Living with Price Above Value

by
Michael Hudson
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An interview with the Positive Penger group.

Jussi: So welcome all and welcome Michael. Good to have you here again. How are you?

Hudson: It’s good to be back.

Jussi: Our pleasure as usual. Let me just introduce you shortly first. I think most people know quite a lot about you. I’ll make it short. You have been an advisor to governments, warned correctly about the debt crisis in Latin America and the great financial crisis 2008. You worked on Wall Street as an economist. One of your assignments was to calculate how much it was possible to indebt Latin American countries so all their export income was used to pay interest on loans. Another way to put it, how much can you put these countries in debt. As an associate at Harvard you led research into four thousand years of the history of debt, money and the economy, and published five volumes of colloquia on this history. Also you have written nine books on modern economic relations.

Last time you showed us that big financiers historically have acted to write the rules for their benefit. We call that financialization. For that to succeed, finance must influence our way of thinking, mainly with regard to how we view money, debt and value. Today we will go into value and price theory.

But before that, I think we could do a short summary of last time. You gave us a long-term view of money, debt and the economy. starting from Sumer and Babyloni to today. You showed that there have been thousands of years of power struggles with financial interests wanting to take control of a society and the economy, and it goes on today.

If you look at this picture we can simplify this by dividing history into two parts: First from Sumer until Rome. That’s the green part in the picture. During that time, debt jubilees by palaces to whom most debts were owed were common. Money and credit systems a tool to develop society. Local authorities used bookkeeping to keep track of transactions and to record debt and credit. And rulers used debt jubilees to cancel personal debt in order to preserve self-sustainability in society.

Then we jump over to the reddish parts here on the screen: from Rome to today. There we have the change and suddenly private financiers are in power due to their financial wealth. Money is viewed as wealth, a commodity and scarce. Debt is sacrosanct, otherwise no creditor will give loans and the economy will fail without financing. This made it possible to use private debt as an instrument to grab land from others as long as you can enforce it.

And you were also into, from your Canadian experience and a few other things, that government debt in your own currency is not the problem. High private debt or government debt in foreign currency is a cause for crisis. We also have had Steve Keen here and he showed this clearly, even though common thinking seems to be the other way around. I tried to make that short, is there anything you like to add on that Michael?

Hudson: That’s basically it. You mentioned that financiers write the rules for their own benefit. These rules are called constitutions and bodies of law. Pro-financial laws have been the distinguishing feature of Western civilization since classical antiquity. That represented a sharp break from earlier Near Eastern practice. Greece and Rome didn’t have kings, at least after the kings were overthrown by Rome’s oligarchy early in its history. So the elites succeeded in blocking the tradition of Near Eastern monarchies cancelling personal debts and preventing an oligarchic financial class from emerging.

That is what makes Western civilization so different from everything that went before. Because without kings, without strong central government, or what the Greeks called tyrants, the oligarchy gained control, and managed democracy by a number of political tricks. Like the pro-boule in Athens, the Roman Senate could decide what the public assembly was allowed to discuss. Rome’s oligarchic constitution let everybody vote, but a rich landowner’s vote counted for hundreds of times more than the vote of most people. It was much like the United States today, where the donor class’s campaign contributions to U.S. politicians far overshadow what most voters want. The political rules in the United States reflect the donor class rather than democracy, just as in ancient Rome.

Jussi: Okay so Rome was the cradle for what we see today.

Hudson: Yes.

Financialization’s business plan: Privatizing rents and paying them as interest and fees

Jussi: Okay, thanks. Let’s discuss financialization. Can you tell us a bit about what it is, what is its business plan, and what foundation does it stand on? How is it played out in today’s world? I think you said a bit about it, but please tell us more.

Hudson: Financialization requires going into debt in order to get basic needs – housing for instance. Instead of paying rent to the landlords, like you did ever since feudalism through the 19th century, housing now is bought on credit. So the rent that used to be paid to landlords is now paid to the banks as interest. Renters pay interest, and over the course of a 30-year mortgage the banks end up receiving more money and interest than the seller receives when he or she sells the property. So the idea of paying rent as interest for a loan to get property is how commercial real estate investors as well as homeowners operate.

This debt leveraging goes right throughout the economy. Instead of funding pensions or healthcare on a pay-as-you-go basis as they do in most of Europe, current income has to be set aside in advance and invested in the financial markets – in stocks and bonds, or in just plain financial gambling. The hope is to make money financially. But the way that the financial sector makes money involves exploiting labor. So labor obtains its pensions by financing the exploitation of labor in order go get financial returns to pay its pensions. That’s what Marx called an internal contradiction.

The financialization process is basically anti-labor. Inasmuch as the policy aim of financialization is privatization, it wants to become the government. Financialization wants the banks to be the government and allocate credit and resources, not democratically elected officials. So financialization and libertarian free markets aim at centralizing control in the hands of banks. You have a more centralized control under financialization than you do under democracy or even many state-run economies that are controlled by the financial sector.

That sector uses this control to force the state to sell off its public enterprises, railroads, pension plans, it’s healthcare and all of this, and to privatize education, healthcare and other basic social utilities. Financial charges, management charges and stock buybacks are built into the cost of providing these basic needs. So financialization sharply increases the cost of the economy and it increases the cost of the economy in the form of rents, interest and financial charges paid to the Finance, Insurance and Real Estate FIRE sector – the FIRE sector, in a way that ends up shrinking the economy and preventing its ability to pay the debts. So financialization leads to crises, because its business plan is to get all the money for itself and impoverish the economy. But by impoverishing the economy, it does what Rome did, it leads to austerity and a Dark Age.

You can see this in education that’s been financialized in the United States. It’s provided freely from Germany to China, but to get a college education or even for many high schools in America, you have to take out a loan, at high interest (about 8%). As is the case with housing, the cost of getting an education is however much a bank is willing to lend the student.

The problem is that this leads to debt deflation. Financialization siphons off more and more of the economy’s income in the form of interest, financial fees, penalties and economic rents to the sectors that the financial and banking sector supports.

The classical theory of value, prices, and economic rent as unearned income

Jussi: Okay thanks a lot for that Michael. Let’s get into our perception of value and prosperity and start with classical economists. Can you start by giving us your background and connection to the classical economics, and then tell us how they viewed the economy, and especially their concept of value and price, and a how country should prosper.

Hudson: When I was teaching in the 1960s and 70s, the history of economic thought was still part of the graduate economics curriculum. Students had to learn the history of economic thought as a core course, and they also had to study economic history. Most of my early books were on the history of economic thought, especially international trade theory, balance-of-payments theory and American protectionism. So I had to read all of the classical economists leading up to Marx.

The classical economists were almost diametrically opposed to the kind of economics that’s taught today. That is why it’s not taught in economics courses anymore. The ideas of the classical economists, from the Physiocrats to Adam Smith, John Stuart Mill and his followers, were to free economies fromthe landlord class. The classical economists wanted to develop Britain, France, Germany and other countries industrially. They thought that the only way of becoming industrially competitive was to minimize the free lunch taken by the landlord class in the form of rent – income that rent recipients make in their sleep, as Mill put it. The classical economists also aimed to get rid of monopolies, which obtained monopoly rent much like land rent. This aim involved getting rid of financial rents and natural-resource rents also.

The idea was to free economies from having to pay such rents so that their costs would only involve paying people who actually contributed to the production process. This was to be achieved in a number of ways. Either you would tax away a land rent by a rent tax, which is what John Stuart Mill urged, or by simply nationalizing the land. There was a debate over whether the state should take control of the land by buying out the landlords, or just plain nationalizing it. But one way or another the idea was to get rid of the landlord class and its income that did not reflect a productive activity adding to real value.

The problem was how to do this with governments ruled by parliaments like those of Europe, dominated by the House of Lords in Britain and other upper houses in continental Europe. That required radical democratic reform. The theory was that with democratic reform, people would vote in their own interest. They were expected to vote to shift the tax burden onto the rentierclass, the landlords, monopolists and creditors, not tax labor and industry. That was supposed to make the economies much more competitive industrially. That was the common policy denominator from the Physiocrats through Adam Smith and subsequent classical economists: to free economies from the burden of unearned income and the rentierclass that collected rent in their sleep.

Jussi: Okay so it seems like they wanted to get rid of overhead and focus on the value made by those who created something substantial that we could use in society. So that’s actually opposite to the financial sector, which extracts money fromthe economy.

Hudson: Today’s banking sector is in a symbiosis with the landlord class, because 80 percent of bank loans are mortgage loans. The financial sector’s main clientele are the rentierclasses, the very classes that classical economists wanted to free economies from.

Jussi: When we look at the economy today, it seems like it’s very, narrowed down to individual agents and how to optimize, maximize their profits or whatever you would call it. But in a society, you actually have relations with others also, so is there a difference between how the classical economists view society and how the neoclassical views it?

Hudson: Sure. They’re diametric opposites. Neoliberalism is really not individualism, because it ends up destroying individual choice. It’s an anti-government policy. What they call individualism is getting rid of government controls. They don’t want governments to have the power to tax rentiers. They don’t want government to have the power to regulate the banks. Let the banks decide what to make money on, and let them decide who’s going to administer the Federal Reserve or the European Central Bank and other government agencies. This is a travesty of individualism. It’s dictatorialism. That used to be called fascism a century ago.

A financially centralized economy creates an oligarchy and denies 99 percent of the population a voice in policymaking. That’s euphemized as individualism, but it’s fascism basically. The idea is to prevent government from doing anything that does not favor the FIRE sector and the monopolies that it creates.

To defend this as being efficient and productive, neoliberals claim that there’s no such thing as unearned income. The basis of neoclassical economics – now called neoliberalism – is to say that any and all income is earned. Anybody who earns any income, whether by charging interest, being a landlord or inheriting stocks and bonds in a trust fund and living off it – all this is claimed to be reward for contributing to production.

That means that all wealth is earned, and wealthy people are not the parasites that classical economics depicted them as being. The pretense is that they’re productive people, as if the world could hardly exist without banks and landlords to manage it. They now call themselves the “meritocracy.” It’s as if the host needs the parasite, because neoliberal economies are all about the parasites, even if they kill the host. So basically you have a predatory economics using a rhetoric designed to distract attention from what Adam Smith and the classical free market economists were actually talking about.

Jussi: Okay so what was a free market for Adam Smith?

Hudson: The free market was a market free from economic rent. It brought prices in line with actual cost-value. Rent is the excess of price above value, and it was to be minimized, so as to make economies free from interest and from the ability of the landlord class – in Smith’s day the main rentierclass – and also the financial class. These elites sought to wage or finance wars, to try to grab more land, to get more land rent, to create monopolies and business plans that essentially were exploitative. Adam Smith wanted a free market fromthe rentiers, whereas the neoliberals want a free market free from the government and forthe rentiers.

Jussi: So it’s the other way around again?

Hudson: Yes.

Jussi: So how come that is allowed today? Why do people buy into it – not everybody, but most anyway. That’s the common order everywhere.

Hudson: Well they don’t know there’s an alternative. That’s what Margaret Thatcher said: There iI No Alternative (TINA). If you don’t teach the history of economic thought anymore, and if you don’t teach economic history in the economics curriculum, how are people to know that there is an alternative and that things don’t need to be this way? The economy doesn’t have to suffer from debt deflation. It doesn’t have to go into debt to get an education. You don’t have to go bankrupt to pay your medical bills. You don’t have to save up your pensions by investing in companies that are trying to cut your wages.

There’s no real economic discussion of how economies actually work. Instead, you have a parallel universe of how ahypothetical economy would work in a completely different world – a world in which governments don’t exist, in which bankers are very productive and help the economy grow. The bankers, landlords and monopolists are depicted as the most productive organizers of society, trying to protect labor and industry from intrusive governments and taxes.

The proper role of the state is to minimize rentierincome and prevent a rentieroligarchy

Jussi: So if you look into the state’s role, what was it according to the classical economists?

Hudson: The state’s role for classical economists was to protect the economy from landlords seeking to monopolize wealth. It was to do this is by taxing economic rent or nationalizing the land. The state ideally would enact anti-monopoly legislation, such as you’re seeing in Europe today against Google and other technology companies. It would promote environmental regulations, so that if an oil company or mining company pollutes, either you prevent it from polluting the environment or you fine it to pay for the cleanup costs. The role of government is to protect the economy fromthe rentiers, not serve them.

Jussi: Okay, then we take the other way around: What do neoclassical economists say the role of government is?

Hudson: To disappear and relinquish its power to the banks and the One Percent. The only role of government is to do what it did in Rome: to assassinate popular leaders who advocating cancelling the debts or redistributing the land. The role of the state for neoliberals is to protect the oligarchy from the people, to prevent real economic democracy and roll back everything that the 19th century was fighting for: creating a parliamentary democracy in order to free economies from the rentiers. You roll back reforms. Essentially they want neo-feudalism, so we don’t have to call it fascism. We can call it neo-feudalism. They want to put things the way they were back in the 12th century.

Jussi: Wow, it seems like it’s going backward, to say the least. So, what should the economy’s role be, according to classical economics?

Hudson: Well not only according to, but in reality. It should prevent rent seeking. The basic idea of an efficient economy is to minimize unearned income, because somebody has to pay this unearned income. If you have landlords charging whatever they want, if you have banks inflating the price of property – so that people have to pay in America up to 43 percent of their income for a government guaranteed mortgage – then you’re going to be priced out of the world market. So a good economy would prevent rent seeking. It would tax away the economic rent, which otherwise would be pledged to the bank, and it would regulate monopolies. Most important money and credit should be public utilities. So it shouldn’t be privatized.

The problem today is the rentiersectors: landlords, monopolists, and the oil and mining natural-resource rent recipients. All these sectors are backed by the banks. It’s the banks and the financial sector that are the mother of trusts.

If you keep money and credit in the public domain then credit will be extended for purposes that actually help promote prosperity, not that counteract it. Government money creation by deficit spending is spent into the economy for labor, for industry to build infrastructure, for productive purposes. Privatizing bank credit siphons off income from the economy. At issue is what’s going to be the priority: the host or the parasite? Governments should help the host, not the parasite.

Jussi: So it’s basically a question of what builds a good society, an what is prosperity and what is real value – back to that question.

Hudson: That really was the crux of classical economics: value and price. Classical economics said that we pay many prices way over what the value of things are. and the difference is economic rent. It’s okay for people to pay the cost of construction, building a house or producing a commodity. But if you have to pay interest and all sorts of financial charges and rent extraction on top of this, that’s not value, that’s empty price, that’s price without value. That’s what economic rent is. So that really should be the key focus of economic reform and for thinking about how economies work.

How China is following the classical development policy of industrial capitalism and socialism

Jussi: Okay, thanks. Is there any country today that builds its economy differently or more according to the classical economics view?

Hudson: The closest is China, which is following pretty much the same industrial logic that Britain, Germany and the United States followed in the 19th century. It’s protecting its industry. It is trying to prevent a financial oligarchy from emerging and gaining power. So it’s doing what everybody thought industrial capitalism was evolving toward before World War I. China’s really the kind of society that people expected Europe and the United States to evolve into before they were sidetracked by financialization.

China has kept banking in the public domain through the Peoples’ Bank of China. It can decide what to create credit for – and it’s creating credit largely to build more factories, to build infrastructure for the Belt and Road initiative, to minimize military spending as much as possible and simply to add to economic efficiency, to provide education freely and provide health care. And not to turn labor into commodity, not to make health care a commodity but a public right, not to make money a commodity but as a public utility,

Jussi: Interesting. In what way have you been working in China?

Hudson: I’m a professor at a number of Chinese universities, I was a professor at Peking University, and now in Hong Kong. I talk with government officials about how they can avoid financialization. One of the problems that China has right now is the same problem that you have in the United States and Europe: What do you do with localities that are unable to balance their public budget?

Right now in China, localities in the rural areas have to balance their budgets by selling off or leasing property to real estate developers. That’s the only way they can get money. Much as Chicago and other U.S cities are selling rights to parking meters or toll roads for that. My recommendation to China is what I would recommend to Europe and America. I’m urging the central bank to create the monetary revenue sharing, so that local governments do not have to sell off land – or if the land is sold off, to tax back its rising rental value so that you don’t have a rentier class developing.

A second thing that we’re talking about right now is why China sends students to the United States to study economics here. It made this decision in around the 1980s, seeing that America was the most prosperous country in the world. How are you going to learn economics? Let’s send our students there and find out what it’s done.

But it turns out that economics students in America don’t learn how America got rich. That’s not taught anymore; that’s classical economics. They are taught about how to go to business school and load the economy down with debt, and avoid protectionist policies.

So I’m developing an alternative agenda, an alternative syllabus of the history of economic thought. A summary of my ideas is going to be published in Chinese and American next month. I have a series of lectures that are right now on youtube in English with Chinese subtitles that are sponsored by the Lingnan University in Hong Kong. I think the first lecture had 148,000 viewers, so you have an idea of how much interest there is in China to see that an alternative to neoliberal thought. If they want to find out how America got prosperous, they should actually look at how America did get prosperous in the 19th century and early 20th century – and also how it’s not getting prosperous anymore, but is destroying its prosperity.

If China were to send its students to America, the essence of what they are taught is that China never should have developed. It was all a big mistake for China to make its population richer, because that’s interfering with the free market. If China would have left a free market, then you’d still have a coolie trade, you’d still have poverty, you’d still have a free market as the status quo. They’re taught that China should just dissolve the government and turn power over to the banks.

You can imagine what the Chinese students must be laughing about when they hear these courses. But they have to get the degree, because that’s what they’re here for.

I’m trying to revive the alternative discussion of classical economics which of course is what led into Marxism. China identifies itself as a Marxist country. Quite right, but I’m saying that Marx was the culmination of a classical tradition that led naturally to culminate in Marxism, so I’m showing the classical foundations of Marxism.

Jussi: What are the classical foundations of Marxism?

Hudson: Rent theory, extended into profits as another kind of exploitation, but one deemed “productive” under capitalism. We’re back to value, price and rent theory, and surplus value.

Jussi: What you’re saying is that China did what they say we shouldn’t do in the Western countries: They use the government to create money to build the country.

Hudson: Yes

Jussi: And that is a bad thing according to common education?

Hudson: Neoliberals say that this would “interfere” with the free market. If you had a free market neoliberal-style, only the banks would create money. They’d create credit for takeover loans to buy out companies, and essentially for corporate raiding and asset stripping. The question is: What are you going to create credit and money for?That’s the real issue: What is the aim of money and credit creation?

Jussi: Yes, what should we use our resources for, that’s true. Is there anything else you think that we should learn from China’s economy? I’m not talking about the political system, because that might be a bit sensitive, but from the economic point of view?

Hudson: You can look at the problems that China’s having right now. Its property prices are going up, and a number of companies are in trouble. Let’s look at how the financial dynamics – as opposed to the industrial dynamics – are developing there. Watch and see what the balance is between finance and industry, and watch whether China is able to maintain a labor-oriented industrial strategy and resist privatization and monopoly.

You’ve already seen that they’ve limited Jack Ma’s attempt to use the Ant system as a telephone credit by saying: “No, only the government can create credit, not you.” So they already have a pretty good feel for this. Watch how they’re de-dollarizing their economy and making themselves independent of U.S. Dollar Diplomacy, which basically is aimed at spreading financialization throughout the world.

The logic of public infrastructure investment: to lower the cost of living and doing business

Jussi: Could you tell us something about the Belt and Road initiative, because quite a lot is written in Swedish media about it, but it’s never like any deep understanding.

Hudson: The basic principle at work when you’re developing ports and other shipping, railroads and basic infrastructure for trade and exchange is whether you are going to do this for profit or for overall economic development? Neoliberals have criticized China for the Belt and Road initiative by noting that the first investors in the Panama Canal all lost their money. The company went bankrupt. The world needs a Panama Canal, but it cost more than early revenues brought in. The same thing happened with the Suez Canal. It was a financial disaster and helped ruin Egypt financially.

China’s response is that it’s not building canals and ports to make money off them as such. They are building these ports in order to develop the economy and create an exchange so that the overall economy will be more prosperous. There will be a shared prosperity from China spreading out along the length of the Belt and Road to Europe, developing the economies there instead of lending like the World Bank would do – which would be lending for plantation agriculture and for very expensive American engineering firms.

China is looking at the economy as a broad system, not for quick profit-making. They’re looking at the economy as a mixed public and private economy. How do ports and the other infrastructure investment that that China is developing actually help the country.

Obviously, countries receiving this investment in ports have to pay something for it. But the prosperity created by ports and other infrastructure is what enables them to pay. So China is making productive loans to these countries and if the country is not able to pay, it doesn’t then foreclose in their property and say: “You have to sell off your oil wells and mineral rights to our mining companies, and you have to privatize.” China has shown itself willing to write down the debts or defer payment. It doesn’t try to make loans to countries in order to foreclose. It doesn’t tell countries: “We will lend you the money to pay the debt, but you have to destroy your labor unions, you have to agree to assassinate your land reformers, you have to kill your labor leaders, you have to agree not to teach any economics but the neoliberal economics.” That’s what the USAID, the IMF and the World Bank said to Chile, Brazil and other countries trying to resist U.S. neoliberalism.

China is not trying to finance the impoverishment of countries, which is the business plan of the IMF, World Bank and USAID. They serve the financial sector, whose business plan is to impoverish the economy so that the One Percent, the financial class, ends up with all the wealth, leaving everybody else to shrink. That’s the opposite of what China is trying to do.

Quantitative Easing to support asset prices, “capital” gains and a K-shaped “recovery”

Jussi: Thanks a lot for that Michael. I have a final question before we take some QA: how does Quantitative Easing (QE) fit into the financialization of the economy or society?

Hudson: Its aim is to support asset price inflation. It began in 2008-2009, after the American bank-fraud crisis of junk mortgages – the most massive bank fraud in modern history. The banks had lent so much mortgage credit in excess of the actual value of real estate, with debt service so far above the actual rental yield of this property, that asset prices were going to collapse. If that would have happened, the most reckless banks (especially the largest ones) would have gone bankrupt. Their claims, reserves and collateral were what used to be called fictitious capital. On the balance sheet it was a bank claim saying that the banks were worth X amount of money. But the real value of the collateral backing its loans was much less. Frederick Soddy called this virtual wealth. Ot wasn’t real wealth in the form of tangible real estate and means of production; it was virtual wealth: claims onthis real wealth way in excess of realizable valuations.

The purpose of Quantitative Easing was to flood the market with new credit by lowering interest rates, so that speculators and investors could afford to borrow and speculate on credit. QE was a means of subsidizing speculation in order to keep the overvaluation of property going, and essentially to turn the economy into a Ponzi scheme. For central banks, the role is to serve the interest of the banking sector. That’s why there are central banks as opposed to the national treasury. You load the economy with enough credit to “borrow its way out of debt.” That was the phrase that was used.

We’re in the Ponzi phase of the business cycle, to use Hyman Minsky’s term. There’s less and less real value there but prices have been going up. The media trumpet this as a recovery of the real economy, as if this financialization dynamic is sustainable. But the only way to repay the early entrants into a Ponzi scheme is to have new investors. In this case, you have new bank credit coming in today. In the last few years the Federal Reserve has been buying not only stocks and bonds, but also junk bonds. There are companies that Sheila Bair, the head of the FDIC said: look these are zombie companies, these are bankrupt companies, and the Federal Reserve is buying their junk funds so that the investors and the junk funds won’t lose money. This is crazy!

The role of Quantitative Easing is to keep the illusion going that if the stock and bond markets are booming, then the economy must be succeeding and everything is going okay.

The financial sector’s business plan of the that’s behind this Quantitative Easing is to fuel asset-price inflation, even while it’s causing debt deflation for the economy at large. You have to privatize public utilities. And to do all this, you have to shift control of the government into the hands of the banks, to use the central bank or Treasury not to run a deficit to spend into the economy but into the financial markets.

Right now as you know with Covid, the American and the European economies are strapped. This is a case where the government should be creating credit to pay into the economy, to prevent individuals and small businesses and large businesses from becoming insolvent when their employees can’t work because of the virus. But instead of creating credit to spend into the economy, instead of saying: “There’s unemployment, so we’re going to build up infrastructure,” the central bank uses Quantitative Easing only to buy stocks and bonds and real estate already in place. This does not help the economy or create new means of production or infrastructure. It’s supporting fictitious capital! To do that, you have to take over the government and make sure that democracies don’t have a real choice in making policy in the interests of labor or industry.

Jussi: It seems like QE is one way of feeding the financial industry to secure prices in the market, not to secure jobs and cash flow in businesses and for people?

Hudson: That’s right. You talked before about Rome. What Rome did was bequeath the body of law that we’re still in, making all this possible. To get back to what you said at the beginning of the discussion, the principle of Roman law is the opposite of Near Eastern law: Debt is sacrosanct. Rome bequeathed its pre-pro-creditor legal philosophy to Western civilization. What’s called “security of property rights” is actually insecurity of these rights because its priority is creditor privileges to foreclose on the homes and assets of debtors.

What the U.S. calls the rule of law is creditor-based law. This “rule of law” is written by lawyers for the banks and the corporate sector, not by democracies at large. Whenever there’s an attempt to regulate finance to prevent monopolies, to prevent global warming, that’s called “interfering with property rights” as if somehow that’s a bad thing. The classical purpose of government was indeed to interfere with financial property rights, especially of absentee landlords whose rent extraction was impoverishing the economy.

Jussi: What changes are you suggesting that we make?

Hudson: The important immediate change is to free economies from the rentier class, and to make money and credit a public utility to be used to promote prosperity, not to financially cannibalize economies.

Jussi: I understand in principle, but how do you suggest that we go about doing that?

Hudson: Each country is different. I don’t see how it can be done in the US without breaking up the Democratic Party. We have a duopoly here. The two parties are actually the same party. Most Americans want socialized medicine and free education, but they’re not getting it. Most Americans want to tax the wealthy, but we’re not getting it. So you have to somehow recapture government just like the aim was in the 19th century, but failed as the middle class shied from limiting rentier income and protecting labor.

From the 19th century to World War I there was an attempt to democratize economies to reform them in order to get rid of the old predatory financial sector. It failed. The modern world didn’t end up with the classical economic ideal, but with what we have today in the wake of Margaret Thatcher and Ronald Reagan in the 1980s, and neoliberalism. Obviously, you have to change the government in order to write new sets of tax laws.

Jussi: Do you think that we should take money creation out of the hands of the banks and put it into the public domain?

Hudson: Yes, of course! That’s why I supported the Chicago Plan, among other things, in the United States for many years. Of course money creation should be in the hands of government, not banks, because governments create money for different purposes than banks do. Governments don’t create money to take over existing assets and squeeze more money out of them. They spend money into the economy to create prosperity, to create assets, to finance infrastructure and industry. Of course, this structuring of money creation should be in the hands of governments. That’s the most important change.

Jussi: It is not like the central bank should be the sole creator or something like that?

Hudson: No, central banks are there to serve the commercial banks, but to make sure that banks credit that is productive, not predatory.

Jussi: I’m sure they could be made to serve whoever we like, but who would create the money? If I’m a small business and I want 50,000 euros as a loan, would I then go to the public lenders with my application, so the government would take over the entirety of creating new money to make small loans to everybody around the country?

Hudson: Here’s how it is done in China, and basically what the Chicago plan is supposed to do, subject to the principle of hundred percent reserves: You would do just what you do now. You would go to the bank and ask for a loan. The problem is, in order to make the loan to you, if the bank doesn’t already have the deposits available, it will need money in order to create the credit for you. If you’re borrowing for a productive purpose – not to take over a company, but for a productive purpose – the government will simply create the reserves for the bank to lend you the money. The government creates the money, but it will create money only for banks to make particular kinds of loans. If you want to borrow to buy a house, the government will provide the money for it via the banking system – as if it were a depositor in the bank. If you want to start a business that the bank finds credit-worthy, the banks will be able to judge your credit-worthiness and you get the loan. But they cannot create credit out of thin air. They need government deposit backing.

Jussi: Thanks Michael, I’m not familiar with the Chicago plan, where could I read a 20 or 40 page description of this?

Hudson: I was the advisor for Dennis Kucinich, the U.S. presidential candidate, and he had promoted the Chicago Plan. I know that Stephen Zarlenga had a lot of meetings where Steve Keen and I and others spoke about this.

Jussi: Okay, thanks very much, I’ve taken up a lot of everybody’s time, so I’ll stop now.

QA2: Thank you very much, I really appreciate your analysis. My question is this: The Chicago Plan evolved into the Kucinich bill in the United States, the NEED Act, which does set up essentially the government as a creator of money and makes banks essentially like other non-banks, that is it lends pre-existing money. One of the questions that has come up and you’re undoubtedly aware of was raised by the authors of “The End of Banking.” If you just impose the regulation of the NEED Act, that limits essentially what banks can do. It won’t stop the shadow banking industry. So my question to you is: What would happen in terms of shadow banking as we know it, as a result of simply ending bank creation of money and shifting money creation to the government?

Hudson: That’s what 100 reserves means. There will still be rich people with money to lend, especially foreign investors. But financial reform needs tax reform to go with it. You have to tax away the existing economic rent, so that it will not be available to pay as interest. Also, it is necessary to wipe out the overburden of debt that now exists. You cannot re-stabilize the economy and get out of today’s austerity and debt deflation without writing down the debts, cancelling many of them. But you can’t cancel mortgage debts of absentee owners without replacing former debt service with a land-rent tax, so as not to make an absentee real estate sector debt-free. These reforms would end a lot of the assets on which the shadow banking industry is based. A proper tax policy and with a debt cancellation would create an environment in which new money creation will work.

What if China let many billionaires begin buying out companies and creating monopolies? It wouldn’t happen there, and it didn’t used to happen in the United States under the anti-monopoly laws here. You can’t reform only one part of the economy, like finance, without reform the rest of the system. So you need systemic reform: Monetary and financial reform have to go together with fiscal reform, policy reform and legal reform.

QA3: We live in Switzerland, and I’m here with my father. You said that democracies don’t really decide which policies and laws are enacted. In Switzerland we have the right to make a referendum on laws that we do not like, and we can vote on them as a people, and we can do initiatives to propose changes to the constitution, that also will be voted on by the people. Do you think that it has an influence on how much the economy is beneficial to the people, and if yes, do you also think that it would be a good change for societies and democracies in general if such rights were in most of the countries?

Hudson: A referendum is certainly democratic, but within an overall oligarchic structure in the United States and most of Europe. If you could get a referendum and have the government respond by actually creating a real public health system, cancel student loans and introduce progressive classical tax reform and cut back military spending, that would be fine. The problem in the United States is the Supreme Court. There is a neoliberal majority in the court – with lifetime membership – that would claim that such reform is interfering with free markets and that the “founding fathers” and constitution did not permit this, so they would nullify the referendum. It would take a constitutional amendment, or even a new Constitutional Convention – in today’s right-wing atmosphere. So we have a bizarre structural political and constitutional problem in America that you don’t have in Switzerland.

QA4: Michael it is a pleasure to meet you and listen to you. My question is a bit philosophical but as a student of ancient history, I imagine Egyptian slaves, Roman soldiers, and medieval peasants in a world with less work, more leisure, and more joy, freeing the human spirit and yet here we are today still talking about more work? We all seem to want to work more, and of course value comes from work, and value is what is captured by owners who exploit their ownership to, if you like, enslave other people. Do you think we’ll ever be able to imagine a different world? One in which there is less work and more of what the human experience is supposed to be about?

Hudson: I wrote “Financialization and its Discontents” about this problem. Suppose that you were back in 1945 and were told about all the productivity gains that have been made in the last 75 years. You would think that we would have a four-day week, or even a three-day week. There’s so much productivity that we do not have to work. And yet the more productivity rises, the more people are working overtime.

That is in large part what is making productivity going up, by squeezing more and more out of labour and paying it less and less. Also, consumers are bearing much of the effort that companies used to bear, largely as a result of computerization. So people have to work so much harder now than they used to when I went into the workforce. But this isn’t a product of nature. It doesn’t have to be this way. It’s a result of policy. Employees are working harder basically to pay off the debts that they’re running up. Much of this extra work they’re doing is to carry the financial sector, the FIRE sector and the rest of the rentier sector on their shoulders. If you get rid of the rentier sector you won’t have to work so hard.

Jussi: Thanks for the question Don and great answer Michael. So, I jump over to Stamatis, I think you are next in the queue.

QA5: Thank you very much Michael for your talk! My question is this: I was thinking that if we really had a Chicago plan-based economy, where reserves were in place. There should be some way, which is not exactly clear in the Chicago plan, of how to increase the money supply. This is usually by the debt deficit spending of the government. But this does not say that this deficit would not go to the FIRE sector, or that financialization would be over. So the only two things that would be different, in my understanding, is that we would not have any account of how much of this money goes there. That would only be in the government’s books. Is there any other difference? How would we beat financialization? It would not be only by changing the banking system. It would require other kinds of laws.

Hudson: Yes, you are right. That is why I said the economy is a system, and there have to be other changes. Of course, if the government wanted to keep spending on the military-industrial complex, or to go to war or subsidize corrupt privatizers and financiers, you would have to change the government as well as the banking system. But you are right: Stopping the banks from creating credit solves the problem of bank credit, but it does not solve the rest of the problems that you just brought up.

There has to be overall political reform. That was called socialism in the 19th century. We could still call socialism today. You would need socialist reform and a thoroughgoing political reform to restructure what the government is all about. So, it is not only what money and the financial sector are all about, it is about the role of government. And its role to help society? Is it to help the 99 Percent, or to help the One Percent? Is it to help clean up the world’s environment? Is it to promote peace? Or is it to promote a New Cold War, like the governments today in Europe and America?

QA5: Okay so I will add a follow-up question, one. In our case, in the EU, we have a problem, because the situation is out of the hands of the government. It is inside treaties, it is invisible.

Hudson: Basically, your governments act as a branch of NATO and related U.S. policy, no matter which parties are elected.

QA5: Yes, well, that is one step further than I wanted to take it. In the international sense, yes, that is the situation. The banking system is eventually dependent on New York banks and that is why we depend on NATO.

Hudson: No, you depend on NATO politicians, right-wing politicians, finance, and corrupt right-wing groups because Europe is not really very democratic. Look at Sweden and Britain holding Julian Assange as prisoner, or look at the Netherlands’ kangaroo court trying to frame up Russia for the ML17 shoot-down over Ukraine, or the Baltics, Polish and other opposition to Russia’s Nord Stream 2 pipeline. These are U.S. policies, not in the interests of Europe, but its politicians serve U.S. interests.

QA5: Right. But how does this make us dependent on NATO?

Hudson: I should have elaborated what I meant partly as a quip. The State Department, the CIA and many NGOs through which the U.S. operates essentially pay the checks to buy your politicians, especially in Brussels. My friend Paul Craig Roberts was Undersecretary of the Treasury for International Affairs, and he explained to me that the tactic is simply to buy politicians – and European politicians are about the cheapest in the world because they’re just so free of oversight and punishment.

QA5: I will not disagree there. Okay thank you Michael.

Jussi: Thanks Stamatis. Then we go to Jeremy.

QA6: Thank you Jussi. Hi Michael, would you walk us through how debt deflation works. As I understand it, it is a consequence of the repayment of principal interest and fees to banks, which accept them by reducing the liability side which happens to be our money supply. What happens when government deficit spending – let’s say for the most worthy of causes that we might all agree with, not for oligarchic causes, what happens when that collides with debt deflation? Does that not still create an enormous disparity between the bank reserves that banks get which accrue interest and the deposits that mere depositors get which disappeared via the repayment of principal?

Hudson: No, paying private debts and government budget deficits have gone together with an increasing money supply for many years. The debt dynamic is separate from the money supply dynamic. So regarding budget deficits, what you are suggesting sounds like what is called the crowding-out theory. You think if the government spends money by running a deficit, there is less to be spent in the domestic economy. There actually is more. The government can create as much money as it wants, it has no connection at all with crowding out money elsewhere in the economy. Stephanie Kelton has just published a good book on Modern Monetary Theory explaining all of this, and the economics department of the University of Missouri at Kansas City, where I used to be on the faculty, spent years explaining all this.

QA6: I do not believe I was elucidating the crowding-out theory, but deficit spending does increase bank reserves or bank holdings of treasuries. They augment bank assets, bank liabilities, even if the liabilities is spent for let’s say some flood worker, some fire worker, that individual is simply getting a bank IOU, a deposit and as they repay principal interest and feedback to the bank. Is that not debt deflation resulting in a disparity between what banks are able to earn as in…

Hudson: That is not how the world works at all. The government doesn’t have to borrow from the banks. Again, Stephanie Kelton has explained all of this. The government can create money. It doesn’t need to borrow from the banks, it doesn’t need to pay interest on bonds if it creates the money. It can just print the money. You are suggesting a right-wing Austrian theory that’s been thoroughly discredited. I know you’re not doing it on purpose, but you’ll have to read about Modern Monetary Theory or look at the Federal Reserve Bulletin and lok at balance sheets to trace the flow of money and credit. If you look at the statistics, you’ll find out that what you’ve described is just a fantasy.

Jussi: Thank you Jerome. We have Raize Kaiser. I hope that was the proper pronunciation.

QA7: Hello everyone from the Hague, the Netherlands. I’m very very happy with this lecture of Michael, especially for the fresh economic perspective you are giving. I think that fighting the FIRE sector is difficult, and influencing the democratic discussion is also difficult. What we need is a Sustainable Development Goal #18. I tell it my students there’s missing a SDG 18 about monetary, financial and tax reform. But it’s understandable it’s missing, because the whole world would be against it. So another option is perhaps electronic digital money. What do you think of parallel local monies to create a new flow of money around the FIRE sector. Let them stay where they are and let us focus on creating a new economy.

Hudson: Local currency doesn’t work. This has been discussed for a hundred years. If it would have worked the Weimar Notgeldin Germany would have worked. Money creation has to be at the federal level. Because basically, what gives money its value is the ability to use it to pay taxes. The only way that localities could create money would be to make it acceptable in paying enormous amount of taxes. Most localities are not able to do that. One locality would be played off against another, and would not end up being successful. So in practice local currency doesn’t work out. It’s a long story but there’s a huge literature about that.

QA7: Okay it’s a pity because fighting the FIRE sector is very, difficult. I don’t see any perspective that will change in the near future.

Hudson: We need a revolution. You’re right. It takes a revolution

QA7: I don’t like revolutions. I was also very impressed about your story about the Jubilee in ancient history. Because at home my father reading the Bible told us from Leviticus 25 that thou shalt not economically oppress one another. My father was an economist and taught economics, do not oppress one another. That’s the kernel of a good economy and the FIRE sector will not join us in that.

Hudson: Well, you don’t have to go all the way back to the Bible or biblical times. You can look in 1948 at the German economic miracle. That was the debt cancellation.

QA7: You are right

Jussi: What we’re trying to do here in Sweden with positiva pengaris to actually have a grassroots movement. We think it has to come from there if you want to make a difference. Legally we have a democracy which means we are voting but we need to be aware of what we are voting about. We need to exercise that vote and get away from corrupt thinking and corrupt policies in order to get something done. So actually we do believe it’s possible to change this, I believe it can go quite quickly when it starts to spread properly. That’s our conviction anyway. So I think a grassroots movement can make that go and make it go quickly and forcefully but kindly. Okay, with power but kindly.

Hudson: Especially if you’re armed.

Jussi: Well we are armed with knowledge and we need to trust in our ability to make it happen. Sorry for the interruption but anyway. So I think next up is actually Cecil you’ve been waiting a bit.

QA8: I’m a first-year economic student so forgive me if I sound infantile or if I sound amateur.

Hudson: You’re not as infantile as you will be when you get a PhD in economics.

QA8: You talked about debt cancellation and I was wondering can that be the breakout for African economies? Could debt cancellation be a breakout for African economies?

Hudson: Of course, you will have to write down the existing debts. And that is what makes my analysis different from most other people. Right now the debts cannot be paid. The question is, howare they not going to be paid? The only way to pay them at present is the way they were paid after 2008: by a mass foreclosure on the property of debtors. When the South can’t pay foreign debts, they are told to sell off and privatize their public domain. The other way of not paying debts is to cancel them. I think there has to be a debt write-off, a cancellation of debts.

The good thing about cancelling debts is that you wipe out savings on the other side of the balance sheet. By wiping out the debts of the 99 Percent, you wipe out the predatory savings of the One Percent, the debt overhang that it seeks to collect by imposing austerity on the economy and impoverishing everyone below themselves. A debt cancellation takes away the sledgehammer that the One Percent uses to keep the rest of the economy in debt peonage. This is the existential choice that today’s economy faces. Either you’ll have a debt cancellation or you’ll have barbarism. That’s basically what the book that I’m publishing in the next month, my Chinese lectures, are all about.

Jussi: Thanks for jumping in, hope you’re happy with that answer. Do you have time for a few more questions?

Hudson. My eyes are getting blurry from looking at the screen, so I’m closing them, but yes I can talk now that I’ve turned off the screen.

Jussi: Okay, perfect. I think Joe Polito has been on the queue for some time.

QA9: Thanks, fantastic presentation Michael, as always. I hope this question is on topic. Here in Canada one of our major banks just published a report on affordable housing. One of their suggestions is to increase the capital gains tax on commercial real estate deals. I know you’ve written about this, and I wonder if you could explain the logic of this measure and how it affects land prices and hence the affordability for housing.

Hudson: Capital gains are fueled by banks creating more and more credit to bid up property prices. Stated another way, capital gains are made primarily by banks loading the economy down with real estate debt. Because they are what landlords and speculators make in their sleep, they’re unearned and should be taken away, or at least 90 percent. But the financial and real estate sectors led a political campaign in the United States not to tax capital gains. In England and Europe, many capital gains are not taxed at all. That’s a travesty. Most financial fortunes are made not by charging interest or earning profits, but by capital gains. I published a number of articles on my website showing the charts and how much larger the volume of capital gains is than profit or sometimes even than GDP.

The fortunes of the One Percent are not made mainly by investing productively or by saving up the profits they’ve made. It is by capital gains. They should be taxed away, above everything else. That was exactly what John Stuart Mill wrote in 1848 in his Principles of Political Economy, with Some of their Applications the Social Philosophy. Basically, he wrote, the reason why governments should be the owner of land is so that you will not have landlords making money in their sleep, by what we call capital gains now – by the rising rental yield of their property. He didn’t imagine that property prices would be inflated by bank credit like they are today. So of course it’s good to tax away capital gains. Economies will save themselves from the One Percent, and won’t have to tax Canadian labour and Canadian industry so much.

Jussi: Thanks Joe. Gunnar, you are up next

QA10: Hello Michael. I want to add to Don Wilford’s question about how much should we have to work if the central bank or the government gives out money for universal basic income? What would you say about that? Is the informal sector productive as you see it? As I see it, in Sweden we have a consumption as big as if we had two planets to get our resources from. I also see that the informal sector needs labour, not paid labour, but labour. So what if part of the newly created money were to go to basic income?

Hudson: I think everybody deserves enough income to live. Of course basic income is a good idea. My colleague Pavlina Tcherneva from the Levy Institute has written quite a bit about this. The counter-argument is that if you give everybody a basic income, they won’t go to work. Who’s going to be working at McDonald’s and these things? Well the solution’s simple: pay them a decent wage. Once you pay a decent wage, that’ll solve most of the problem. But if you’re not going to pay them a basic minimum wage, then of course they’re not going to work for an income that does not enable them to live. So everybody has a right to live, and the government should support them. But it should also support a basic minimum wage, higher than what you have in the United States. President Biden and the Democrats refused to support it as part of their revenue bill, despite the fact that raising the minimum wage would reduce the need for government welfare payments to make up the gap between what Walmart and other big stores paid and what workers needed to survive. The low minimum wage in America forces employees to go on public welfare so that their employers can get the government pay what Walmart doesn’t have to do. The effect is to squeeze down labour so it’s absolutely driven into the market and pauperized so that companies can make profits by paying less.

The solution is to raise the basic wage, which no party in the United States has been willing to do. That’s why elections here are so deceptive, preventing candidates like Bernie Sanders or others from getting into a position to legislate a decent living wage.

QA10: Must it be a wage? Why could not everyone have a minimum basic income that you can live on? Then you could choose your employer, and that is important. Maybe you are needed at home or in your local community, so it’s something that makes every person decide her own future and decide what to do with their lives.

Hudson: Yes, otherwise you’ll pauperise the economy as you’re having throughout the post-Soviet countries in Central Asia or the Baltics today. You are forcing a mass immigration from countries that don’t have a basic wage. They have to emigrate in order to find work, in order to live.

QA10: But at the same time you can finance the public sector. Because people won’t go and lie on their bed on their sofa. That is not, for most people, right.

Hudson: There are many ways to administer around that. People want to work, want to be productive in one way or another, but you want to avoid pauperisation.

Jussi: The question is actually how to secure the pension, and I think that is another systemic thing needs to be looked into.

Hudson: So it should be as we’ve just been discussing a basic income. Pensions should be pay-as-you-go, the way Germany does, by the government. You don’t have to financialize pensions. That is one of the big problems of financialization, as we discussed earlier in this interview. Financializing pensions has turned out to be a way of helping the financial sector de-industrialize the economy.

Jussi: Basically, the pension is dependent on the productive capacity of the country you’re living in, because ultimately you’re living on the real economy. But I think the question is a bit bigger than we can take right now. If you don’t mind, both Elizabeth and Michael and we jump forward.

QA11: Hello everyone and thank you so much Michael for a really good talk. I want to return to the theme you mentioned before about this current Ponzi scheme that we’re living in. With ever more Quantitative Easing and this unprecedented zero-interest period that we’ve been in, do you see any natural end to that? Can it go on forever, do they just double the Quantitative Easing every five years? When do you think we will reach a breaking point?

Hudson: There’s no way of knowing just when the breaking point will come. an I’m discussing with my Wall Street friends all the time. We’re watching the economy polarize and go down while the stock market goes up. It’s called a K-shaped recovery: down for the economy, but up for the financial sector. How on earth can it go up? Well, the answer is the Federal Reserve can just do the Quantitative Easing on and on. Of course it can’t last forever, but there’s no way of knowing when the break will come. If you look over the last few hundred years, the break usually comes because some big bank has a fraud somewhere. You have a rogue trader making trades for himself that loses the bank’s money, like the London whale. You have an AIG, the insurance company whose London office made a lot of bad underwriting for derivatives against Goldman-Sachs, which insisted on immediate settlement – using its own valuations. Will somebody make a similar bad bet in aderivatives trade and go under, and will that pull down the whole sector?

Nobody knows where the break in the chain of payments will occur, or when it will come. But as the economy gets more overstretched and more debt leveraged, how can it recover and produce profits to support rising stock prices when we’re in the middle of debt deflation? It’s a contradiction. There’s no way that you can have the finance sector going up and the economy going down unless you end up with feudalism, which is what happened when this occurred in Rome 2000 years ago. So obviously at some point we’re going to end up with a huge crash, but nobody knows when or just what accident will trigger it.

People would have thought that Covid would trigger it, and maybe it will. But in America there has been a moratorium on rent payments and mortgage interest payments. That was absolutely necessary, but the moratoriums are about to expire. When they do, there are going to be evictions, homeless people thrown onto the streets. Will they sleep on the subways and the parks? Will they fight back? Who knows what will happen? We are moving into an anarchic period right now, but nobody can see exactly what’s going to happen in chaos.

QA11: Thank you so much.

Jussi: Thank you John. Michael thank you very much for your sharing your vast experience, and actually practical experience to being in many places and reading. All the things you’ve done and that you take your time to share it with us here. I really really appreciate it and we got to learn quite a lot this time. So I can say from everybody here, and from our association thanks a lot and thanks for everybody who contributed and turned up to this webinar.

We’re going to make a transcript. As usual, it takes some time. Our English is not fluent as you might hear, that is why it takes a bit of time. But then we send it over, and we’re going to send links to everybody who’s been here. Thanks a lot Michael again. I deeply appreciate all you share with us. From everybody else: thank you, thank you very much and thanks everybody else, see you later. Bye

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