New Hudson

[oddlots]

... and one of the very best:

http://michael-hudson.com/2010/07/fr...ious-capital1/

I think there is a lot of very rewarding thinking going on here, even if you've read a lot of Hudson.

The main value to me is this: Hudson is the quickest way to a "Holy Sh!t" moment you can get, at least regarding our economic moment in time. He gives you the tinker-toy elements to seeing why the whole model is hopelessly incoherent and illusory. (By "whole model" think of the asset-price / credit fueled boom that has been the dominant feature of our lives since roughly Thatcher and Reagan.) And to see the value of this, think of the trouble one has in explaining to those around you that the experience of roughly anyone they can talk to has "just" become precisely irrelevant. That's a difficult turn to negotiate on an intellectual level, much less an emotional one. You can get there through more circuitous routes, but there's no better guide in a desert-island-discs sort of way than Hudson. And this essay distills the basic analysis while also adding a lot more detail regarding banking history in the Anglo-Saxon world versus, for instance, continental Europe that is new to me at least and gives a startling and slightly disturbing new perspective on 20th century conflicts.

[reggie]

Re: New Hudson

How are we ever going to educate blue-collar wage earners sufficiently enough so that they can understand what is being done to them/us? Thanks so much for posting a link to this article.

Conclusion

Finance capitalism has become a network of exponentially growing interest-bearing claims wrapped around the production economy. The internal contradiction is that its dynamic leads to debt deflation and asset stripping. The economy is turned into a Ponzi scheme by recycling debt service to make new loans to inflate property prices by enough to justify yet new lending. But a limit is imposed by the shrinking ability of surplus income to cover the debt service falling due. That is what the mathematics of compound interest are all about.
Borrowing to make speculative gains from asset-price inflation does not involve tangible investment in the means of production. It is based simply on M-M’, not M-C-M’. The debt overhead grows exponentially as banks and other creditors recycle their receipt of debt service into new (and riskier) loans, not productive credit.


Half a century of IMF austerity programs has demonstrated how destructive this usurious policy is, by limiting the economy’s ability to create a surplus. Yet economies throughout the world now base their pension planning, medical insurance, state and local finances on a faith in compound interest, without seeing the inner contradiction that debt deflation shrinks the domestic market and blocks economies from developing.



What is irrational in this policy is the impossibility of achieving compound interest in a “real” economy whose productivity is being eroded by the expanding financial overhead raking off a rising share. Meanwhile, a fiscal sleight-of-hand has taken Social Security and Medicare out of the general budget and treated them as “user fees” rather than entitlements.



This makes blue-collar wage earners pay a much higher tax rate than the FIRE sector and the upper income brackets. FICA paycheck withholding has become a forced “saving in advance,” ostensibly to be invested for future “entitlement” spending but in practice lent to the Treasury to enable it to cut taxes on the higher brackets. Instead of financing Social Security and Medicare out of progressive taxes levied on the highest income brackets – mainly the FIRE sector – the dream of privatizing these entitlement programs is to turn this tax surplus over to financial managers to bid up stock and bond prices, much as pension-fund capitalism did from the 1960s onward.



A century ago most economic futurists imagined that labor would earn higher wages and spend them on rising living standards. But for the past generation, labor has used its income simply to carry a higher debt burden. Income over and above basic needs has been “capitalized” into debt service on bank loans used to finance debt-leveraged housing, and to pay for education (originally expected to be paid out of the property tax) and other basic needs. Although debtors’ prisons are a thing of the past, a financial characteristic of our time is the “post-industrial” obligation to work a lifetime to pay off such debts.



Meanwhile, the FIRE sector now accounts for 40 percent of U.S. business profit, despite the tax-accounting fictions cited earlier.
Financial lobbyists have led a regressive about-face toward an economic Counter-Enlightenment. Reversing an eight-century tendency to favor debtors, the bankruptcy laws have been rewritten along creditor-oriented lines by banks, credit-card companies and other financial institutions, and put into the hands of politicians in what best may be called a financialized democracy – or as the ancients called it, oligarchy. Shifting the tax burden onto labor while using government revenue and new debt creation to bail out the banking sector has polarized the U.S. economy to the most extreme degree since statistics began to be collected.



The Progressive Era expected planning to pass into the hands of government, not those of a financial sector at odds with industrial capital formation and economic growth. Nearly everyone a century ago expected infrastructure to be developed in the public domain, in the form of public utilities whose services would be provided freely or at least at subsidized rates in order to lower the price of living and doing business. Instead, public enterprises since about 1980 have been privatized – on credit – and turned into tollbooth privileges to extract economic rent. Bankers capitalize these opportunities, which are sold on credit.



Little is left for the tax collector after charging off interest, depreciation and amortization, managerial salaries and stock options. The resulting tax squeeze impoverishes economies, obliging governments either to cut back their spending or shift the fiscal burden onto labor and non-financialized industry.


The resulting financial dynamic is more like what Marx described as usury-capital than industrial banking. In the spirit of the Saint-Simonians he believed industrial capitalism to direct credit into productive capital formation, he expected that financial planning would pave the way for a socialist reorganization of society. Instead, it is paving the road to neoserfdom. Financial operators are using credit as a weapon to strip corporate assets on behalf of bankers and bondholders.



Employees can afford homes and other property (and indeed, entire corporations) only by borrowing the purchase price – on terms that involve a lifetime of debt peonage, and indeed (in most countries) bearing personal liability for negative equity when housing prices plunge below mortgage levels. Government planning has become subordinate to the dictates of unelected central bankers and the International Monetary Fund imposing austerity programs rather than funding capital formation and rising living standards.


.....

[reggie]

Re: New Hudson

sorry, double post

[oddlots]

Re: New Hudson

Never mind the working class. Try educationg, if that's the right word, almost anyone, anywhere there's been a housing bubble or generally "asset price Keynsianism" as someone once called it. The thinking is so pervasive it's almost like the Matrix.

My favourite approach is to ask how it is that we are, in aggregate, to get rich selling each other our houses. What is the mechanism precisely? The responses are variants on that hilarious conversation Peter Schiff described. He went to a showing of a condo in the building next to where he rented. The condo fees and mortgage would have been higher, much higher, than his rent. The real estate agent introduced herself and asked Schiff what he thought of the place. He said it was more expensive than his rental next door. But here you are building equity she pointed out and it will appreciate. Why would it appreciate if I can rent the same thing - actually better - next door for cheaper asks Schiff. Well because real estate appreciates came the response.... No, but why would it appreciate...

It was a hilarious story as Schiff tried to explain or express the same thing in as many different ways as possible. No lightbulb. Wish I could find the vid.

In other words I don't think it's a working-class issue except in the way it obscures the hollowing out of industry - perhaps its real function - and even here it cuts across all but the elite strata.

[bagginz]

Re: New Hudson

A superb essay. Thanks for posting.

Not a short or an easy read by any means, (for me at least) but well worth the effort.

I remember EJ saying it's the scope of Hudson's knowledge that sets him apart. I didn't quite get what EJ meant at the time.

Now I do.

What I find astounding reading the above is his not only Hudson's knowledge of economics, but that he trancends regular economics by having a profound understanding of the cultural and historical context; the major thinkers, the paradigms they introduced and - the icing on the cake for me - how those ideas and paradigms interacted between the thinkers at that time.

The end result is a complete picture of how we got from there to here and our situation today in a historical context.

[RebbePete]

Re: New Hudson

A great exercise in editing the lessons of history, pointing out the issues with capitalism without mentioning once the grand failures socialistic and communistic societies have shown themselves to be. By his line of reasoning, the Soviet Union should have been a shining tower of worker prosperity. Right.

The basic flaw I see with his thinking is that he assumes that government, flush with all the tax revenue taken from rentiers, will act for the benefit of labor. Unfortunately, selfish, sinful men will act, unless kept in check, for their own benefit, even if they hold public office. Government, when well funded, grows into a bloated hive of fiefdoms, bestowing its favors on the well-connected while lining the pockets of those in power.

Free-market capitalism is a far better system when run correctly, since it pits the competing self-interest of multiple selfish players against each other. The role of government needs to be that of "the cops," preventing any one player (or small subset of players) from dominating the game and changing the rules. We don't have this today, since large financial and industrial corporations have co-opted the system so that there are no checks and balances.

- Pete

[dummass]

Re: New Hudson

The basic flaw I see with his thinking is that he assumes that government, flush with all the tax revenue taken from rentiers, will act for the benefit of labor. Unfortunately, selfish, sinful men will act, unless kept in check, for their own benefit, even if they hold public office. Government, when well funded, grows into a bloated hive of fiefdoms, bestowing its favors on the well-connected while lining the pockets of those in power.
- Pete

There needs to be strict laws, strictly enforced, for crimes against the people and society (political crimes). The death penalty would be a good deterrent. Public hangings, with full media coverage, would make the point quickly!

[bagginz]

Re: New Hudson

A great exercise in editing the lessons of history, pointing out the issues with capitalism without mentioning once the grand failures socialistic and communistic societies have shown themselves to be.

Funny, despite the ghost of Marx being invoked, I didn't see the essay as a Capitalism vs Communism debate. More of an overview of how the oligarchs have wrestled power back to themselves from it's previous trajectory towards more of a meritocracy.

Though I don't know much about Marx's work (other than the general negative brainwash that I've been fed over the years) it seems he had some pretty good ideas and quite a grasp of human economic affairs.

But good ideas and how people twist them to justify their own selfish actions are quite seperate things.

See Keynsianism. Every government is more than happy to stimulate by defecit spending during downturns, but not one of them, as far as can tell, follow the second part of the equation; which is to set money aside during the boom times.

The basic flaw I see with his thinking is that he assumes that government, flush with all the tax revenue taken from rentiers, will act for the benefit of labor.

Well, if one is going to point out what is wrong with the current system and be so bold to propose one that works, one has to assume that it is actually possible. Otherwise why bother?

Unfortunately, selfish, sinful men will act, unless kept in check, for their own benefit, even if they hold public office. Government, when well funded, grows into a bloated hive of fiefdoms, bestowing its favors on the well-connected while lining the pockets of those in power.

Agreed 100%

I sometimes think that the fact that one wants to be a politician should automatically exclude that person from being in a position of power. In any system of government there clearly there has to be seriously thought out safeguards against abuse of power/corruption. Transparency, accountability and public scrutiny, minimum financial incentives - for starters.

Cheers,
bagginz

[wayiwalk]

Re: New Hudson

I think a turning point in this country was the growth of minimum security prisons for white collar criminals....certainly did not act as much of a deterrent to those predisposed to steal.

[vinoveri]

Re: New Hudson

Unfortunately, selfish, sinful men will act, unless kept in check, for their own benefit, even if they hold public office. Government, when well funded, grows into a bloated hive of fiefdoms, bestowing its favors on the well-connected while lining the pockets of those in power.

- Pete

I would suggest the word "especially" be substituted for "even"

"Whenever a man has cast a longing eye on offices, a rottenness begins in his conduct."
Thomas Jefferson

"Power corrupts ...."
Lord Acton

[reggie]

Re: New Hudson

The thinking is so pervasive it's almost like the Matrix.

Baudrillard has written extensively on this.
http://www.amazon.com/Simulacra-Simu.../dp/0472065211

There needs to be strict laws, strictly enforced, for crimes against the people and society (political crimes). The death penalty would be a good deterrent. Public hangings, with full media coverage, would make the point quickly!

Yes, “euthanasia of the rentier.” Unfortunately, I'm afraid there might be no one left, at least no one who is currently in the public eye.

"To save society, its victims must see that asset-price inflation fueled by debt leveraging makes them poorer, not richer, and that financialization is the destroyer and exploiter of industrial capital as well as of labor. "

~Hudson

Unfortunately what I think Hudson might not see is that with new understanding of Complexity (ie. Chaos), the Oligarchs are quite comfortable managing a society on the edge.

http://www.amazon.com/Complexity-Eme.../dp/0671872346

Complexity: The Emerging Science by M. M. Waldrop
http://www.siliconyogi.com/andreas/i....M.Waldro.html

• All complex systems are built up from numerous components which constantly drive large and small scale change, through common mechanisms, in the overall system.
• The mutual dance of interdependence among organisms is stressed as is the growing recognition of the central role of cooperation in fostering survival as contrasted with reliance on competition.
• Complex systems seem to operate and survive best when they operate on the edge of chaos and order and when behavior is organized from the bottom up.
• To effect a systems behavior or development one must appreciate its patterns and power, apply interventions judiciously, and don’t bet on a limited set of strategies

http://www.amazon.com/Chaos-Making-S.../dp/0143113453

The management of complex systems could not have been achieved without technology and the global information grid (ie Internet).

[oddlots]

Re: New Hudson

Errrr... the below was in reply to RebePete above. Not sure why it didn't appear as such. I show remarkably little curiosity about how this site actually works for one who spends so much time here. Frankly overwhelmed and annoyed with technology most of the time. Sway between elation about getting some podcast to play in the car and utter frustration about... not getting some podcast to play in the car. Can I get itulip in the car. EEEK. How do I turn this thing off?!!!


I honestly think you're " leaving a lot on the table" here Pete, to use a
trader's phrase. What Hudson is ultimately appealing to here is progressive-era thinking and classical economics. Marx appears here mostly as a species of Classical economic thought. If you really want to do Hudson's thinking some damage you have to engage him on that field. Painting him as a Stalinist or Leninist
in disguise is kind of weak, at least as you presented it here.

[chr5648]

Re: New Hudson

How are we ever going to educate blue-collar wage earners sufficiently enough so that they can understand what is being done to them/us? Thanks so much for posting a link to this article.

Most people are too dumb regardless of whether they are blue collar or white collar to put multiple concepts together, just think about how many average suckers are out there within 1 standard deviation of the average 100 IQ level. Their thinking processes are reactive with large amounts of ignorance and misinformation.

I say we let them play around with their ipoops and 200+ premium cable channels, they deserve it!

[gwynedd1]

Re: New Hudson

"Borrowing to make speculative gains from asset-price inflation does not involve tangible investment in the means of production. It is based simply on M-M’, not M-C-M’. The debt overhead grows exponentially as banks and other creditors recycle their receipt of debt service into new (and riskier) loans, not productive credit."

The mechanics of this became so obvious to me. Equity ownerships sells out to debt ownership. Debtors default and assets go to creditors. Creditors have no use for the assets even if it were productive ;its now in the wrong hands. What does an empty house do? The creditor would be left holding the bag except they now own the government printing press; now they have seen to it they cannot lose with bailouts and the destruction is passed on to the debt ridden society. Finance always wins. They get all the money when things are running, and they are bailed out when it all falls apart. Yet they are the only ones who do nothing. There is the finance class and the slave class.