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I caught up with economist Michael Hudson on his way to the 19th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies, and he is in rare form.
• What’s wrong with New Europe?
• Why is the euro falling?
• Debtors versus creditor nations split the EU
Eric Janszen (EJ): Thank you for your time this morning.
Michael Hudson (MH): Glad to be here.
EJ: It’s been a while since I’ve interviewed you so I’m looking forward to a wide-ranging discussion today. I want to include your Financial Times article last week on the fate of ex-Soviet debtor nations, the Bank of International Settlement report I sent you on sovereign debt risk in Western economies, and also talk about China. Let’s start with the BIS report.
MH: I skimmed through it very quickly. It’s the worst junk economics I have ever read! According to their reasoning, America will be bankrupt within a year unless it levies a $30 trillion tax on wealth immediately. Wages have to be cut by 90% and everything has to be nationalized because, by their logic, in order to pay for a $3 trillion war you need to have a $60 trillion savings already pre-saved at 5% interest. Let’s extend their logic to the $13 trillion bailout last year. America has to have $200 trillion in order to yield that much in interest. That’s the logic that they’re applying to Social Security and Medicare, too. It’s junk logic. The whole idea that Social Security has to be pre-funded and Medicare has to be pre-funded with savings levied regressively is hypocritical unless they say wars have to be pre-funded and bailouts to the financial sector have to be pre-funded.
EJ: Whom does the BIS represent, in your opinion?
MH: They’re the lobbyists for the international financial class. They represent the ultra-right-wingers of the world standing up for their vested interests—and especially for the banks—in antagonism not only against labor but also against industry. Their aim and function is to utterly destroy industry and to impose a neo-feudal economy. This sounds like ranting at first except when you look at their policies. They are so right wing, so destructive, so ignorant of the most basic monetary principles that you realize they are thinking back in the way people thought in the medieval period. They have no understanding of what credit is because if somebody does understand what credit is they are considered unfit to for work by the BIS. Anything they say should be looked at as active class warfare and paid propaganda. It should not be taken seriously.
EJ: So what is your theory about the role of Simon Johnson who was Chief Economist for the IMF, now a professor at the MIT Sloan School of Management and a member of the CBO’s Panel of Economic Advisers? He was the first of rank to note that our political system as run by a financial oligarchy.
MH: Oh, he’s monetarism with a friendly face. A lot of the things he writes are correct so he’s sort of the good cop setting things up for the bad cop.
EJ: His blog baselinescenario does read that way, with a “on the one hand this and the other hand that” treatment of Wall Street malfeasance and dysfunction in the US political economy.
MH: He would have to actually explain how it works. I mean there’s nothing wrong about somebody working for an institution like the BIS or the IMF. I mean, I learned what I know about balance of payments working for Chase Manhattan and Arthur Anderson so I can understand it. But I think that going through the kind of monetarist education that he did gives him a set of blinders at the very outset and any proposals for reform he has is limited by this set of blinders. Consider how destructive the IMF’s austerity plans have been, for instance. This was apparent thirty years ago. I mean almost everybody else has already seen these sins. The world seems to love a repentant sinner, but wouldn’t it be nice if we had institutions in these roles that didn’t sin in the first place?
EJ: The prescription appears to come down to different ways of repaying the debt. Why doesn’t the IMF consider the option of curing a nation’s over-indebtedness by simply writing it off?
MH: Their assumption is that all the debts have to be paid. And they have to be paid by essentially labor and industry through the financial class that will use these payments to lend out even more credit to labor and to industry to make them even more indebted, causing yet further collapse, requiring larger bailouts, requiring yet further taxes. So the basic modus operandi is self-destructive and will shrink economies until they get tinier and tinier. You’re seeing this happening in Latvia and Iceland. In Iceland mothers are telling their kids, “you better emigrate because there aren’t going to be any jobs here for the next generation.” And in Latvia, labor has been leaving for the last five years.
EJ: So this has escalated now to involve larger economies within the European Union since the last conversation you and I had—most famously Greece, of course.
MH: I think that’s the false analogy. It’s not really escalated. It’s a completely different problem that the monetarists are trying to use as an excuse to confuse people to say, “well we’ve got to abolish Social Security and Medicare and public medicine here.” The Greek leadership inherited a military dictatorship that freed the wealthy from having to pay income tax. So Greece is notorious as a place where wealthy people don’t pay taxes. You’ve heard of Leona Helmsley saying only the poor people pay taxes. But in Greece, the doctors don’t, the professionals don’t. There’s no systematic tax collecting there except wage withholding and so the result is a very regressive tax regime. The IMF and the Europeans and the popular press misrepresent their tax problem as if it were a financial problem. It’s basically a fiscal problem—the transfer of the tax burden off the higher income and wealth brackets onto labor and onto the bottom of the social pyramid. That stifles industry. It raises the cost of labor. It raises the cost of living. It raises the cost of doing business and makes countries less competitive. Yet that is not what they’re saying in Greece. They’re saying that because we don’t tax the upper brackets, we have to tax the lower brackets all the more and call it "austerity."
What’s wrong with New Europe?
EJ: What was the thrust of your Financial Times article last week?
MH: I said that while the problem with Greece was government debt in a country within the euro zone, the problem is more serious in the new Europe countries—the post-Soviet economies and Hungary, Romania, the ex-communist countries and Iceland. Countries with their own local currencies that had linked their currencies to the euro with the intention of joining the European Union but have debts denominated in euros, although their revenues are in domestic currency, and they’ve way over-borrowed. They’ve transferred the tax off property, off real estate onto labor creating a real estate bubble that now has burst and so that real estate in these countries is in negative equity. They’re not getting the foreign exchange anymore to cover their trade deficits and so their currencies are going to collapse. For the first time, these countries are taking on public debt, which was very low before, not for the purpose of spending domestically but slowly to support the exchange rate so that domestic real estate owners can pay foreign currency debts to the foreign banks. This isn’t the Greek problem at all. I think that it is ignorance to say that it is, but that is how the media frequently describes it.
EJ: Your suggestion in your Financial Times article to ex-Soviet states that owe debts in euros versus their own currencies is to declare their debts in their own currency?
MH: Well, first of all, everybody acknowledges that the currency cannot be supported at the existing exchange rates. So the currency is going to plunge. It can plunge anywhere from 40% to 90%. Now obviously if the currency plunged by that amount—I think Iceland’s currency plunged by almost seventy percent—if the currency plunges and the debts are owed in euros then this is going to more than doubling the mortgage payments and will force almost all the domestic real estate into default. So the first thing they should do in order to reduce the debt burden to foreign central banks is re-denominate all the foreign debts in their own currency, i.e., abolish the foreign currency clause in contracts, just as President Roosevelt abolished the gold clause in the US contracts. Then he devalued the dollar by 41% in 1933.
EJ: But that was done in order to stop a deflation spiral that was occurring here at the time, to purposely produce a surge of import price inflation. Latvia and these other countries don’t have a deflation problem. Wouldn’t a 50% devaluation produce quite a bit of unwelcome inflation?
MH: There’s going to be inflation in any case. When Old Europe expanded and absorbed these countries in, the post-Soviet economies thought that Europe was going to help them recover like the World Bank after WWII was supposed to be the world international bank for reconstruction and development. These economies thought they’d be reconstructed. Instead they were deconstructed. Europe looked at the post-Soviet economies and New Europe not as countries to be helped to grow like European countries did with protectionism, subsidies, especially agricultural protectionism as in the Common Agriculture Policy, but rather they looked these nations as a new “colonial” market. The idea was to prevent their agriculture, prevent their industries from developing and especially to prevent them from developing banking on their own but to become dependant on European banks, so that the Baltic countries became dependant on the Swedish banks particularly. Hungry, Romania and Central Europe became dependant on the Austrian banks just as in Hapsburg times. The result was that Old Europe has done nothing to help New Europe develop.
So Old Europe is quite culpable for having promoted a kind of neo-liberalism that was so right-wing as never to have been able to get a foothold at all either in Western Europe or in the United States. In Latvia there is a flat tax on labor of over 50% and less than a 1% tax on property. This is crazy! No western country would do anything like this. This is the most regressive tax system in the entire world, and that was Western Europe’s alternative to Communism. So now these populations are saying, “well, wait a minute, do we really want to have a relationship with a Europe that isn’t operating according to social democratic principles as we thought it was.” And as it was at the outset in the 1950s. They’ve figured out that instead they have been taken over by the financial interests as a banking promotion project and they are beginning to vote that way, as in Iceland. In Iceland 97% of the voters refused to go along with the referendum to have Iceland pay banks in England and the Netherlands the money that these countries claimed was owed that Iceland claims it does not owe at all. In Latvia, the opposition parties there that look like they’re coming to power behind the Social Democrats, Harmony Centre, the Russian speaking population, the Nationalist parties all in a coalition now against the neo-liberals. They have come to realize that they have been saddled with this crazy junk economics pushed by the Chicago School, by the same people that developed the euro—Ed Mandel and the other monetarists who don’t have a clue as to how political society actually works and all their silly theorizing is now falling apart.
EJ: Why wouldn’t your prescription for Iceland, to default on the debt, work for Latvia and these other countries? Wouldn’t that be less destructive to their own economies than inflating the foreign debts away by devaluation? If the currency falls 50% won’t an imported auto double in price?
MH: Iceland doesn’t have to default. Iceland doesn’t have any debt. For one thing, it doesn’t owe the “IceSave Debt” at all to England or the Netherlands. Those governments paid with their own money in violation of the European Union rules and the euro rules that Iceland had signed and that all the other European countries did. All that Iceland wanted was for an honest broker to hear the case in court and rule that it doesn’t owe them money. You can’t just go into a country and say, “If you don’t pay me $5 million I’m going to blackball you from membership in the European Union and I’m going to use the IMF illegally to force you to pay. And I’m going to make sure that the banks go to the credit rating agencies to blackball you by lowering your debt rating so you have to pay higher interest rates.” This is leading Iceland to look elsewhere other than Europe for its political and economic alliances in the future.
EJ: So let’s use a different term than default. Abrogate? Nullify?
MH: In Iceland they call it the Rule of Law. The Rule of Contracts. Basic contract law.
EJ: Which independent international institution of justice might take this view that you are taking and support Iceland to enforce the rule of law?
MH: Any court in the world. Any court in the world that does not have corrupt judges that are bought off. I mean, a contract is a contract. The rules are very clear.
EJ: Where would we find this contract to verify these facts? If we were to scout around on the Internet where would we find the rules that specifically disallow…
MH: In the past Iceland has asked America to mediate. For instance, when Iceland had an argument with Britain over fishing territory, it asked the United States to mediate and the US came down on the side of Iceland. I think it already raised the debt issue with Hillary Clinton but the State Department didn’t give an answer and Iceland worries that America and England may stand up to the financial interests in this case. So I don’t know. No government looks like it wants to get involved so Iceland is basically saying, “okay, we’ll look around in Asia or we’ll look around at our nearest neighbors across the Arctic Circle, in Russia and China, for help.”
So they’re certainly looking there. The other problem of course is domestic debts in Iceland that are indexed to the Consumer Price Index that in turn reflects the exchange rate, because consumer products are mainly imported. So obviously there’s an argument there that the practice of tying interest rates to the CPI violate the constitution; the Constitution of Iceland explicitly prevents this practice. And yet this has been the practice for decades that’s bankrupting Icelanders. People are trying to get it into court. The government, the current social democratic government, which is on the right-wing political spectrum there, is blocking at this.
EJ: If Latvia and the other former-soviet republics don’t take the initiative to establish that their debts are in their own currency and then devalue, won’t the markets do that for them anyway? If their currency reserves get too low to cover foreign debt payments, won’t their bond and currency markets crash as in Argentina in 2002?
MH: The problem is what happens before that? Latvians are not looking at economic reality and saying, “well, there’s no market support for our currency so we’re going to do what America has accused China of doing, of manipulating the currency.” And they are manipulating the currency, upward in this case, by borrowing from the European Union and the IMF exclusively to stabilize the currency. So the market has already refusing to stabilize Latvia’s currency.
EJ: Your argument is that they’re just better off tying their debts to their own currency and devaluing.
MH: Every country needs to owe their debts in their own currency. It’s a prime rule of international finance: never owe debts in a hard currency if your revenue is in a soft currency. Otherwise the debt burden is just going to rise and rise as it did for Latin America when they continued to devalue. And the whole idea of the IMF telling Latin American countries to devalue in the 1960s and 70s was based on the fact that when you devalue, the debts become more expensive and that increases the debt overhead and slows down economic growth because it diverts spending away from goods and services onto paying debt. So the more Latin America devalued the worse its balance of payments position got and that led to default in 1982.
EJ: In the case of Argentina the IMF was supporting their currency in the year 2000 much as the IMF is supporting Latvia’s, because the market wouldn’t. Then we had our crash here and in 2001 the IMF basically said, “Good luck. You’re on your own.” Then the debt crisis and default in 2002. Could that happen to Latvia?
MH: Argentina is a special case because it was using the US dollar instead of its own currency. Its problems go back a hundred years and they just keep reappearing in the same way, which is why it has devolved from one of the richest countries in the world to one of the poorest. The problem there is the domestic class war between the oligarchy and the rest of the population, much more than a financial problem of international finance. The IMF was set up ostensibly to make only short-term loans that were of a cyclical nature. But the problem with third world countries, with Argentina and the post-Soviet economies, are not cyclical: they’re structural. The IMF is not set up to deal with structural problems so the argument can be made that just as lenders are irresponsible in not spelling out the dangers to the borrowers taking on sub-prime mortgage loans here in the United States, the IMF has been irresponsible in not explaining to its borrowers how destructive its loans and austerity plans were.
Most borrowers realized this, and until about a year ago they’d all been able to escape from the IMF. The IMF was busy closing down offices around the world. It had only one client left and that was Turkey and then Turkey finally managed to get out of its clutches. The collapse of the real estate bubble in the United States that sent the world into recession was a godsend for the IMF because it treated the crisis as if it were a temporary phenomenon, an opportunity to get back into making short-term loans to “rescue” economies, rather than a phase change.
But in fact the global financial crisis triggered a phase change, a change in direction, and I think all of the people who borrowed from the IMF, those countries can say, “Look, this was utterly irresponsible. It’s junk economics. We are not going to pay as a result of ‘your’ mistaken economics in lending to us. Just as a bank that made bad loans should be allowed to go under, you should not be repaid. These are the equivalent of ‘odious debts’ because you made these loans under false pretenses and told us this would help our economy rather than hurt our economy. You owe us reparations. Please give us back five or ten times the amount you lent us so that we can recover from the disaster we brought upon ourselves by listened to you fools.”
Latvia unemployment skyrockets in 2008
EJ: This is very important point for readers, your point about a phase change and the possibility of a significant structural realignment in not only the ex-Soviet bloc but possibly within the Euro-zone as well.
MH: Yes. In other words, the game is over. It’s run its course. And by that I mean economies are fully “loaned up.” That means there’s no more collateral that is free to be pledged for debt. All of the revenue from real estate has been pledged for debt and the result is a collapse of real estate prices leaving negative equity. Since the post-Soviet states were free of Russia in 1991, they’ve had a structural trade deficit. They have not developed the means to finance this deficit, except in a few areas like Slovakia, but have financed a long-term structural trade deficit by borrowing mortgage money in foreign currency. So the foreign currency inflow for mortgages has been turned over to the Central Bank that’s been able to use it to pay for the imports of foreign goods from domestic currency to foreign exporters and at the same to subsidize capital flight.
EJ: The IMF is enabling capital flight from the Baltic states?
MH: The main function of the IMF foreign exchange support is basically capital transfers, which is partly capital flight and partly debt payment. There’s been a long theory of capital transfers ever since John Stuart Mill’s article in 1844 and certainly the work of Keynes in the 1920s. All of this is exactly antithetical to the junk economics that the IMF promotes and that Europe has followed. Europe is acting as if somehow all this money that’s being paid is just a liquidity problem and everything is going to get back to normal. But it can’t get back to normal unless real estate prices recover and employment and industrial investments recover and state and local budgets recover and none of them are going to. They’re all in structural deficit largely because the tax system, which is symbiotic with the financial system, the tax system has been shifted off property, off the land, off real estate, off financial wealth, onto labor and industry and is stifling development everywhere.
EJ: Moving on to the euro zone, are Greece, Spain and Portugal the canaries in the euro coalmine. Is it likely that other countries within the Euro-zone are going to subsequently have difficulties?
MH: A deficit country is different than a surplus country. There’s a difference in domestic accounting, domestic currency, fiscal policy, and the balance of payments. Greece and these other countries—the PIIGS—are in a balance of payments crisis because their debts are owed to the creditor “core” of Europe, to Germany and Holland primarily and to some degree to France. So Germany, France, and Holland are at one pole of the euro and the other countries are at the other pole and there is a financial polarization within Europe in the context of an increasingly regressive and destructive tax policy.
EJ: How do you see the conflict between the euro zone debtor and creditor countries getting resolved?
Why is the euro falling?
MH: Well, either the European economy is going to shrink and shrink and shrink or there’ll be huge defaults and they’ll wipe out a lot of debt. One person’s debt is another’s savings. So if the debts can’t be repaid that means somebody is going to lose. Now in the first instance it’s the banks that have made the bad loans that lose, but now the governments are bailing out the banks and are trying to tax labor and industry to make up the difference and sell off public enterprises. And that’s making matters even worse because now you’re having fiscal overhead added on to the financial overhead and Europe is becoming a very high cost area and that’s what’s leading to the decline of its currency.
EJ: So the weakness that we’re now seeing in the euro is an expression of this concern that is a self-reinforcing process? That there’s no way out of this without defaults?
MH: Well, there’s going to have to be a restructuring and it’s going to involve the write-off of the bad debts. There are obviously a lot of bad debts that can’t be repaid. People are walking away from their property. The debts are going to have to be written down to the market value. And basically in the process of carrying the regressive tax shift, the governments are going to have to shift the tax back onto property. That means the governments are going to collect the rental value of property that is presently being pledged to banks with interest. So if the governments raise the taxes on property, this is going to be at the expense of banks and lead to yet more loan defaults.
EJ: Who wins the political battle shaping up here between the PIIGS and their creditors? Within the structure of the euro?
MH: I guess whoever has the most guns politically. The Greeks are out on the streets. The French are out on the streets. They’re not like Americans. They’re really protesting and the class war is back in business over there. Same thing in Ireland.
EJ: My French friends will tell me they’re barbarians over there. We’re very civilized here in the United States.
MH: That’s our problem, as Freud said in “Civilization and its Discontents.”
EJ: I remember reading that book in college. He explained the conflict between the demands of society for individuals to stifle the animalistic behavioral foundations of human nature. Is there a way to diffuse the conflict? A muddle-through option? The IMF has been in and out of the Greek rescue.
Debtor versus creditor nations split the EU
MH: The IMF cannot be part of the solution. It’s part of the problem. The EU basically is part of the problem because it’s pro-financial. So the whole way in which the European Union is structured, basically in a centralized way to be run by the financial lobbyists, obviously isn’t working. The EU isn’t really like the United States. It doesn’t really have it’s own parliament and systematic taxes. The Germans are saying today that in the old days, a century ago, if a problem like this came up in, say, Latin America, the United States would send in the marines. They’d occupy the custom’s houses and as these governments made most of their money on charging customs on imports and exports the marines would collect it and pay the creditors.
But now what are the creditors going to do today? Are, let’s say, the Germans going to take over in Greece? Who will act as the equivalent of the Internal Revenue Service to collect the money? The Germans would have to promote not a military dictatorship as the colonel powers did in the old days but a popular government that would tax the rich and the Germans aren’t going to do that. The European Union, the creditors, because they support the right wing not the left wing, are preventing these governments from collecting taxes progressively to balance the budget and pay the debts. That’s the problem: it’s a right-wing versus left-wing problem. Unfortunately, there isn’t really a left wing in Europe to make this case very well. The social democrats have more or less abandoned what used to be an economic policy at the outset. They are now concerned more with political and social issues than economic issues. So there isn’t really a party in Europe that is taking the side of progressive economic policies. They’ve left economics and finance, and debt and credit policy, to the right wing to discuss among each other rather than making it a left-wing topic like it used to be a hundred years ago.
EJ: Isn’t that something of a global phenomenon?
MH: Yes.
EJ: I don’t see it as being terribly different here in the US.
MH: Or in Australia. The Labor Parties all over the world. The most right-wing parties that you can see are the labor parties of Australia and New Zealand where they were leading the privatization sell-offs and leading the tax shift favoring the financial sector. And they didn’t even realize it! They’ve somehow “decoupled” financial analysis from the social analysis that characterizes social democratic and labor parties from their outset a hundred years ago.
Interview with Dr. Michael Hudson – Part II: China’s next phase ($subscription)
• The big power shift
• Treasury bonds for nothing
• The unstable measure of value
Eric Janszen (EJ): Many trends are converging over the next few years and you brought up quite a few of them including significant changes going on in China. We’re starting to see some of that exhibited in changes in policy. Do you see a major political shift in China coming over the next few years?
Michael Hudson (MH): Yes. I think there’s going to be a generational change for one thing. Younger leaders will take over. But the generational change will not only be demographic, it will be a geographic change. I think it’ll be more away from Shanghai, more towards Beijing and towards the centre of the country—to Nanjing, Wuhan, and the South, and further inland which is not so financially tied to the West, not so neo-liberal. The neo-liberalism was a means of breaking down the bureaucracy that they had get rid of. In that sense, it succeeded in building up China remarkably. When I was there last fall, I felt I was stepping into the future when I’d go to a train station or take a railway train or drive into the city. So it’s done a lot but it is now time to go on to the next stage and continue evolving. Now that China has over $2 trillion in foreign exchange reserves, it can operate without trying to accumulate the financial reserves that it had to, just for purely defensive reasons in the last decade or so to prevent anything like a recurrence of the Asian financial crisis of 1998 being directed at it.
EJ: What is China’s next stage of development?
MH: It’s moving from an export-oriented stage more towards developing the internal consumer market. It’s doing that for two reasons: one, the export market is drying up with the movement of the western economies into depression and debt deflation; two, so that China’s enormous productive capacity can be deployed to produce continued growth. How is China going to sell this output if not to its domestic market? more... ($ubscription)
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MH: Yes. In other words, the game is over. It’s run its course. And by that I mean economies are fully “loaned up.” That means there’s no more collateral that is free to be pledged for debt. All of the revenue from real estate has been pledged for debt and the result is a collapse of real estate prices leaving negative equity. Since the post-Soviet states were free of Russia in 1991, they’ve had a structural trade deficit. They have not developed the means to finance this deficit, except in a few areas like Slovakia, but have financed a long-term structural trade deficit by borrowing mortgage money in foreign currency. So the foreign currency inflow for mortgages has been turned over to the Central Bank that’s been able to use it to pay for the imports of foreign goods from domestic currency to foreign exporters and at the same to subsidize capital flight.
EJ: The IMF is enabling capital flight from the Baltic states?
MH: The main function of the IMF foreign exchange support is basically capital transfers, which is partly capital flight and partly debt payment. There’s been a long theory of capital transfers ever since John Stuart Mill’s article in 1844 and certainly the work of Keynes in the 1920s. All of this is exactly antithetical to the junk economics that the IMF promotes and that Europe has followed. Europe is acting as if somehow all this money that’s being paid is just a liquidity problem and everything is going to get back to normal. But it can’t get back to normal unless real estate prices recover and employment and industrial investments recover and state and local budgets recover and none of them are going to. They’re all in structural deficit largely because the tax system, which is symbiotic with the financial system, the tax system has been shifted off property, off the land, off real estate, off financial wealth, onto labor and industry and is stifling development everywhere.
EJ: Moving on to the euro zone, are Greece, Spain and Portugal the canaries in the euro coalmine. Is it likely that other countries within the Euro-zone are going to subsequently have difficulties?
MH: A deficit country is different than a surplus country. There’s a difference in domestic accounting, domestic currency, fiscal policy, and the balance of payments. Greece and these other countries—the PIIGS—are in a balance of payments crisis because their debts are owed to the creditor “core” of Europe, to Germany and Holland primarily and to some degree to France. So Germany, France, and Holland are at one pole of the euro and the other countries are at the other pole and there is a financial polarization within Europe in the context of an increasingly regressive and destructive tax policy.
EJ: How do you see the conflict between the euro zone debtor and creditor countries getting resolved?
Why is the euro falling?
MH: Well, either the European economy is going to shrink and shrink and shrink or there’ll be huge defaults and they’ll wipe out a lot of debt. One person’s debt is another’s savings. So if the debts can’t be repaid that means somebody is going to lose. Now in the first instance it’s the banks that have made the bad loans that lose, but now the governments are bailing out the banks and are trying to tax labor and industry to make up the difference and sell off public enterprises. And that’s making matters even worse because now you’re having fiscal overhead added on to the financial overhead and Europe is becoming a very high cost area and that’s what’s leading to the decline of its currency.
EJ: So the weakness that we’re now seeing in the euro is an expression of this concern that is a self-reinforcing process? That there’s no way out of this without defaults?
MH: Well, there’s going to have to be a restructuring and it’s going to involve the write-off of the bad debts. There are obviously a lot of bad debts that can’t be repaid. People are walking away from their property. The debts are going to have to be written down to the market value. And basically in the process of carrying the regressive tax shift, the governments are going to have to shift the tax back onto property. That means the governments are going to collect the rental value of property that is presently being pledged to banks with interest. So if the governments raise the taxes on property, this is going to be at the expense of banks and lead to yet more loan defaults.
EJ: Who wins the political battle shaping up here between the PIIGS and their creditors? Within the structure of the euro?
MH: I guess whoever has the most guns politically. The Greeks are out on the streets. The French are out on the streets. They’re not like Americans. They’re really protesting and the class war is back in business over there. Same thing in Ireland.
EJ: My French friends will tell me they’re barbarians over there. We’re very civilized here in the United States.
MH: That’s our problem, as Freud said in “Civilization and its Discontents.”
EJ: I remember reading that book in college. He explained the conflict between the demands of society for individuals to stifle the animalistic behavioral foundations of human nature. Is there a way to diffuse the conflict? A muddle-through option? The IMF has been in and out of the Greek rescue.
Debtor versus creditor nations split the EU
MH: The IMF cannot be part of the solution. It’s part of the problem. The EU basically is part of the problem because it’s pro-financial. So the whole way in which the European Union is structured, basically in a centralized way to be run by the financial lobbyists, obviously isn’t working. The EU isn’t really like the United States. It doesn’t really have it’s own parliament and systematic taxes. The Germans are saying today that in the old days, a century ago, if a problem like this came up in, say, Latin America, the United States would send in the marines. They’d occupy the custom’s houses and as these governments made most of their money on charging customs on imports and exports the marines would collect it and pay the creditors.
But now what are the creditors going to do today? Are, let’s say, the Germans going to take over in Greece? Who will act as the equivalent of the Internal Revenue Service to collect the money? The Germans would have to promote not a military dictatorship as the colonel powers did in the old days but a popular government that would tax the rich and the Germans aren’t going to do that. The European Union, the creditors, because they support the right wing not the left wing, are preventing these governments from collecting taxes progressively to balance the budget and pay the debts. That’s the problem: it’s a right-wing versus left-wing problem. Unfortunately, there isn’t really a left wing in Europe to make this case very well. The social democrats have more or less abandoned what used to be an economic policy at the outset. They are now concerned more with political and social issues than economic issues. So there isn’t really a party in Europe that is taking the side of progressive economic policies. They’ve left economics and finance, and debt and credit policy, to the right wing to discuss among each other rather than making it a left-wing topic like it used to be a hundred years ago.
EJ: Isn’t that something of a global phenomenon?
MH: Yes.
EJ: I don’t see it as being terribly different here in the US.
MH: Or in Australia. The Labor Parties all over the world. The most right-wing parties that you can see are the labor parties of Australia and New Zealand where they were leading the privatization sell-offs and leading the tax shift favoring the financial sector. And they didn’t even realize it! They’ve somehow “decoupled” financial analysis from the social analysis that characterizes social democratic and labor parties from their outset a hundred years ago.
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• The big power shift
• Treasury bonds for nothing
• The unstable measure of value
Eric Janszen (EJ): Many trends are converging over the next few years and you brought up quite a few of them including significant changes going on in China. We’re starting to see some of that exhibited in changes in policy. Do you see a major political shift in China coming over the next few years?
Michael Hudson (MH): Yes. I think there’s going to be a generational change for one thing. Younger leaders will take over. But the generational change will not only be demographic, it will be a geographic change. I think it’ll be more away from Shanghai, more towards Beijing and towards the centre of the country—to Nanjing, Wuhan, and the South, and further inland which is not so financially tied to the West, not so neo-liberal. The neo-liberalism was a means of breaking down the bureaucracy that they had get rid of. In that sense, it succeeded in building up China remarkably. When I was there last fall, I felt I was stepping into the future when I’d go to a train station or take a railway train or drive into the city. So it’s done a lot but it is now time to go on to the next stage and continue evolving. Now that China has over $2 trillion in foreign exchange reserves, it can operate without trying to accumulate the financial reserves that it had to, just for purely defensive reasons in the last decade or so to prevent anything like a recurrence of the Asian financial crisis of 1998 being directed at it.
EJ: What is China’s next stage of development?
MH: It’s moving from an export-oriented stage more towards developing the internal consumer market. It’s doing that for two reasons: one, the export market is drying up with the movement of the western economies into depression and debt deflation; two, so that China’s enormous productive capacity can be deployed to produce continued growth. How is China going to sell this output if not to its domestic market? more... ($ubscription)
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