KF: We welcome to the show Professor Michael Hudson, Distinguished Research Professor at the University of Missouri-Kansas City, the leading Post-Keynesian university in America. It’s been fantastic to see, Michael, that the public profile of UMKC has really taken off with Randall Wray, yourself and Stephanie Kelton being quoted quite widely these days. Can you explain what Post-Keynesianism is?
MH: The fact that we all have a very similar approach is what has enabled us to challenge the neoliberal Chicago School. Our approach is heterodox – we see that money is created, basically, on computer keyboards. When a bank lends money, they create a deposit by writing a loan. You sign an IOU, the bank has a promissory note from you to pay them interest and they open a deposit in your name. The Federal Reserve does the same thing, as does any central bank, except for Europe’s. On their keyboards, they can simply do what a commercial bank does, namely, create money by creating a bank deposit for the banks to draw on. That is basically how the Bank of England, the Federal Reserve Bank of New York, the national banks of China, Russia and other civilized countries create a finance of government deficit. That is why government debt in almost every country has gone up and up and up every year for the last few centuries. And as the government spends money into the economy, this is the money and the spending and the income that enables economies to grow.
So if you don’t create money – if the central bank doesn’t monetize the government deficit by just printing money electronically and spending it into the economy – then people have a choice: either there is no growth in money and the economy shrinks or people have to do what they did during the Clinton Administration of the United States when we actually didn’t run a deficit and that is if you’re not getting rising wages, but your expenses go up and education prices go up and health insurance goes up, then you have to borrow from the banks, which is like running a credit card up. When you run a credit card there’s no money but you owe more – that’s what has happened to economies throughout the world and it’s especially what has happened in Europe because the banks in Europe have taken control of the governments and said “don’t have a central bank that does what central banks in other countries do – don’t finance the deficit, sacrifice the economies to the banks and make sure that all of the growth and income we have goes to us the banks – not to labour, not to industry. We want labour’s wages to go down so labour will buy less, so our industries will shrink, so we can take over companies and bankrupt them and bankrupt entire countries. And when the countries go bankrupt from shrinking, then we can tell them: privatise your real estate, your off-shore resources, your subsoil, natural resources, privatise your telephone systems and others; sell them all to us so that then we can create monopolies and take the money for ourselves, and do all this because we don’t want you to do what civilised countries do and that is create your own money to run a government deficit.”
So what you have in Europe and other neoliberal countries is madness, economic shrinkage, emigration, shortening lifespans, falling family formation and marriage rates, rising disease rates and rising suicide rates. This is the neoliberal Chicago plan that’s called “free markets”.
KF: You’re describing modern monetary theory, could I drag you back to this Post-Keynesian angle, though. How has Keynesianism been reinvented within this new brand?
MH: It has not really been reinvented. Keynes had this idea that when there is unemployment, somehow the government spending has to come in and revive employment. That’s called Keynesianism. There are a lot of simple Keynesians – even Paul Krugman is that kind of Keynesian. Post Keynesians go beyond that – basically, if there is anyone we look to be beyond Keynes it’s Hyman Minsky, but also Randall Wray and myself. And we say that government normally has to not only run a deficit in order to revive the economy, it has to aim at raising living standards and wage levels, not increasing the economy just by printing money and giving it to the banks, which is what the Federal Reserve in America does and what the European Central Bank does. So, we put the real economy first, not the financial sector and the banks.
KF: So within Keynesianism there is this belief of the multiplier effect, that one dollar injected into the economy will trigger greater transactions down the line and from that employment will take place.
MH: I don’t think that any serious person believes that any more. That was a disaster of an idea. He is right in the sense that, for Keynes, the multiplier effect is basically the bank credit creation multiplier or the reserve ratio – if a bank has to keep one fifth of its deposits on reserve, then it can lend out five dollars for every dollar it has. So all the multiplier was was a credit creation multiplier. That’s the old Keynesianism. But what we say at Kansas City is don’t leave this multiplier to the banks to create the credit because when a bank creates credit, it creates debt, and what Keynes left out of account in the 1930s (unlike what he wrote in the 1920s) was that bank credit was debt – and that debt is the problem that we have today. And you don’t solve a problem of debt deflation and a bubble economy by creating yet more debt. You can’t borrow yourself out of debt – that’s crazy.
KF: Recently the US congress conducted an audit of the Federal Reserve and found that some $16 trillion had been printed and distributed amongst the companies and central banks around the world.
MH: Yes, although a lot of those were repayments – you make the loan, you get repaid and you make the loan again, so $16 trillion was more than the net. The total volume of transactions was $16 trillion but there were a lot of repayments and new loans, so the net was nowhere near as large. The Federal Reserve and the Treasury actually only added $13 trillion to the federal debt as a giveaway to the banks. The $16 trillion was just a measure of all of the transactions including the repayments and the new loans, so it’s somewhat of a misleading figure compared to the $13 trillion, which was the net figure.
KF: So the point with all this money creation is that usually it would create some spur in the economy but it seems that much of this money was being used for the carry trade and speculative activities to flush up bank balance sheets again.
MH: That’s exactly the point: there are many ways of creating money. In the past, the financial sector pretended that when banks create money, that’s a loan to build factories and employ people. Banks don’t make loans to build factories and employ people. They make loans for corporate raiders to buy factories, fire the labour source, downsize it, outsource it to non-unionized labour, send it abroad, break it up and shrink the economy. So it’s not like they lend money like that.
Last year the Federal Reserve had an $800 billion quantitative easing. At one-quarter of one per cent interest, the Federal Reserve lent – gave – this money to the banks. The banks used part of this money just to leave on deposit with the Federal Reserve and get interest, but actually an amount equal to $800 billion was lent abroad in foreign currency speculation (mainly to the BRIC countries) and arbitrage.
In other words, they take this quarter-per cent money, they buy Brazilian bonds that were yielding 11%, they pocket 10.75% difference, and they not only get the 10.75% difference, but all this Federal Reserve money, spilling out of the US economy into the Brazilian economy forced up Brazil’s currency and gave the banks a foreign exchange free ride over and above the interest free ride. So giving more money to the financial sector merely gives banks enough money to buy even more congressmen to buy control of the political process and privatise the government and have nothing to do with the real economy at all. In fact, it enabled the banks to load the economy with even more debt and actually shrunk the economy because of the perverse way in which the Obama administration had a new chapter in class warfare.
KF: From abroad here in Australia, it seems like America has literally thousands of banks, some of them tiny one town banks. But for this too-big-to-fail meme to dominate American policy, it seems a little bit of a stretch. Can you explain why too big to fail really came to play?
MH: Because of lobbying. In order to become head of a committee in congress, a banking committee, if you’re a Democrat, you have to raise a million dollars from your campaign contributors and give it to the Democratic Party. So the Wall Street banks are the largest campaign contributors and they back people who are useful idiots or people who are just plain corrupt, which isn’t hard to find in the political process here or in Australia or anywhere else. And they will buy people whose first loyalty is to the banks. And the [politicians] say, “OK, Citibank and Merrill Lynch and others have given us so much money that we guarantee that you won’t lose a penny.” And Mr Obama has said, “My job as president – I’m really your lawyer, your advocate, I’m not really a president. My job is to deliver my constituency, Democratic Party voters, to my campaign contributors on Wall Street. And we promise that no matter how much fraud you do, no matter how much you steal, no matter how much you shrink the economy, no bankers is going to go to jail.
And we further promise that you won’t lose any money. No matter how many gambles you make, we will make you whole at taxpayer expense because the economy will go broke if you guys have to lose a penny. We’d rather have the 99% lose half of their money. We’d rather have the economy go into poverty than you losing a single penny. That’s my promise to you. Will you please give more money to the Democratic Party so that we can serve you better?”
KF: It just seems that economic theory, while being so dominating of public policy on one front can be so easily ignored. And with all of these banks in America, surely, if some were allowed to fail, it would have been better for the market system rather than socializing the losses with a lifetime of debt for the public to pay off.
MH: The market system here is that the banks are supposed to run the economy. That’s what the market system basically means. Of course it would be better for the real economy, but the governments are not supporting the real economy, they’re supporting the bankers and the bankers’ gain is the real economy’s loss.
KF: So much of the money required for political lobbying is to pay for advertising on what was once known as the public airwaves. Is there any discussion in the reform community for free airtime to be provided to the political parties, as they do in New Zealand for elections?
MH: No. None, whatsoever. The Democrats and Republicans have identical policies. They have all agreed that no matter what, they’re going to work for their campaign contributors, and they have the same contributors – different people but it’s all Wall Street, basically. If you had free expression of ideas, you’d violate the Chicago School definition of a free market.
In order to have a “free market”, defined as central planning by the banks, you have to prevent any alternative to your ideas. Remember Margaret Thatcher’s phrase, “there is no alternative”. In order to make sure there is no alternative, you have to make sure that you have a totalitarian control of the media and of the political system. Without totalitarian control, you can’t have a free market, Chicago-style. That’s why when the Chicago boys went into Chile, they closed every university and took over the radio stations and imposed a dictatorship. That’s the free market, neoliberal-style.
KF: So if companies are too big to fail, it seems that according to your most recent article “Wall Street’s War Against the Cities”, that governments are actually being set up to fail.
MH: I don’t agree with you at all! The governments are not failing when they’re serving their constituency, the bankers. The governments are succeeding! President Obama’s campaign manager, Rahm Emanuel, said “this crisis is too good to go to waste”. And one of the crises is the state and local crisis here in America. So to balance the budget, Washington is not giving federal grants and aid to the states and municipalities. That forces them into a budget crisis and they have to sell off their sidewalks, their roads, their real estate, and anything in the public domain at fire-sale prices, very much like what’s happening in Greece, to the financial sector. The government isn’t failing by destroying the economy. The government is succeeding in destroying the economy! That’s what it’s all about.
KF: Well we’re economists here and you well know that the economic system, the public finance system, has essentially been set up to fail. That’s the point I’m making.
MH: No, it has been set up to give a free lunch! That’s not failure if you’re the free luncher! If you’re the parasite and the host is shrinking and you’re gaining, that’s not your failure, that’s the failure of the host and its immune system. But the government is not failing to serve its real constituency, which is its campaign contributors and the financial sector.
KF: 2011 saw the highest average sales tax rate for America. It seemed according to Vertex, there were 542 new sales tax increases or changes throughout the American States, and where UMKC is based, they had the largest rise in sales taxes, some 19% – from 5.3% to 6.3%. Why is there an increasing reliance on these user pay-type charges?
MH: Because if you didn’t tax consumers through the sales taxes, then you’d have to do what governments used to do and tax real estate! And if you taxed real estate, then it wouldn’t have as much money, rental income, free to pay the banks. And the idea is to free all of the income from real estate rent and natural resource rent so that instead of this being the tax base, it can be paid to the banks and the financial sector, so the financial sector, now that it has become the de facto government of the economy, wants all of the rent that used to be the tax base to go to it. And its aim is to shift the taxes off real estate, off finance, off insurance and off monopolies, on to labour to shrink the living standards as rapidly as it can.
KF: It beggars belief that the Tax Justice Network has quantified some $21 trillion hidden in tax havens around the world. If there was a better usage of the property tax, or I prefer, actually, a land value tax, would this wealth discretion be possible?
MH: Only if you change the tax system. If you don’t tax real estate, and you don’t tax wealth, then it doesn’t matter where it goes abroad. There are all sorts of reasons that money goes abroad – false invoicing, there’s an immense amount of fictitious economic statistics that are turned in so that companies can take their revenue abroad rather than at home. They can pretend to lend money to themselves and abroad and then pay interest to themselves in a tax haven where there is no tax on it. On my website, michael-hudson.com, I have all sorts of narratives of how this is done through offshore banking enclaves.
KF: From what you’ve said, it’s not going to be long until there is a full-scale campaign declaring cities, regions, municipalities and nations as dead democracies. Essentially, to hear that word democracy, more and more people are sniggering at it.
MH: I’m not sure what you mean by democracy. Earlier this year, or last year, Angela Merkel said “Look, Greece cannot hold a referendum, because if it holds a referendum, the people are going to vote against paying the banks just like they voted in Iceland against the paying banks.” So you cannot have democracy. That is incompatible with the prime directive of modern politics, which is no bank will lose a penny; the 1% have to keep on doubling their share of wealth every 30 years or so; they have to continue to gain at the expense of the 99%. And as long as that’s the case, you cannot have democracy – that is incompatible with oligarchy.
Plato explained this many years ago. He said that there is an eternal triangle law: democracies turn into oligarchies and within the oligarchies, the oligarchy makes itself hereditary and turns into and an aristocracy, and then the aristocrats fight amongst themselves and some of them try to take the people into their camp and become democrats and the whole thing begins all over again. So we’re in a stage of western civilization where we’re turning from democracy into oligarchy.
KF: Over to China, then, it seems like some steel plants are being closed, the unprofitable ones – there’s a large run-up in iron ore supplies. The Australian miners are getting very nervous about what’s going on. What are you seeing in China as the new president is set to take over soon, will they engage in Keynesian pump priming as the local governments are “planning” to do, or will the weight of this huge land-based mortgage debt that seems to be drowning the country, like it has around the world, will that weigh down the economy and any chance of free-flowing growth as they’ve had?
MH: The Chinese, thank heavens, are not Keynesians. Keynesian economics only works within a given economic structure. China’s discussion, politically, is all about what kind of a structure do we want to maximise our national growth, raise productivity and raise living standards. So in China, they’re not talking about Keynesian problems, they’re talking about how to create a productive and fair society by working directly on the structure.
Now, they realise that now that Europe is dying, and now that the West is committing economic suicide, they are not going to have the export markets that they used to have, so what they realise is “OK, we won’t have the export markets. Fine! Let’s begin using all of this labour and factories and productive potential we have to support our own living standards.” So in China, they’re moving towards domestic living standards and domestic wage increases much more than for the export markets and this is not going to use as much steel as was used in the past. Remember, China has undergone an enormous construction boom, and an enormous railway boom, with the high-speed railways. It has made much of the steel using investment already. Now it’s diversifying towards other forms of investment that don’t use so much steel and you’d expect this demand for steel to lower as the structure of the economy changes away from steel usage.
KF: Well, it’s fascinating to see what is going to happen in China because it could well be that the downturns in the EU, America and what seems to be coming in China are leading us up to a very interesting period with everyone focusing on the New York stock market. What are you seeing will happen over the next few months?
MH: The reason crises have occurred at this point in the past is because of the agricultural cycle – the moving of the crops. And for the last three hundred years, banks have had to lend money to pay farmers for their crops to move them after they harvest the crops in the autumn. So, it used to be called the autumnal drain of money from the coastal regions to the agricultural regions.
Agriculture is not the key anymore, and the crops are not doing that well either, in many countries, because of global warming changing the whole agricultural cycle. So there is nothing particular about the autumn anymore – it used to be the case when economies were largely agricultural, but what is more critical about it becoming autumn is the fact that Greece has no way of paying the money that the Europeans are insisting on, and not many people can see that Spain, Italy or Portugal have the money either, and you’re having a slow crash throughout Europe and North America – a steady shrinkage and you never know when the break in the chain of payments can come. It used to come in autumn, as I said, because some banks in the east coast wouldn’t have the money to pay the farmers and there would be a break, but very often, the break in the chain of payments will come as a result of fraud or embezzlement or something else, so one really doesn’t know at what point the break is going to come.
But there are so many political changes that are coming about – the big change in America is the fact that the congress may not raise the federal debt limit and the government may stop spending money and, in any case, is going to very sharply cut back its public spending, which is going to push the private sector into an even deeper depression than it has been falling into. And that’s sure to make even more bankruptcies, foreclosures and missed payments throughout the economy, and the same thing is happening in Europe, so Europe and America are the big problems, for non-agricultural reasons.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. His new book summarizing his economic theories, The Bubble and Beyond, is now available. He can be reached via his website, email@example.com.
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