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The Great Ponzi Scheme of the Global Economy

Wed Apr 27, 2016 10:17 pm (PDT) . Posted by:

“Anna” ixion6

CHRIS HEDGES: We’re going to be discussing a great Ponzi scheme that not
only defines not only the U.S. but the global economy, how we got there and
where we’re going. And with me to discuss this issue is the economist
Michael Hudson, author of
<http://store.counterpunch.org/product/killing-the-host-digital-book/&gt;
Killing the Host: How Financial Parasites and Debt Destroy the Global
Economy. A professor of economics who worked for many years on Wall Street,
where you don’t succeed if you don’t grasp Marx’s dictum that ( modern)
capitalism is about exploitation. And he is also, I should mention, the
godson of Leon Trotsky.
I want to open this discussion by reading a passage from your book, which I
admire very much, which I think gets to the core of what you discuss. You
write,
“Adam Smith long ago remarked that profits often are highest in nations
going fastest to ruin. There are many ways to create economic suicide on a
national level. The major way through history has been through indebting the
economy. Debt always expands to reach a point where it cannot be paid by a
large swathe of the economy. This is the point where austerity is imposed
and ownership of wealth polarizes between the One Percent and the 99
Percent. Today is not the first time this has occurred in history. But it is
the first time that running into debt has occurred deliberately.” Applauded.
“As if most debtors can get rich by borrowing, not reduced to a condition of
debt peonage.”
So let’s start with the classical economists, who certainly understood this.
They were reacting of course to feudalism. And what happened to the study of
economics so that it became gamed by ideologues?

HUDSON: The essence of classical economics was to reform industrial
capitalism, to streamline it, and to free the European economies from the
legacy of feudalism. The legacy of feudalism was landlords extracting
land-rent, and living as a class that took income without producing
anything. Also, banks that were not funding industry. The leading
industrialists from James Watt, with his steam engine, to the railroads …
HEDGES: From your book you make the point that banks almost never funded
industry.
HUDSON: That’s the point: They never have. By the time you got to Marx later
in the 19th century, you had a discussion, largely in Germany, over how to
make banks do something they did not do under feudalism. Right now we’re
having the economic surplus being drained not by the landlords but also by
banks and bondholders.
Adam Smith was very much against colonialism because that lead to wars, and
wars led to public debt. He said the solution to prevent this financial
class of bondholders burdening the economy by imposing more and more taxes
on consumer goods every time they went to war was to finance wars on a
pay-as-you-go basis. Instead of borrowing, you’d tax the people. Then, he
thought, if everybody felt the burden of war in the form of paying taxes,
they’d be against it. Well, it took all of the 19th century to fight for
democracy and to extend the vote so that instead of landlords controlling
Parliament and its law-making and tax system through the House of Lords,
you’d extend the vote to labor, to women and everybody. The theory was that
society as a whole would vote in its self-interest. It would vote for the 99
Percent, not for the One Percent.
By the time Marx wrote in the 1870s, he could see what was happening in
Germany. German banks were trying to make money in conjunction with the
government, by lending to heavy industry, largely to the military-industrial
complex.
HEDGES: This was Bismarck’s kind of social – I don’t know what we’d call it.
It was a form of capitalist socialism…
HUDSON: They called it State Capitalism. There was a long discussion by
Engels, saying, wait a minute. We’re for Socialism. State Capitalism isn’t
what we mean by socialism. There are two kinds of state-oriented–.
HEDGES: I’m going to interject that there was a kind of brilliance behind
Bismarck’s policy because he created state pensions, he provided health
benefits, and he directed banking toward industry, toward the
industrialization of Germany which, as you point out, was very different in
Britain and the United States.
HUDSON: German banking was so successful that by the time World War I broke
out, there were discussions in English economic journals worrying that
Germany and the Axis powers were going to win because their banks were more
suited to fund industry. Without industry you can’t have really a military.
But British banks only lent for foreign trade and for speculation. Their
stock market was a hit-and-run operation. They wanted quick in-and-out
profits, while German banks didn’t insist that their clients pay as much in
dividends. German banks owned stocks as well as bonds, and there was much
more of a mutual partnership.
That’s what most of the 19th century imagined was going to happen – that the
world was on the way to socializing banking. And toward moving capitalism
beyond the feudal level, getting rid of the landlord class, getting rid of
the rent, getting rid of interest. It was going to be labor and capital,
profits and wages, with profits being reinvested in more capital. You’d have
an expansion of technology. By the early twentieth century most futurists
imagined that we’d be living in a leisure economy by now.
HEDGES: Including Karl Marx.
HUDSON: That’s right. A ten-hour workweek. To Marx, socialism was to be an
outgrowth of the reformed state of capitalism, as seemed likely at the time
– if labor organized in its self-interest.
HEDGES: Isn’t what happened in large part because of the defeat of Germany
in World War I? But also, because we took the understanding of economists
like Adam Smith and maybe Keynes. I don’t know who you would blame for this,
whether Ricardo or others, but we created a fictitious economic theory to
praise a rentier or rent-derived, interest-derived capitalism that countered
productive forces within the economy. Perhaps you can address that.
HUDSON: Here’s what happened. Marx traumatized classical economics by taking
the concepts of Adam Smith and John Stuart Mill and others, and pushing them
to their logical conclusion.
<http://store.counterpunch.org/product/killing-the-host-digital-book/&gt;
2KillingTheHost_Cover_ruleProgressive capitalist advocates – Ricardian
socialists such as John Stuart Mill – wanted to tax away the land or
nationalize it. Marx wanted governments to take over heavy industry and
build infrastructure to provide low-cost and ultimately free basic services.
This was traumatizing the landlord class and the One Percent. And they
fought back. They wanted to make everything part of “the market,” which
functioned on credit supplied by them and paid rent to them.
None of the classical economists imagined how the feudal interests – these
great vested interests that had all the land and money – actually would
fight back and succeed. They thought that the future was going to belong to
capital and labor. But by the late 19th century, certainly in America,
people like John Bates Clark came out with a completely different theory,
rejecting the classical economics of Adam Smith, the Physiocrats and John
Stuart Mill.
HEDGES: Physiocrats are, you’ve tried to explain, the enlightened French
economists.
HUDSON: The common denominator among all these classical economists was the
distinction between earned income and unearned income. Unearned income was
rent and interest. Earned incomes were wages and profits. But John Bates
Clark came and said that there’s no such thing as unearned income. He said
that the landlord actually earns his rent by taking the effort to provide a
house and land to renters, while banks provide credit to earn their
interest. Every kind of income is thus “earned,” and everybody earns their
income. So everybody who accumulates wealth, by definition, according to his
formulas, get rich by adding to what is now called Gross Domestic Product
(GDP).
HEDGES: One of the points you make in
<http://store.counterpunch.org/product/killing-the-host-digital-book/&gt;
Killing the Host which I liked was that in almost all cases, those who had
the capacity to make money parasitically off interest and rent had either –
if you go back to the origins – looted and seized the land by force, or
inherited it.
HUDSON: That’s correct. In other words, their income is unearned. The result
of this anti-classical revolution you had just before World War I was that
today, almost all the economic growth in the last decade has gone to the One
Percent. It’s gone to Wall Street, to real estate …
HEDGES: But you blame this on what you call Junk Economics.
HUDSON: Junk Economics is the anti-classical reaction.
HEDGES: Explain a little bit how, in essence, it’s a fictitious form of
measuring the economy.
HUDSON: Well, some time ago I went to a bank, a block away from here – a
Chase Manhattan bank – and I took out money from the teller. As I turned
around and took a few steps, there were two pickpockets. One pushed me over
and the other grabbed the money and ran out. The guard stood there and saw
it. So I asked for the money back. I said, look, I was robbed in your bank,
right inside. And they said, “Well, we don’t arm our guards because if they
shot someone, the thief could sue us and we don’t want that.” They gave me
an equivalent amount of money back.
Well, imagine if you count all this crime, all the money that’s taken, as an
addition to GDP. Because now the crook has provided the service of not
stabbing me. Or suppose somebody’s held up at an ATM machine and the robber
says, “Your money or your life.” You say, “Okay, here’s my money.” The crook
has given you the choice of your life. In a way that’s how the Gross
National Product accounts are put up. It’s not so different from how Wall
Street extracts money from the economy. Then also you have landlords
extracting …
HEDGES: Let’s go back. They’re extracting money from the economy by debt
peonage. By raising …
HUDSON: By not playing a productive role, basically.
HEDGES: Right. So it’s credit card interest, mortgage interest, car loans,
student loans. That’s how they make their funds.
HUDSON: That’s right. Money is not a factor of production. But in order to
have access to credit, in order to get money, in order to get an education,
you have to pay the banks. At New York University here, for instance, they
have Citibank. I think Citibank people were on the board of directors at
NYU. You get the students, when they come here, to start at the local bank.
And once you are in a bank and have monthly funds taken out of your account
for electric utilities, or whatever, it’s very cumbersome to change.
So basically you have what the classical economists called the rentierclass.
The class that lives on economic rents. Landlords, monopolists charging
more, and the banks. If you have a pharmaceutical company that raises the
price of a drug from $12 a shot to $200 all of a sudden, their profits go
up. Their increased price for the drug is counted in the national income
accounts as if the economy is producing more. So all this presumed economic
growth that has all been taken by the One Percent in the last ten years, and
people say the economy is growing. But the economy isn’t growing …
HEDGES: Because it’s not reinvested.
HUDSON: That’s right. It’s not production, it’s not consumption. The wealth
of the One Percent is obtained essentially by lending money to the 99
Percent and then charging interest on it, and recycling this interest at an
exponentially growing rate.
HEDGES: And why is it important, as I think you point out in your book, that
economic theory counts this rentier income as productive income? Explain why
that’s important.
HUDSON: If you’re a rentier, you want to say that you earned your income by
…
HEDGES: We’re talking about Goldman Sachs, by the way.
HUDSON: Yes, Goldman Sachs. The head of Goldman Sachs came out and said that
Goldman Sachs workers are the most productive in the world. That’s why
they’re paid what they are. The concept of productivity in America is income
divided by labor. So if you’re Goldman Sachs and you pay yourself $20
million a year in salary and bonuses, you’re considered to have added $20
million to GDP, and that’s enormously productive. So we’re talking in a
tautology. We’re talking with circular reasoning here.
So the issue is whether Goldman Sachs, Wall Street and predatory
pharmaceutical firms, actually add “product” or whether they’re just
exploiting other people. That’s why I used the word parasitism in my book’s
title. People think of a parasite as simply taking money, taking blood out
of a host or taking money out of the economy. But in nature it’s much more
complicated. The parasite can’t simply come in and take something. First of
all, it needs to numb the host. It has an enzyme so that the host doesn’t
realize the parasite’s there. And then the parasites have another enzyme
that takes over the host’s brain. It makes the host imagine that the
parasite is part of its own body, actually part of itself and hence to be
protected.
That’s basically what Wall Street has done. It depicts itself as part of the
economy. Not as a wrapping around it, not as external to it, but actually
the part that’s helping the body grow, and that actually is responsible for
most of the growth. But in fact it’s the parasite that is taking over the
growth.
The result is an inversion of classical economics. It turns Adam Smith
upside down. It says what the classical economists said was unproductive –
parasitism – actually is the real economy. And that the parasites are labor
and industry that get in the way of what the parasite wants – which is to
reproduce itself, not help the host, that is, labor and capital.
HEDGES: And then the classical economists like Adam Smith were quite clear
that unless that rentier income, you know, the money made by things like
hedge funds, was heavily taxed and put back into the economy, the economy
would ultimately go into a kind of tailspin. And I think the example of
that, which you point out in your book, is what’s happened in terms of large
corporations with stock dividends and buybacks. And maybe you can explain
that.
HUDSON: There’s an idea in superficial textbooks and the public media that
if companies make a large profit, they make it by being productive. And with
…
HEDGES: Which is still in textbooks, isn’t it?
HUDSON: Yes. And also that if a stock price goes up, you’re just
capitalizing the profits – and the stock price reflects the productive role
of the company. But that’s not what’s been happening in the last ten years.
Just in the last two years, 92 percent of corporate profits in America have
been spent either on buying back their own stock, or paid out as dividends
to raise the price of the stock.
HEDGES: Explain why they do this.
HUDSON: About 15 years ago at Harvard, Professor Jensen said that the way to
ensure that corporations are run most efficiently is to make the managers
increase the price of the stock. So if you give the managers stock options,
and you pay them not according to how much they’re producing or making the
company bigger, or expanding production, but the price of the stock, then
you’ll have the corporation run efficiently, financial style.
So the corporate managers find there are two ways that they can increase the
price of the stock. The first thing is to cut back long-term investment, and
use the money instead to buy back their own stock. But when you buy your own
stock, that means you’re not putting the money into capital formation.
You’re not building new factories. You’re not hiring more labor. You can
actually increase the stock price by firing labor.
HEDGES: That strategy only works temporarily.
HUDSON: Temporarily. By using the income from past investments just to buy
back stock, fire the labor force if you can, and work it more intensively.
Pay it out as dividends. That basically is the corporate raider’s model. You
use the money to pay off the junk bond holders at high interest. And of
course, this gets the company in trouble after a while, because there is no
new investment.
So markets shrink. You then go to the labor unions and say, gee, this
company’s near bankruptcy, and we don’t want to have to fire you. The way
that you can keep your job is if we downgrade your pensions. Instead of
giving you what we promised, the defined benefit pension, we’ll turn it into
a defined contribution plan. You know what you pay every month, but you
don’t know what’s going to come out. Or, you wipe out the pension fund, push
it on to the government’s Pension Benefit Guarantee Corporation, and use the
money that you were going to pay for pensions to pay stock dividends. By
then the whole economy is turning down. It’s hollowed out. It shrinks and
collapses. But by that time the managers will have left the company. They
will have taken their bonuses and salaries and run.
HEDGES: I want to read this quote from your book, written by David Harvey,
in <http://www.amazon.com/exec/obidos/ASIN/0199283273/counterpunchmaga&gt; A
Brief History of Neoliberalism, and have you comment on it.
“The main substantive achievement of neoliberalism has been to redistribute
rather than to generate wealth and income. [By] ‘accumulation by
dispossession’ I mean … the commodification and privatization of land, and
the forceful expulsion of peasant populations; conversion of various forms
of property rights (common collective state, etc.) into exclusive private
property rights; suppression of rights to the commons; … colonial,
neocolonial, and the imperial processes of appropriation of assets
(including natural resources); … and usury, the national debt and, most
devastating at all, the use of the credit system as a radical means of
accumulation by dispossession. … To this list of mechanisms, we may now add
a raft of techniques such as the extraction of rents from patents, and
intellectual property rights (such as the diminution or erasure of various
forms of common property rights, such as state pensions, paid vacations, and
access to education, health care) one through a generation or more of class
struggle. The proposal to privatize all state pension rights, pioneered in
Chile under the dictatorship is, for example, one of the cherished
objectives of the Republicans in the US.”
This explains the denouement. The final end result you speak about in your
book is, in essence, allowing what you call the rentier or the speculative
class to cannibalize the entire society until it collapses.
HUDSON: A property right is not a factor of production. Look at what
happened in Chicago, the city where I grew up. Chicago didn’t want to raise
taxes on real estate, especially on its expensive commercial real estate. So
its budget ran a deficit. They needed money to pay the bondholders, so they
sold off the parking rights to have meters – you know, along the curbs. The
result is that they sold to Goldman Sachs 75 years of the right to put up
parking meters. So now the cost of living and doing business in Chicago is
raised by having to pay the parking meters. If Chicago is going to have a
parade and block off traffic, it has to pay Goldman Sachs what the firm
would have made if the streets wouldn’t have been closed off for a parade.
All of a sudden it’s much more expensive to live in Chicago because of this.
But this added expense of having to pay parking rights to Goldman Sachs – to
pay out interest to its bondholders – is counted as an increase in GDP,
because you’ve created more product simply by charging more. If you sell off
a road, a government or local road, and you put up a toll booth and make it
into a toll road, all of a sudden GDP goes up.
If you go to war abroad, and you spend more money on the military-industrial
complex, all this is counted as increased production. None of this is really
part of the production system of the capital and labor building more
factories and producing more things that people need to live and do
business. All of this is overhead. But there’s no distinction between wealth
and overhead.
Failing to draw that distinction means that the host doesn’t realize that
there is a parasite there. The host economy, the industrial economy, doesn’t
realize what the industrialists realized in the 19thcentury: If you want to
be an efficient economy and be low-priced and under-sell competitors, you
have to cut your prices by having the public sector provide roads freely.
Medical care freely. Education freely.
If you charge for all of these, you get to the point that the U.S. economy
is in today. What if American factory workers were to get allof their
consumer goods for nothing. All their food, transportation, clothing,
furniture, everything for nothing. They still couldn’t compete with Asians
or other producers, because they have to pay up to 43% of their income for
rent or mortgage interest, 10% or more of their income for student loans,
credit card debt. 15% of their paycheck is automatic withholding to pay
Social Security, to cut taxes on the rich or to pay for medical care.
So Americans built into the economy all this overhead. There’s no
distinction between growth and overhead. It’s all made America so
high-priced that we’re priced out of the market, regardless of what trade
policy we have.
HEDGES: We should add that under this predatory form of economics, you game
the system. So you privatize pension funds, you force them into the stock
market, an overinflated stock market. But because of the way companies go
public, it’s the hedge fund managers who profit. And it’s those citizens
whose retirement savings are tied to the stock market who lose. Maybe we can
just conclude by talking about how the system is fixed, not only in terms of
burdening the citizen with debt peonage, but by forcing them into the market
to fleece them again.
HUDSON: Well, we talk about an innovation economy as if that makes money.
Suppose you have an innovation and a company goes public. They go to Goldman
Sachs and other Wall Street investment banks to underwrite the stock to
issue it at $40 a share. What’s considered a successful float is when,
immediately, Goldman and the others will go to their insiders and tell them
to buy this stock and make a quick killing. A “successful” flotation doubles
the price in one day, so that at the end of the day the stock’s selling for
$80.
HEDGES: They have the option to buy it before anyone else, knowing that by
the end of the day it’ll be inflated, and then they sell it off.
HUDSON: That’s exactly right.
HEDGES: So the pension funds come in and buy it at an inflated price, and
then it goes back down.
HUDSON: It may go back down, or it may be that the company just was
shortchanged from the very beginning. The important thing is that the Wall
Street underwriting firm, and the speculators it rounds up, get more in a
single day than all the years it took to put the company together. The
company gets $40. And the banks and their crony speculators also get $40.
So basically you have the financial sector ending up with much more of the
gains. The name of the game if you’re on Wall Street isn’t profits. It’s
capital gains. And that’s something that wasn’t even part of classical
economics. They didn’t anticipate that the price of assets would go up for
any other reason than earning more money and capitalizing on income. But
what you have had in the last 50 years – really since World War II – has
been asset-price inflation. Most middle-class families have gotten the
wealth that they’ve got since 1945 not really by saving what they’ve earned
by working, but by the price of their house going up. They’ve benefited by
the price of the house. And they think that that’s made them rich and the
whole economy rich.
The reason the price of housing has gone up is that a house is worth
whatever a bank is going to lend against it. If banks made easier and easier
credit, lower down payments, then you’re going to have a financial bubble.
And now, you have real estate having gone up as high as it can. I don’t
think it can take more than 43% of somebody’s income to buy it. But now,
imagine if you’re joining the labor force. You’re not going to be able to
buy a house at today’s prices, putting down a little bit of your money, and
then somehow end up getting rich just on the house investment. All of this
money you pay the bank is now going to be subtracted from the amount of
money that you have available to spend on goods and services.
So we’ve turned the post-war economy that made America prosperous and rich
inside out. Somehow most people believed they could get rich by going into
debt to borrow assets that were going to rise in price. But you can’t get
rich, ultimately, by going into debt. In the end the creditors always win.
That’s why every society since Sumer and Babylonia have had to either cancel
the debts, or you come to a society like Rome that didn’t cancel the debts,
and then you have a dark age. Everything collapses.

<https://www.facebook.com/CounterPunch-official-172470146144666/&gt; Join the
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Michael Hudson’s new book,
<http://store.counterpunch.org/product/killing-the-host-digital-book/&gt;
Killing the Host is published in e-format by CounterPunch Books and in print
by <http://www.amazon.com/exec/obidos/ASIN/3981484282/counterpunchmaga&gt;
Islet. He can be reached via his website, <mailto:[email protected]>
[email protected]. Chris Hedges’s latest book is Days of Destruction,
Days of Revolt, illustrated by Joe Sacco.