on more debt. Further, an estimated 6.4 million of the 56 million mortgages held in the United States are still severely underwater. Millions more are less severely underwater or just barely “above.” Many of these mortgages were underwritten at the height of the boom. Since then, the home values, and in many cases the incomes, of these borrowers have fallen. Lower rates may help but do not solve their financial stress. Though their rates may be lower, all of these borrowers are now in a world where increases in income and revenue are harder to come by.
This all takes a bite out of the spending and investing that drives growth.
The unprecedented amount of our global debt glut is underscored by the creeping presence of negative interest rates—a situation where the borrower, unbelievably enough, gets paid for borrowing. An estimated 15 percent of European corporate debt issued now has a negative interest rate. If the massive $150 trillion glut of debt is the culprit that is curbing demand, then perhaps this European Central Bank experiment with negative rates is the inevitable response to this glut. High private debt contributes to lower rates by reducing demand for credit—since highly leveraged borrowers have less ability to borrow more and are often understandably wary of further borrowing. But these negative rates are not generally available to low- and middle-income borrowers.
Despite the popular perception, consumers carry 13 percent more debt as a percent of GDP than in 2000.
U.S. private debt growth has disproportionately affected the least well-off Americans. In fact, since 1989 (the year the Fed started a survey of this statistic), the debt level of the 20 percent of U.S. households with the lowest net worth has grown two and a half times faster than all other households. And though consumers have deleveraged since the crisis, and the popular perception is that consumers are in much better shape today, consumers are in fact carrying 13 percent more debt as a percent of GDP than they were in 2000, the moment before the ill-fated private debt boom that led to the 2008 crisis began.
As mentioned, GDP roughly equates to the aggregate spending and income of the businesses and households in a country, and the private debt of a country is the sum of household and business loans. So to speak about the “private debt to GDP ratio” of a country is essentially the same as speaking about the “private loan to income ratio” of that country. You’ll recognize that ratio, because it is the same one that lenders have long used to help make loan decisions for individuals and businesses. Whether you are applying for a loan as an individual or for your business, if your loan-to-income ratio is low, the lender is likely to conclude that you have capacity for more debt, and if it is high, the lender will likely conclude that you will struggle to pay your existing loan, much less qualify to take on additional debt.
It follows directly that if a country’s private debt to GDP ratio is low, let’s say 50 percent, then the households and businesses in that country generally have low loan-to-income ratios and are well positioned to power growth through increased leverage. And if a country’s private debt to GDP ratio is high, let’s say 200 percent, then the households and businesses in that country are generally overleveraged, with, on average, very high debt ratios. They are much less likely to be able to boost growth through more borrowing.
Private debt to GDP by country:
Another source: https://www.imf.org/external/datamapper/Privatedebt_all@GDD/SWE
From today to start off with:
KF: How do you see the interest rate cycle, do you really think they’re going to keep pushing ahead with interest rates, to bring the economy back a peg? Or is that core inflation that’s winding back that’s starting to suggest that we’re not going to see such —
MH: Well over the last three months, inflation has come down very substantially. When they say “We’re up 7% in the United States for the last year” — or, actually, all of that was before the sanctions on Russian oil pushed gas [and food] prices way up. Now that our gas and food prices are coming back down, the inflation has gone way down. [But inflation is still higher than it was a] year ago because of all of the anti-Russian sanctions that the [U.S.] government has done.
John S: Why [are] China’s and Japan’s inflation rates at 2-3%, while the West is at 8-10%? [China and Japan] had supply chain issues also.
MH: Well, because [China and Japan] are not following American sanctions. They are getting inexpensive oil from Russia at a fraction of the cost that Europe has to pay. So the American sanctions are applied only against the United States and Europe, and not against Asia. So of course [China and Japan] have no reason to have their currency going up. The only thing [actually] pushing their currency up is the fact that the [exchange rate of the] U.S. dollar (USD) is rising as a result of the high interest rates [in the U.S.]. So [there are arbitrage movements of capital] *out* of Japan and China [and] *into* the USD. [The Japanese and Chinese] currencies are weakening, and because world mineral prices and oil prices and food are set in [USD], that increases domestic currency costs [for China and Japan] of [any] raw materials [that are priced in USD] that they have to import.
Now just yesterday, the Russian Foreign Minister [Sergey Lavrov] said1 that [Russia is] working on changing the prices that Eurasian countries have to pay, so that they will be repricing their oils, metals, and raw materials in an ‘own-index currency’ [that is] cut off from the USD so that they can move away from the USD. This is going to give them even more of a price advantage over the United States.
John S: Isn’t the West’s corporate greed (eg. rent seeking, monopoly pricing) also a big factor driving inflation?
MH: You don’t even have to be greedy. If you work for a corporation and you don’t use monopoly power to raise prices when you can, they’ll just fire you and hire somebody that is willing to do it. It’s not an emotional greed: it’s built into the economic management system of finance capitalism. It’s all about ‘monopoly rent‘.
John Chadwick: Michael, In 2006 you predicted the 2008 crash. I haven’t heard you predict when the U.S. will fall, and the price of gold and precious metals will rise. [What] are the biggest factors that you look at? For example: Saudi [Arabia] selling oil to China in yuan [renminbi], China selling its U.S. Treasury Bills, [or] countries doing trade in their own currency.
MH: Well, in a stable economy, like when I was working on Wall Street [50 to 60] years ago, the way you would forecast where gold prices, or commodity prices, or anything was [going], was to use a ‘trend analysis’. But today, the price of gold is something political, and more and more of the key elements ([for example, those having] to do with the NATO war with Russia and China) are political. So you’d think that the movement out of the USD, by Saudi Arabia [and] other countries who are afraid to hold USD holdings anymore (because the United States may simply grab their money like it grabbed2 Russia’s money, or like England grabbed Venezuela’s money) [is occurring because] they want to hold something where it can’t be grabbed. And if they hold their own gold, then it can’t be grabbed, unless they’re silly enough to leave their gold in London or New York. So [seen as a graph,] all of this is going to be a quick ‘step function’ — it’s not a curve, it’s not forecastable. You would have to forecast what the political system and the military developments would be, and that’s not something that you can do a mathematical chart of.
KF: So what is happening in terms of the percentages of trades? In terms of these bilateral deals, how much trade has moved away from the USD to these more multilateral currency exchanges?
MH: Well, even when trade moves into foreign currencies, it’s still related to the U.S. price of goods and services. [So, really, they’re just] using non-U.S. banks and trading in their own currency, but it’s still based on the USD, and USD pricing. Payments in many cases have to be made by using an intermediary or at least a reference point to the USD, so that’s the problem that Asian countries have to face. I think in the last week or so Yves Smith on [naked capitalism] had a whole series of articles3 saying how really difficult it is [for other countries] to have an alternative [transactions currency] to the USD. You can’t simply just bypass it when the basic pricing of so many raw materials [is denominated] in U.S dollars.
KF: What about the election of [Luiz Inácio Lula da Silva (“Lula”)] to president in Brazil and talk of creating a Latin American currency? Do you [think] that could withstand the pressures of global trade?
MH: That would have to be a long time coming.
[Let’s take the Euro as a case study.] The problem that the Euro has as a currency [is that there’s] no real central bank creating the same currency. Each country has its own budget and its own budget deficit or surplus. There’s no real central bank that federates everybody. You would need Latin America to be just like the United States [in order] to have its own currency. Because the key [to] having your own currency is: Who’s going to create the currency, and who is [the currency creator] going to give it to? Europe can’t decide what countries to give the Euro to to spend so it doesn’t give [it] to anybody.
Latin America would simply remain isolated if it followed the European pattern. And it’s not, politically, “up to” creating a United States of Latin America, any more than Europe is “up to” creating a United States of Europe.
[17:00] Tim: Latin America is electing socialist left-wing presidents. How can [Modern Monetary Theory (MMT)] be helpful for each country, individually. Can they somehow work together with an MMT economic philosophy?
MH: That’s a loaded question. When I was brought down to Brazil when Lulu was in power to meet with their Council of Economic Advisors, they said that in order to get elected Lula had to make a deal with the banks (which means the ruling families of Brazil) to go along with them, and essentially let the banks remain in control. Lula would be doing many social programs but certainly the banks would be left in control.
In 1990, when I organized the world’s first Sovereign Debt Fund with “Scudder, Stevens”, Brazil was paying 45% interest a year on its U.S. dollar debts, as was Argentina. And despite the fact that 45% is a huge amount (wouldn’t you like to get that?) Scudder, Stevens tried to sell the fund in the United States. They had their salesmen go all around. [Potential fund purchasers in the] United States said, “We don’t want any part of Latin America. We give up. They’ve defaulted.” [The Scudder people] went to Europe. Nobody in Europe would buy [the funds]. Merrill Lynch went down to Brazil and Argentina and they bought the 45% and they (that is, the 0.1% of the bankers, who are the families of the President, the families of the central banker, the big criminal gangs) bought it. But they bought it, holding it off shore, and I think the Dutch West Indies is where the fund was decided to be incorporated. And so essentially they want to make a killing on being able to finance governments.
The last thing that the ruling class in Brazil wants is for a government to be able to create its own money and finance its own spending, instead of relying on the One Percent to tell it what to spend on and how much to pay the One Percent. So you would need a social revolution to definancialize the economies of Latin America. You’d need a real social, a real socialist revolution in order to have MMT down there, because otherwise you’re going to have the ruling families of Argentina, Brazil, the big Latin American countries, remain in control, blocking any kind of MMT.
- You have to nationalize the banks. People power over corporate and banking power. Regulate against corruption in politics and in Wall St. or whatever money-trading stock-trading mechanisms you have in a society (seems pretty obvious).
KF: In addition to the sanctions and rents extracted by monopolists, what impact did central planners’ 2020 policy decision to create bank credit for consumer consumption have on recent inflation?
MH: Not very much. The banks are lending to anyone who has the money to pay. Credit card rates have gone up. Mortgage rates have gone way up. That’s the big thing, and with mortgage rates so high, that’s killed the housing market. And by killing the [residential] housing market for most of the population, that’s stopped mortgage lending and construction. [Also,] the commercial property rates in the United States are only about 80% (maybe it’s a 75% now), so with people working at home much more, all the big companies are downsizing their office space so there’s really not going to be much construction, and hence there’s not going to be much construction lending, or mortgage lending, going on.
KF: In terms of all this reorientation of economies, it’s fascinating to hear you say that Saudi Arabia might be moving towards more multilateral trade with Belt and Road countries who might have the ability to upgrade to [Electronic Vehicle (EV)] transportation so quickly.
Climate is something we don’t often hear you talk about much, but within your FIRE Sector analysis is ‘Insurance’.9 How do you think insurance is going to survive in this world of continuous climate disasters? And what role is there for the future of insurance? Will the state have to take this over?
MH: I certainly hope not! The answer to your question is: Look at what’s happened in Florida — in the last two months the insurance rates have doubled, tripled, and quadrupled so much that people are now unable or unwilling to buy new homes in Florida because the insurance rates are so high. [It’s like] making a mortgage loan at 10% interest. Nobody could really afford that. The insurance is so high that people are going to decide not to move into Florida, because it’s just too dangerous.
The government getting into subsidized insurance has been a disaster. The one area that the government has got into are [beachfront] houses for millionaires. These houses, because they’re near the ocean — there [are] hurricanes, they [are] flooded again, and again, and again. So the government will (not quite every year, but every few years) for free, keep giving a 1 million dollars to rebuild a house. 5 years later, [it will] happen again, another 1 million dollars to [rebuild] the house. The government insurance for real estate is spent for the One Percent of the population that has beachfront property and it’s utterly corrupt.
It would be wrong for the government to pick up the risk of living in a flood-prone plain, like [the areas of] New Jersey below sea level. It would be crazy for the government to keep rebuilding the homes again, and again, and again. You have the people in New Jersey on the news here (in New York we’re right next to New Jersey so they keep having people from New Jersey [on the news]) and you’ll have the homeowners say, “Oh, it’s flooded again. It flooded last year. It flooded the year before. Why does God keep doing this to us? Why are we flooded?”
And they don’t realize [that] it’s not God, [but] that you’re living 10 feet below sea level and that’s why you’re flooded year after year after year. It would be crazy for the government to actually subsidize real estate developers to build yet more housing below sea level to be flooded again, and again, and again, and [just] keep rebuilding it.
I know that John Maynard Keynes suggested making employment by building the Egyptian Pyramids just to ‘make work’. But building New Jersey real estate or Florida real estate is a travesty of this. It’s too risky. So when the insurance companies are raising the prices for risk, they really are raising the prices for the risk. It really is hurricane country in Florida. And I’m not sure you really want to think of moving there.
KF: Well, maybe you have to sleepwalk to see it as a reasonable decision to move there.
MH: Well, you have Governor DeSantis of Florida saying that he’s very worried that this is going to affect his running for President against Trump in 2024. He says [that with] the cost of insurance, and the effect on real estate in Florida (Florida is all about real estate: it’s a real estate and tax avoidance state), and the hurricanes, and global warming accelerating, that [that] finishes off the whole ‘Florida model’.
KF: So are the insurance companies producing ‘risk maps’ that highlight where the higher premiums are going to be charged, and giving property owners at least some insight as to how those premiums are accelerating and giving [property owners] some sort of forecasting signals that this is not a wise economic decision?
MH: If they’ve been making risk maps, they’ve been keeping it to themselves. They don’t want to be sued, and don’t want it to be controversial, and they’re just raising the rates. I don’t know how scientifically they’re doing it, but you can certainly see where the hurricanes are, and you can calculate (or they’re calculating now): What are going to be the cleanup costs of the last two months’ hurricanes in Florida? What does it really cost? If we’re going to expect a once-in-a-century hurricane every two years, that’s 50 times in a century, then all of a sudden you have to look at this as ‘the new normal’. It’s not once in a century, it’s not once in a decade. It’s every year now.
KF: Will it be 2080, 2090 until the public recognizes this synergy, this corruption, this revolving door between government and real estate — particularly the planning departments of local municipalities — allowing houses to be built on flood plains? This is a corruption that’s gone on for centuries. How long until we finally call that out as something that just should never happen?
MH: You can never forecast when America is going to give up Christianity and [realize that] it’s not God that’s doing this — it’s economic reality.
It’s been exactly a century since Thorstein Veblen wrote Absentee Ownership. Veblen said that the way to understand any American town [or] any American city [is] as a real estate project. And the job of the mayors is to work with the banks to help get suckers to buy property. You want to promote civic pride and somehow promote the city or the state as a place that you’re going to want to have real estate in. So the real estate developers, speculators, [and] absentee owners can make money.
If you look at who finances the campaigns of mayors in the United States, it’s almost always the real estate interests. Donald Trump was a big funding [recipient] of New York City politics, which is what gave him the favoritism. Or the payoffs. (Sometimes it’s little white envelopes that are not on the record.) But American politics are all small-town politics, and it’s all about real estate and the bankers behind the real estate.
[33:07] Soumyadip Ghosh: Are there any examples from precolonial history (i.e. before Britain and the U.S.) where a country’s national currency has served as a universal reserve [currency] that has facilitated international trade outside the country’s borders or effective military domain?
MH: Well, you had the Roman currency as a silver coinage in the Roman Empire. From about the fifth to the ninth centuries in Europe almost all of the coinage had Levantine (ie. Near-Eastern) denominations, and then you had the Byzantine currency. But all these were silver currency. So you could say that during [these periods], no matter what the national currency was, it was always silver coinage in one denomination or another.
[That’s] before you had the paper currencies. Paper currencies are really a product of the modern world, and they were brought into being as a means of debt financing. Until you had national debts, you couldn’t really have a national currency, because the only way of giving [value] to a national paper currency is to accept it as payment for taxes to cover the national debt. (You couldn’t have this under kings, because if kings ran up a debt they could go bankrupt, like Edward III [who] went bankrupt and bankrupted the Bardi and the Peruzzi families in the fourteenth century.)
You needed part parliamentary democracy, which enabled Holland and the Low Countries to commit the whole country to paying a national debt. [They were able to] borrow money to fight Spain (which was their master) and get their independence from Spain because they were a democracy and Spain wasn’t. All of that had to develop really into the modern times.
KF: [When the Romans conquered] other countries, was their currency used inside those countries? And did it have an effective backing of value?
MH: It was all metal. Now, at a certain point of course, under the Empire, they degraded the currency. You had masses of coinage, and normally you’d weigh the coins ([usually from a variety of] city states) in order to decide what the actual metal content was. In practice, coinage circulated very much in terms of the commodity content, because there wasn’t much taxation then.
That’s because these countries were oligarchies and oligarchies don’t like to be taxed. Oligarchies like to control the money, and you control the money by (i) having it in gold or silver that other people don’t have and (ii) [the absence of a] democratic government that can come in and simply create it.
John Schreiner: As the U.S. reserve currency starts to dwindle, what impact will that have on U.S. residents?
MH: Not necessarily much at all. I mean, the U.S. will not be able to buy Russian or Chinese products, or products of countries that America is boycotting. It means that your taxes are going to go way up to pay the military industrial complex and there’ll be much less social spending. Homelessness will probably go up.
My friend Steve Keen is in London right now, and he says that London is looking like New York. It’s a few degrees below freezing and people are freezing to death in the streets. I guess you’d call that certainly one [end] of the spectrum of what’s happening.
We’re dealing with a multi-layered economy. The ‘macro’ is going to be that America doesn’t make manufacturers, it has to import everything. If it boycotts the rest of the world as an enemy — sort of excommunicating the rest of the world — then what are we going to do here? Nobody can even figure that out. I guess if you want things to buy they’ll have to be antiques.
KF: That’s the fascinating state of play we’re at. We’ve gone through this globalization phase, where manufacturing and pollution has been exported, and that’s being replaced by housing, production, and big infrastructure projects, particularly here in Australia (but I suppose in America the military expenditure has maintained that manufacturing base). Where do you see this ‘services-orientated economy’, that finance, insurance and real estate takes so much of — is there another step going forward? Many people thought Silicon Valley and you know the whole I.T. thing, was going to be the next stage. How do you see this playing out?
[41:20] MH: Silicon Valley is sort of a layer of output over other things. Most of its effort has been on [how to] use artificial intelligence so they don’t have to employ living labor anymore. If you’re in Silicon Valley, you say, “How can we create a world of 70% unemployment, where only 30% of the people work? How are we going to deal with that, starving the 70%? How can we make them die quickly?” That’s really the ‘technology problem’ that Silicon Valley has, and, of course, that’s the problem that the World Economic Forum (WEF)] in Switzerland is trying to “solve”.
And the war in Ukraine — America’s war against Russia and the sanctions is part of this. [They say,] “Let’s start by starving the world. Let’s start by patenting all of the anti-covid and pharmaceutical technology. We need a number of things. We need global warming to flood the highly populated parts of the world. We need starvation. We need to cut off the oil supply so they can’t heat the homes.” That’s a start in getting the kind of world that Silicon Valley [can cope with].
KF: My God, you’ve gone Malthusian on us! You really think that’s what’s coming up?
MH: You asked me what the plan was and what Silicon Valley’s role is. That’s its role. Either it can take up all of your time in Internet stuff and just watching entertainment all day long. Or it can replace you so that you don’t have a job, [which would] give you the free time to use Facebook and social networking [platforms].
KF: It’s often this battle between old and new money. And I must say you must be chuckling a little bit of recent. Have you seen any good crypto exchanges to invest in?
MH: I’ve never bought any crypto. Fortunately, I’m too stupid to understand it, and I can never figure out how it works. So I never [bought it]. I don’t like to play other people’s games. So I was immune from the whole thing.
KF: Well, it must have been a real worry for the banking system to see this tokenization come through, but perhaps the wise heads in the old money thought that a deregulated, self-interested-run currency system would undo itself in time.
MH: Obviously the purpose of regulation is to prevent fraud. That’s why people want the banks to have regular bank inspectors. When I worked for banks in the 1960s you could just see they were always very concerned when the bank inspectors were coming around, very deferential. Back in W.C. Fields comedies in the 1930s you had the bank inspector coming and oh, you have to give them everything, you’re gonna look at everything, you want to break his glasses, step on his glasses, and then he has another pair, just in case.
Government regulation is needed because crooks love to go into finance. Just like Willie Sutto said, he robbed banks because that’s where the the money is.11
My colleague at the University of Missouri – Kansas City, Bill Black, says the best way to rob a bank is to own one.[enf_note]In fact, Professor Black has written a book with this title, _The Best Way to Rob a Bank is to Own One_ (University of Texas Press 2005), which treats primarily the savings and loan crisis of the 1980s and 1990s.[/efn_note]
So obviously if you’re dealing with an inherently criminal and criminalized sector — which the finance sector has almost always been — of course you need some kind of government oversight to last as long as it can before the financial sector has regulatory capture and takes over the regulators.
John Chadwick: What’s going to happen with housing prices, with mortgage rates as they are? Will speculators step in to fill the gap? I’m in Canada and the housing prices have far outpaced U.S. housing prices, especially in the last 15 years. I suspect my kids should buy a house ASAP.
MH: Canadian housing doesn’t make any sense to me. When I went up to the [Western provinces](https://en.wikipedia.org/wiki/Western_Canada), I was driven past utter shacks, and [even] the shacks cost a million dollars. I don’t know how you can make enough money to carry the mortgage. In the United States it’s typical for housing now to take over a third of the budget, maybe 40% of many people’s budgets. Whereas when I first got a job, 25% of the budget was a normal expense for housing, either renting or for buying a house. So I can’t figure out where all of this is going.
Certainly, as private families don’t have enough money to buy housing, you’re going to have absentee owners buy them at auctions. Arrears on mortgage payments are sharply rising in the United States, so they’re expecting a wave of foreclosures, and that will probably lead to yet more absentee ownership. Right now if you look at the chart of equity versus debt, and American real estate as a whole, the equity is less than 50 [percent]. It’s been that way for 10 years. So the value of the price of housing is almost all accounted for by the amount of debt associated with it, and that’s one of the things that is driving spending away from goods and services, and is shrinking the market for what people produce, and having it all being paid to the landlord to pay the rent to the banks as interest.
KF: Michael, surely you could explain the difference between Canadian and American real estate prices through the U.S. property tax that funds schools?
MH: People don’t realize that American urbanization was all based on dividing the country into a chessboard-type arrangement of local school districts.
The great book [Ancient Society by Lewis Henry Morgan14 in the United States, now that you sort of privatized election financing. So the problem isn’t simply power. If you had good, democratic, social leaders in power (like I like to think the Chinese Communist Party is aiming at) that would be ‘people power’.
But if you have ‘financial power’, that’s ‘One Percent power’, and it’s used to hurt the 99%.
There’s always going to be power, but the question is: What will it be used for? That’s why you had religions developing in the first place. To sort of make power used for socially productive purposes to maintain economic and social resilience, rather than economic polarization that ends up impoverishing the economy and leading to the Dark Age.
Again, [the important question is:] what kind of power are you talking about?
KF: The supposed theme for today was to talk about [NATO’s] influence in inflaming tensions around Russia and Ukraine. Has NATO made any statements looking to de-escalate situations in that part of the world?
MH: Well, the NATO spokesman is probably the stupidest person that Norway could produce, Mr. Stoltenberg, and he couldn’t do any regular work so they made him Prime Minister, apparently, and now they bumped him up to head of NATO. And he says, “NATO wants to help Ukraine conquer the Russian naval base in Crimea. And the war will go on until Russia gives up.” In other words it’ll go on until Russia drops the atom bomb in six months and blows up the world.
I worked with these people years ago at the Hudson Institute. There are a group of people in the United States that *want* atomic war, and they want war now, because they’ve made a calculation — and I think they’re correct in their calculation. They say, “Russia and China are pulling way ahead of the United States. We cannot compete with them, because we don’t have the money to compete with them, because we’ve given it to the financial sector. And [Russia and China are] putting their money into research and development. Each year that goes by, they have more of an ‘overkill’ on us than we have on them.” ‘Overkill’ means: how many times over you [could] annihilate the whole population of an enemy country.
NATO is run by the Pentagon, which is run by the State Department. I won’t say the individuals who are doing it, but these are really crazy people like Miss Nuland and her husband Kagan. It’s that group of people. And they really want war.
President Biden has said the war with Ukraine is only the opening in a war that will [last] at least 20 years. We are in a permanent war to the death with China and first of all with China supporter, Russia. This is the NATO position: permanent war. If America is losing the war they would rather blow up the world than lose the war.
And especially that’s true of the Republicans, the former CIA head [Pompeo], the Christian who said “Well, there’s one good thing about atomic war ending the world, Jesus will finally come and send all the Christians to Heaven and everyone else to Hell.” If you have crazy Christians who believe that, and they’re in charge of the military policy, you’d better break away as quick as you can.
KF: Is anyone talking about just how many NATO bases surround Russia? And has there been any olive branch offered to to pull a couple of those back particularly with this de-dollarization trend coming through?
MH: Absolutely none, no. They’ve simply hardened their line. You can read the speeches of the Russian Foreign Minister Lavrov or [President] Putin and they’re very open in what they’re stating. And you can read this statements of NATO, what NATO Secretary General Jens Stoltenberg says, or the [German Foreign Minister (and former co-leader of The Greens) Baerbock.
The Green Party in Europe is absolutely set. They want to accelerate global warming. They want to accelerate the rise in sea levels. They hate Russia. They want to have people go back to wood and coal, kind of Paleolithic heating. [It’s as if] the German leadership has a death wish. Well, it’s not really a death wish. It’s the money wish, because they’ve been groomed by U.S. NGOs for many years to support US policy, and they know where their money has been coming from, their support. And you have the United States having meddled in Europe to have Europe’s leading politicians — certainly on the left and the center — all be American proxies.
So you have only the nationalists, who the Americans didn’t try to infiltrate, because [America] was supporting ‘the nationalist-right’ before, and all of a sudden the parties that the Americans didn’t infiltrate — Alternative for Germany — and the other right-wing parties, are the only people who are trying to move against this increased belligerence.
It’s as if Europe is committing not only economic suicide, but a political and demographic suicide. Where are Germany’s industrial workers going to emigrate now that they don’t have jobs in the steel industry, in the fertilizer industry, and any other German industry that they’ve been working for for the last 50 years?
[59:50] Dena Lebowitz: As we discussed last time, the U.S. is basically asking Germany to commit economic suicide. [Have] there been any updates on that? Have any of the German [political] parties started to really question these sanctions?
We just recently had a German living with us and he said, “Look, the energy prices have gone up but they haven’t been as extreme as we thought. It hasn’t been too bad.” According to the nineteen-year-old who was staying with us, [Germans] can handle this. Are there any ripples occurring through German politics? "
["only seeing the result of financializing the economy there's nothing secret there uh there's no conspiracy this is uh how"]
MH: Well, the reason German energy prices haven’t gone up more is because the steel industry stopped using energy; the glass industry stopped using energy; the fertilizer industry stopped using energy. So of course the German homeowners are able to heat their homes with gas. The oil prices I’m told have gone up very [sharply], maybe 5 or 6 times in Germany. Well, that’s a lot of money to go up. There’s been a lot of people fired. So your friend obviously isn’t a steel worker who’s been laid off because the company’s just closed down operations.
So what do you do if your whole industry has gone down and will not open? That’s the important thing — Russia and Germany have each made it clear there will not be any Nord Stream rebuilt. This is a permanent shift from Russia all the way east to the rest of Asia. They’ve ended the reliance on Germany, Italy, France, and the rest of Europe.
Europe no longer is going to have a trade and investment relationship with the rest, because they’ve shown that they can’t be trusted. And, thanks to the fact that there’s been the American sanctions, that has led these countries to realize that they need to become independent in producing basic needs — basic industrial goods, basic requirements — so that the United States and Europe never again can say, “We’re going to hurt you by cutting off something you need that’s essential.” They’re all relying on each other for essentials.
So European progress has ended. We’re seeing the end of a 1,000 year takeoff ever since the Crusades.15 We’ve seen the end of European prosperity that’s irreversible for at least a century, and I don’t think the population has understood that.
Today I had an [hours-long] discussion on German radio about this, and they [said] that there’s no discussion of the kind of thing that you and I have been talking about here, or that we talked about on Patreon, that has occurred in Germany, at all, in the newspapers. It’s just like a news blackout of topics about where all this [is] really leading to — no discussion whatsoever.
KF: Yeah, day to day reporting and no medium to long-term analysis. It’s a great way to keep the blinkers on, isn’t it? Long live the Internet to allow some of this necessary analysis to occur.
If we look at this energy trend that is being enforced upon Europe, obviously it’s going to affect inflation rates there; and we look at the effect of natural disasters around the world as well, that are going to lead to pricing spikes in various commodities additionally.
Is there a role for central banks to change the way they apply pressure to inflation, through the interest rate mechanism?
MH: I hope not. I don’t think central banks should exist. Central banks are a disaster. They were created essentially by the wealthy financial sector — especially foreign creditors16 — in order to gain control over governments. No government needs a central bank. The United States did very fine with a Treasury long before there was a Federal Reserve. The Treasury — any national treasury — can do everything that a [central] bank can do. A central bank [takes] economic management and financial management out of the hands of democratically elected officials and puts it in the hands of the commercial bankers.
[Regarding the] Federal Reserve, I have an article17 on my website that I published in India some years ago (the article will be part of the book that I’m working on now on the Tyranny of Debt) on the origins of the Federal Reserve. After the Crash of 1907 David Kinley wrote a huge set of volumes,18 looking at economic banking history throughout the world. He pointed out how the Treasury was doing everything that the Federal Reserve did. When the Federal Reserve was created, they did not even permit a Treasury or Washington official to be on the board. They said, “We’ve got to take all management out of the hands of democratic politics, because if you have the people voting on what to do, they won’t vote for what we, the 0.1%, want to do.”
So they moved the central bank out of Washington, to New York City, and they had other brands and other banking centers, Philadelphia, Boston, Chicago, now twelve banking centers — the same places where you’d had sub-Treasuries before that.
Central banks are basically the planners and the sponsors of the financial sector. They’re inherently anti-democratic, so there’s nothing that they can do that’s positive because they’re created for the same reason you see in the United States today: What does the central bank produce? Unemployment. That’s its job — to prevent the economy from growing. And to make sure that more and more of the national income is paid to the banking sector, because central banks are the lobbyists and the protectors of the banking sector, protecting them from government.
KF: People who read the mainstream news may well say that sounds like a giant conspiracy, Michael.
John Chadwick wants to add to our new vocabulary the phrase ‘global coup d’état’ which is taken from a Twitter thread posted by Archbishop Carlo Maria Viganò:
For two years now we have been witnessing a global coup d’état, in which a financial and ideological elite has succeeded in seizing control of part of national governments, public and private institutions, the media, the judiciary, politicians and religious leaders.19
MH: That’s not a coup d’état, that’s how the world’s been operating for so many years! Where’s the “coup d’état”? What’s new? We’re only [describing] the result of financializing the economy. There’s nothing secret, there’s no conspiracy. This is how the logic of financialization works, as distinct from industrialization. It’s a different set of economic interests. If you have the entire financial sector, in almost every country, following this financial logic, there’s no conspiracy there. To them, that’s how the world works and even how it should work.
The coup d’état they’re worried about is a democratic coup d’état of having economic reforms that definancialize the economy, and have the kind of a fair progressive tax system that you and I have spoken about.
All this has happened before. This is not new. This is part of a long historical trend.
KF: Well, thank you very much for another fascinating discussion, and thanks to our beloved Patreon community.
MH: The question is, how do we spread our knowledge? How do we institutionalize ourselves? How do we spread and really become ‘agents of influence’.
KF: Well, why don’t we do a session on that next year? — Just have an operational discussion on what the various people within our Patreon group could bring. And how we could work together to help take Michael’s work to a wider audience, and bring the rest of the community along.
MH: I think that a lot of you have the same logic that I have, and there are many people that have it. But it’s not institutionalized, and it’s not discussed in the “polite mass media”. It’s discussed a lot on the Internet. But how do we go beyond that?
- Is part of a longer, 1000 year historical cycle...so much good information to help me understand the reality of the world today. From the book "The Tyranny of the Federal Reserve" (which the book Michael Hudson will be working on, it sounds like will be quite similiar to but a bit different ) - From that book though, it goes back to about the 1400's I believe when a King was convinced, from a Bank, to take a loan. - Governments are the best debtors because they have a whole nation with which to tax, so their "credit rating" is very high, especially the larger the base is (people - and the "real" economy) and security (military) of that state is.
"Central Bank Balance Sheet in the United States averaged 3,372,776.47 USD Million from 2002 until 2022, reaching an all time high of 8965487.00 USD Million in April of 2022 and a record low of 712809.00 USD Million in January of 2003. This page provides - United States Central Bank Balance Sheet - actual values, historical data, forecast, chart, statistics, economic calendar and news. United States Central Bank Balance Sheet - values, historical data and charts - was last updated on January of 2023."
- Look at the graph - switch to 10 year views - The U.S. Central Bank printed from before 2020, was under 4000000 MILLION to OVER 8000000 (too many numbers without commas)
Central Bank Balance Sheet 8,584,576.00
Foreign Exchange Reserves 35,620.00 (so the central bank is holding 35.6 billion while holding debts on 8.58 trillion (of dollars)...?...(*lost for words*))
I don't know what these mean but: https://tradingeconomics.com/united-states/money-supply-m1
Am thinking it's tracking where the different dollars are located and together they are the total money or dollar supplies in the world...(is something like that I imagine).
Household debt to GDP:
Currently at 75.58. - So, for the average household, 75% of their income goes to debt payments (or should, theoretically). Michael Hudson and others I've put on my blog, talking about money and the economy etc. are correct.
Russian household debt to GDP: 21.76 (according to the IMF from above).
Austrialia: 119.32 (wowzers)
Saudi Arabia: 15.97
7 great economists and how their ideas still affect us today
Despite being called the "dismal science," economics impacts our lives every day. Here, we look at seven of the greatest economists in history.
Americans are nice - good people:
Americans are among the most loving, Chinese and Germans the least
A new study of global love finds that Americans have some of the most loving relationships, while Chinese and Germans have some of the least.
Credit: P. Sorokowski et al., Scientific Reports, 2023
An international team of scientists surveyed 9,474 individuals from 45 different countries about how loving their relationships are.
Participants in the U.S., Italy, Portugal, and Hungary reported some of the most loving relationships, while participants in China, Germany, Turkey, and Pakistan reported some of the least.
The researchers also found that a country's modernization, gender equality, collectivism, and temperature were associated with greater feelings of love in relationships.
Karl Fitzgerald: Alright, let’s get into it. We’ve got lots of good questions. Welcome, everyone. My name is Karl Fitzgerald. I’ve been Michael’s webmaster for over a decade now and yes, we’re so lucky to have Michael Hudson with us today. We’ve all read his books. We’ve all seen his whirlwind approach to unveiling the reality of economics so yes, Michael, great to have you here. I wanted to start off with just a nice easy one.
I’m sure you could answer this in your sleep but for you, what are some of the guiding principles that listeners should really grasp in terms of just how rigged our economic system is today? What’s the handful of principles that you think are a useful barometer for people to grasp just how off-kilter our economic system is?
Michael Hudson: I’ve been working on a vocabulary to describe these principles. There are a number of seemingly opposing forces at work. I think we should call the inflation, The Biden Inflation, because the inflation that we’re seeing is almost entirely the result of Biden’s inaugurating a new 20- to 30-year cold war with Russia. He’s announced that it’s going to take 20 or 30 years. He said Ukraine is only the opening. His sanctioning of Russian oil, gas and food is pushed up by inflation by about at least 10% from Europe all the way to the United States. So, on the one hand, this inflation that people are saying is the problem has led the Federal Reserve to say, “Well, there’s a cure to that Biden inflation. Let’s have a depression and lower wage rates. If only we have more unemployment, we can cure the inflation.”
So, you have the Biden inflation and exports that are forbidden from Russia going together with a deliberately central bank inspired debt deflation. And I think we should call this the Obama debt deflation because it all stems from 2008 when Obama had promised to write down the junk mortgage debt but as soon as he got in to office, he said, “No, we’re not going to write down the junk mortgage debt. We’re going to write down the debtors. We’re going to evict 10 million American families from their houses because my campaign contributors are my constituency.” And so, he kept the debt on the book.
This is one of the few times in modern history – normally, when there is a business cycle, it peaks and then, there is a financial crash. And the one good thing about the financial crash is it wipes out the savings of the 1%. But Obama said, “The economy is really the 1%. The 99% are overhead and so, we’re going to preserve all of the debts on the book and write down what labour gets in net disposable income. That is, the disposable income after paying taxes and after paying debt service.” And in America and Europe and certainly, in the global sales countries, debt service has gone way up.
So, at the same time, you have the labour force faced with rising cost of living for energy, food and other things, with a deliberate central bank desire to cause unemployment to increase corporate profits of the 1% against the 99%. You’re also having families much more debt-ridden than they were before. Education debt is now soaring in America, even beyond credit card debt. Bank debt, housing debt, mortgage debt, they’re all way up and of course in England, there is a special twist that there isn’t in the United States. At least, in the United States, housing prices may go down but for new houses, it’s more expensive but if the credit interest rate, mortgage rate goes up from 2½% to 6%, at least, that’s for new buyers.
But in England, the rate goes up from 2% to 6% for everybody who has already taken out a mortgage. There are no fixed rate mortgages in England. And so, there is going to be a wave of up to one third of English home owners thrown out on the street. This is the ideal of what we’ve been calling neoliberal economics but as you notice from what Karl put up today, my discussion with Ralph Nader, he says that neoliberal is an academic term used by economics professors. And he says, “Instead of a neoliberal economy, say bank-run economies.” And that’s probably a clearer term.
These are phrases that I wanted to throw out for discussion to see whether they really help. I’m trying to give a new vocabulary to understand the dynamics that are happening today because the vocabulary should really describe the economics and the label should match the content instead of the labels that we have in the media.
Karl Fitzgerald: Yes. You touched on the UK there and the resignation of Truss, Britain’s current economic woes. Where do they stem from? Is it monetary mismanagement or due to self-imposed economic sanctions? How much are due to structural problems and debt overhang? [So, (Patreon), John Connolly. [pause] Oh, you want me to repeat that? (Audio problems)]
John Connolly: Yes. No, you summarised the question. I’m just interested in the factors underlying Britain’s current economic woes. How much due to economic sanctions? How much due to monetary mismanagement? How much to debt? (08:34)
Michael Hudson: Ah, I thought that was all the lead-in. I didn’t realise that Karl was reading a question. Well, the answer is just, they’re English. I mean, this has been going on for a thousand years. I probably shouldn’t say English because England hasn’t had an English king ever since King Canute in 1040 or something. They’ve all been Normans or Dutch or Franc’s or somebody else, or German’s. England is just a total mess. I think that once Thatcher followed by Tony Blair with an exclamation point turned it into a bank-run economy and essentially turned over the whole economy to the City of London, the voters got so angry that the reason they wanted to whisker off from Europe was they saw that their international banking sector was what was impoverishing them.
And they withdrew from Europe just really to punish the bankers. And so, the bankers got the revenge by basically leaving an economy that had turned away from an industrial economy into a financialised bank-run economy and it doesn’t work. And it won’t work. I think with 20-30% of English homeowners losing their homes, where are they going to go? Maybe they’ll migrate to Ukraine, after it’s all wiped out. I don’t know. They don’t speak a foreign language. That’s a problem with English speakers. I guess they’ll all become Karl’s neighbours in Australia maybe. I don’t know what’s going to happen but basically, it’s the financialised economy, de-industrialised economy and a privatised economy.
Privatisation has killed England and the tax policy of taxing labour, not land and capital, has essentially created a parasitic ruling class. There’s almost no way to make money by producing a productive service in England. Parasitism is the only way that you can survive in an economy as backward as England has become.
John Connolly: So, what’s the prognosis? A lost cause, pretty much?
Michael Hudson: Independence.
John Connolly: Okay.
Karl Fitzgerald: Steph L asks, so what do you think the British global financial class wants to see from the UK Government?
Michael Hudson: Exactly what Ms Truss had done. Tax labour and industry, not finance.
Steph L: That’s kind of what I asked actually, because I found it so hard to understand why there seemed to be – it seemed to be like the Bank of England specifically moved against Truss to get her ousted and I couldn’t understand because from what I saw of the budget, it seemed pretty well on line. Do you think there was something else at play with why she’s getting shown the door?
Michael Hudson: Yes. It’s not the budget. It’s the fact that the labour unions and the pension funds had taken out derivatives, financial derivatives with the banks. They had thought that if you take out a derivative, that will actually protect you from losing money in the event that interest rates go up. But derivatives really don’t get rid of the risk. They merely transfer the risk. And what the derivatives trades that were done by the labour unions and the pension funds did, were basically shifting all the risk off onto them, off the banks. It’s a bonanza for the banks. You should be very happy if you like GDP. GDP has gone up. Bank earnings have gone up. Wealth has gone way up in England because you just impoverished the labour force.
This is exactly what academic economics says should be done, so the bankers should be very happy and maybe the English people can all move to Scotland if there’s any room. I don’t know, but there’s no work for them in England now and they’ve essentially had, were watching their pensions being wiped out by Trump’s policy and the Bank of England was trying to prevent that. But it’s all in the derivatives. It has nothing to do with the budget deficit, nothing to do with spending at all. It’s all on gambles. The banks told them to go to the casino and promise that they’d win. Of course, that’s just what Donald Trump told people, to go to his casinos. And the casino always wins. You don’t win in going to the financial casino unless you’re one of the billionaires and one of the big players that can monopolise and control the market.
Steph L: Okay, thank you so much.