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Sweeping the world have been glowing reviews of the new book by Thomas Piketty, Capital in the 21st Century. I’ve been pounding on the bookshop doors asking when it’s arriving, this 700-page opus. It hasn’t hit here yet but I’ve read many book reviews. Have you had a chance to grab a hold of this must-read document?
Michael Hudson: No, but I have worked on the statistics that he uses for the last 50 years, so I know the problems with the statistics and what they can do and what they can’t do. And I’ve read what he’s been publishing all along with his colleague in California,
Emanuel Saez, about the concentration of wealth and income at the top of the pyramid.
Karl: And that’s the big point is that he’s renowned, along with Saez, for working on income inequality, but this book really looks at wealth inequality.
Michael: The problem with Piketty’s statistics are that it vastly understates how unequal the world really is and that’s because – you may know in Australia that our Queen of Mean, the hotel lady Leona Helmsley said “Only the little people pay taxes”. What she means is only the little people earn income. Rich people in America don’t earn income, they make capital gains and capital gains are not in everybody’s income statistics, they’re not in the statistics basically that are reported. And the IRS, the Internal Revenue Service of the United States, only conducts a study of capital gains once every ten years or so, and countries like England and many European countries don’t even have a tax on capital gains, so they’re not going to appear in the statistics.
So one of important results of Piketty’s work, if you know what you’re reading, is that the disparity in wealth is much greater than the disparity of income, and that’s because of tax avoidance by the rich. They don’t earn an income. And the same is true of corporations. The largest American corporations I think in the world are Google and Apple. Apple takes all of its income in Ireland, not in the United States, so how are you going to treat all of this? That’s the element that’s left out of this, that rich people don’t earn an income.
The other thing that is left out of the income tax statistics is of course how fortunes are really made, and that’s crime and fraud. The good thing about Piketty is he points out, why is it that French novelists and English novelists tell you much more about wealth than economics? And he points out that in the 19th century novels by Jane Austen and Balzac, the way to make a fortune is to marry into it. That’s true, but what Balzac also said is that behind every fortune is a great theft.
Now, let’s look at Forbes’ list of the richest people in Russia, China, the Ukraine or the post-Soviet economies. I can guarantee you that they didn’t make this wealth by saving up income, they didn’t earn a higher income; they stole the property by fraud and internal bribery, the same way that the great fortunes were made in the United States. The History of Really Great American Fortunes by Gustavus Myers shows how the railroad land grants made fortunes by bribing congressmen and by privatising the land. The great fortunes are made by privatising natural resources, land and the public domain, and since 1980, when the concentration of wealth and income have really taken off, as Piketty shows, this is the age of privatisation, of Margaret Thatcher, of Ronald Reagan, and Boris Yeltsin in Russia.
Karl: But that’s been the interesting point is even with these limited statistics, he’s had to delve into the tax records to try and find this incredible wealth that’s come through privatisation, that’s come through this rent-seeking. That even with all those limitations you’ve pointed out, he has still come up with some incredibly strong statistics that people like Paul Krugman are just floored by. And it seems like it’s slapped the economics profession in the face to say look, we’ve got to get beyond income inequality and really focus on this wealth issue and have a look at how this wealth is created and what we can do to redirect economics, to look at the distributive side of the equation.
Michael: You’re right. He’s started the discussion by showing the fact of vast inequality. What needs to be done now is to explain how did this inequality come about and what do you do about it? And as you and I have talked on this show before, the solution of simply taxing fortunes, which is very hard to do, is a very broad hammer. And you and I have spoken about particular kinds of wealth and particular kinds of making fortunes are predatory, and that’s namely economic rent, whether it’s land rent, natural resource rent, monopoly rent or the kind of money that the financial sector makes. So Piketty’s book, large as it is, didn’t discuss this except at the end to say “Well, you need to somehow tax the wealth away”. Well, that’s true, but that’s for another book in the future. How do you tax it away? What’s the best kind of tax to make economies grow?
One of the things that Piketty does not discuss when it comes to making fortunes is the role of debt, that most of these fortunes that have taken off since 1980 have taken off because of the increased debt leverage. As interest rates have fallen since 1980, you’ve had more and more bank credit going in to just bid up real estate prices, stock prices, bond prices, every kind of price, not to mention fine arts trophies that have gone with this. So, just as you’ve had the rising ratio of wealth to income of the 1%, you also have a rising ratio of debt to income. And so this indebtedness and the net worth again is very unequally distributed. Most peoples’ families, the major asset they have is in their home but these homes are also very heavily mortgaged and the mortgage payments they make, basically the 99% makes interest payments to the 1%.
And what to me really has been accelerating wealth at the very top is the financial sector, is the ability of the 1% to get the other 99% in debt to them by saying “Look, we’re controlling the access point to buying a home, to buying basic needs, in America to getting an education, and you can’t afford to buy a home or get an education or even a car without borrowing money. And we’re going to charge you enough interest so that everything you earn in effect you’re going to be paying us for interest”. And that’s the same thing that is leading the corporate raiders and the activist shareholders to try to raid corporations and say “Pay up more of your money as dividends”.
So you’ve actually had a dismantling of tangible wealth and an increase in what used to be called fictitious capital or fictitious wealth, which is all basically debt leveraged wealth.
Karl: Now one of the things Thomas Piketty goes into great detail and has earned him quite a few plaudits is looking at the difference between economic growth rates and the return on investments. And his general thesis is that when the economic growth rate falls below the long term average of 5% that the wealth gap accelerates because the wealthy, who own all this land, the mines, the privatised utilities, they can claim a greater return than what the rest of the people who actually have to rely on earning income when there’s low growth rates. And the thesis is that with an ageing demographic we have a period of low growth coming and from that we’re going to see an increased inequality in wealth. So this Gilded Age has really only just begun. What did you think of that thesis?
Michael: I think his conclusion, the gilded age is just beginning, is correct but the logic is not the logic that I’m following in my exposition. He’s saying the exact opposite of Adam Smith. Adam Smith said that the rate of interest is often highest in countries going fastest to ruin. So the fact is you can go to ruin for high interest or low interest.
When he talks about the rate of return the largest sector in the United States, and other countries also, is the real estate sector. If you look at from 1945 to today, the real estate sector doesn’t make an income. As you know, real estate by the billionaires is run as a personal charity. They don’t pay any income – if they made an income, of course, they would pay an income tax and declare it, but they don’t make any income. Almost all the rent they make is paid out either as interest or they charge depreciation as a cost. So what Piketty is referring to is not earnings before interest, taxes, depreciation and amortisation, but one portion of declared earnings excluding taxes, excluding interest, excluding depreciation and amortisation. The next highest wealth industry is oil and gas, they don’t declare any income because either they have a depletion allowance that makes them tax-exempt or they make all their income offshore in the flags of convenience countries. So the actual returns that are made, including the capital gains and total returns, simply are not available in the statistics that he looks at.
Secondly, what is growth? If you look at the American National Income & Product Accounts, for instance, 40% of all corporate profits in America a year ago when the statistics came out were made by the banks, by the financial sector. Now, these returns are basically a transfer payment. They don’t really add to growth. Financial services are not a service, unless you believe that a hold-up man that comes up to you in front of an ATM machine and says “Your money or your life” is giving you the service of giving you your life; it’s actually a transfer payment. He’s taking your money.
So there’s a question about whether all this financial activity and the real estate speculation and all this money paid to Wall Street and to bank managers and corporate managers really is growth or is it just a kind of fictitious growth to go hand-in-hand with the fictitious capital formation? You’re having the statistics take on an increasingly fictitious element, to the degree that they’re made by corporate tax accountants that pay enormous sums to the government not to tax the income they have. I think you have that in Australia in the mining sector where the richest lady in Australia pays a lot of money to make sure that she doesn’t earn a penny. Although she obtains for herself billions per year, none of this is really earned.
Karl: This week we’re with distinguished research professor Michael Hudson, the author of The Bubble & Beyond.
So Michael, what you’re saying there is that, shocking as Piketty’s statistics are, they’re drastically understated and part of the reason that people such as Paul Krugman – you know, he’s written a book review where he says here “Even if the surge in US inequality to-date has been driven mainly by wage income, capital has nonetheless been significant too”. So why does Paul Krugman continue to ignore this incredible wealth advantage that some people have by owning the Earth and the rest of us struggle to keep up with good old wages?
Michael: The simple answer is that Krugman is a neoclassical economist. Neoclassical means anti-classical. He does not recognise that there is such a thing as economic rent. He also got in a big argument with your Australian Steve Keen two years ago saying that banks don’t create credit. “All banks do,” Krugman said, “is lend out savings.” He said it’s inconceivable that a bank can actually create credit or inflate asset prices.
So Krugman is applauded by the right-wing to be their liberal of choice not because he understands the economy, but because he doesn’t understand the economy. If he understood how the economy worked he wouldn’t have won the Nobel Price, because that’s a prize for people pretending that there’s no such thing as economic rent; there’s no such thing as unearned income. And that’s why Krugman’s focus is on, well, the real problem is that these managers of companies are paid so much more and they earn so much more income. But he’s even wrong as to his statistics and, remember, he’s a professional bank lobbyist. He’s paid by the banks. He went to Iceland to support the banks against the government trying to rein them in. So, of course the bankers love Krugman because he’s their lobbyist.
Take the Wall Street incomes that he’s pointing to. In the United States, under US Tax Law the income they make is not really an earned income; they make most of their money through stock options and trading gains, speculation. These are countered as capital gains and not taxed as normal income, but taxed much lower. So once again we have this fictitious accountant’s view of the world of what is income and what isn’t income. And looking at the tax returns one’s obliged to use, the categories that these tax accountants who’ve paid enormous sums to governments to distort content of and to make it appear as if the wealth really doesn’t exist. That’s why they call financial wealth “invisible wealth” in comparison to real estate, which is visible wealth. The whole idea of wealthy people is to make their wealth invisible because if it’s seen it will be taxed and it’ll be resented.
Well, what Piketty has done is make this wealth seen. So at least by his wealth statistics he says “Look, we see it there and we can measure it and we can see how unequal it is. What we can’t see is really how they got this wealth. All we have to show is the income tax statements that reflect the degree to which this wealth finds its counterpart in income”. But it’s sort of like looking – if you drop your keys you look where the light is instead of where you dropped the keys. All he has to go on statistically are the income tax records and he’s done an enormous technical job there, and that’s the only job that one can do as a starting point.
But one would really have to spend even more time reworking the statistics to untangle them to find out what is the actual reality behind this. You’d have to say “What are the capital gains that have enabled these Wall Street and financial managers to make an income?” And their contracts are very clear as to what makes it. To the extent that a corporate manager’s income is tied to the stock price, they get either a bonus or they get a stock option. Well, if they get a bonus based on the stock price what are they going to do with corporate earnings? They’re going to take the corporate income and instead of investing in new equipment and plant, instead of developing a new market, instead of producing more, they’re going to use the money simply to buy up their own stock instead of capital investment. So by buying up the stock, the stock price goes up and they can say “Look at how my management of the company has increased the price of the stock, give me my higher compensation and my stock options and my bonuses”.
So the failure to tax these capital gains away, the sort of free lunch, is leading to the warping of the economy that produces the statistics that Piketty’s come up with.
Karl: So Piketty’s book Capital in the 21st Century is essentially a retake of Marx’s Das Kapital?
Michael: I don’t believe that one bit. That his public relations at work. This has nothing whatsoever to do with Marx. Marx’s Das Kapital focused on depreciation. It was Marx who coined the term “primitive accumulation” meaning privatisation and fraud. Piketty’s analysis is completely different from Marx, despite the fact that his parents were Trotskyists.
Karl: So he talks about a drift towards oligarchy, he’s pointing out this rising inequality. But in Marx’s theory, Michael, I just wanted you to try and clarify things because I like looking at these economic issues from different perspectives. And the one Marxist concept they say is the most important economic law of all is this tendency for the fall in the rate of profit.
Michael: Oh my God, there’s nothing that is more misunderstood than that. What Marx said was that as capital increases relative to labour in production, as you mechanise production and buy capital, more and more of the return to capital is going to be taken in the form of depreciation that is a return of capital, not as a profit. He was talking about cost accounting. The example he uses is – and he’s criticising the Physiocrats and Quesnay there.
When Quesnay made the Tableau Economique he talked about the circulation of income in the economy and what landlords did with the rent they got, and they spend some of it, they invest some of it. What they left out was the amount of rental income that has to be used as seed grain, to buy the new seed grain. Marx says that in a factory and under industrial capitalism if you’re going to spend $1million building a factory with machinery and you want to make a profit on that, you’ll not only get the profit on the $1million – let’s say at 5%, $50,000 a year – you also get your $1million back. So of the price they charge the price includes not only the $50,000 a year profit, it includes enough money to pay back the $1million they put into the factory in equipment as it wears out or as it becomes obsolescent.
So there’s a misinterpretation of almost all people who have not read Marx or read his theories of surplus value where he explains the falling rate of profit. I explain all of this in my book, The Bubble & Beyond, I go into what Marx meant by this. But when a non-Marxist talks about Marx and talks about the falling rate of profit you should just sort of walk away, because they don’t have a clue as to what they’re talking about.
Karl: So it’s part automation, it’s part competition pushing down the price, but also you’re saying it’s a depreciation element that is wound up to hide the profits, in a way, so that these aren’t taxed?
Michael: In the case of real estate it becomes more bizarre. In the United States you’re able to pretend that while your real estate is going way up in value, the building is actually losing value because it has a lifetime and the landlord is allowed to recapture the capital as if real estate, which in effect means the land, as if real estate somehow wears out, like a machine, or becomes obsolescent, like you buy a computer and after three years you have to upgrade it and buy a new computer. But that’s nonsense.
In New York City, where I live, the older the building, the more valuable it is because it doesn’t wear out, it’s maintained – most landlords spend about 10% of their income on maintenance and repairs. So the pretence is landlords pretend that their building is like a machine, wearing out, they charge depreciation and because of that they say “I didn’t make any profit, this is a return of capital”. And as soon as they’ve depreciated a building in full they then sell it among themselves or they buy it all over again and start the whole process all over, so you can depreciate the same building, say it’s 100 years old, you can keep depreciating it again and again and again and again as if it’s worn out all these times, and it’s the same building. But the owners and the next owners and the next owner and the next owner doesn’t have to pay any tax on this.
Karl: Right, so that’s why when this law is critiqued and people say “Look, the falling rate of profit can’t continue for hundreds of years, this is wrong” you’re saying really it is still a valid analysis for the wealth gap?
Michael: Marx was talking about the composition of EBIT, of cash flow. Cash flow is earnings before interest, taxes, depreciation and amortisation. And Marx said within cash flow, to the extent that industry becomes more capital-intensive with machinery, you will have a rising role of depreciation relative to what’s left as profit. So it’s the relationship between the return of capital and the return to employing labour and other expenses.
Karl: Okay, well, let’s switch over to the Ukraine now and since 1991 Russia has suffered this huge capital flight, some $25billion a year leaving the country annually, that’s mounted up to over half-a-trillion dollars. There’s been a huge drain on their economy because this drift to oligarchy has continued and the Ukrainians are now suffering, they can’t afford to maintain the gas payments to Russia, this has escalated tensions there, ethnic tensions. And Michael, I wonder, you’ve done a number of interviews on this topic of recent. It must be so frustrating for you to see what the West has done with the economic policy reform encouraging this sense of reliance by undermining the public finance system?
Michael: What happened in Ukraine is what happened in Russia and all the other post-Soviet economies. American advisors came in and said “Just give away all the public property to individuals. It doesn’t make any difference who you give it to; property has its own logic”. Well, Ukraine was the most inequitable, the most rapacious country of all, except maybe Moldova. They call it the “Nigeria of the North”. Its income and wealth are almost all in the hands of kleptocrats. This is not the kind of thing that Piketty’s analysis can explain. The kleptocrats have sort of taken everything in the Ukraine and, as a result, there’s no money left to run the government because the kleptocrats, both in the West and the East, have been taking all the money.
So the IMF came in and said “Look, you borrowed money, you’ve got to pay. We’re going to insist you stop subsidising the price of gas to your people, you have to remove the gas subsidy and begin charging them more”. And so they said “Well, if we do that they won’t have enough money to keep stealing at the rate we’re stealing, so we’re going to stop paying for the gas”. So Mr Obama and the Secretary of State of America said Russia must give its gas free to the Ukraine. It must give a half-a-billion dollars a month free and not charge anything so that Ukraine will have enough money to buy military arms and invite NATO in to put hydrogen bombs on our border, so we can bomb you if you don’t do what we say.
This is the most despicable misrepresenting in the public media of anything that I’ve ever seen. Material has been coming out today, the Americans trained a group of neo-Nazis, wearing Nazi symbols, wearing Nazi uniforms, in Poland to be trained for two or three weeks as snipers, brought them in to the Maidan Square and had them begin shooting at the police and their own people and then trying to blame this false flag operation on the Russians, when actually it was all done by the Americans. And all this was caught on the telephone, the Americans said “We want our thug to take over the country”, their thug being Yatsun, the bank lobbyist that they put in. So they put in a thug and they’ve been sending these neo-Nazi assassination groups out to the West to get American sympathy. The neo-Nazi’s published anti-Semitic pamphlets, pretended that they were given by the Russians, even though most of the Russian speakers in the Ukraine are Jewish. That’s where Trotsky came from, from Odessa. Ukraine has huge Jewish communities.
So they pretended that the Russians are threatening the Jews, when actually immediately the Jewish synagogues in the Ukraine said “No, these are the Americans that are doing this. These are false flag. The Russians are not doing this”. They forged the signature of a Russian speaker as if he was doing it and Obama and Secretary of State Kerry come right on and lie blatantly as if they can somehow convince people that these lies are true and trying to get the Americans to build up hate. And people are wondering why on Earth is Obama doing this? Is he trying to start World War III? Why are they sending warships with atomic weapons right off Crimea surrounding Russia? I mean, what is this nonsense? It’s absolutely crazy. It’s as if Obama has decided to reinvigorate class war by taking the side of the Nazis in World War II, by these neo-Nazi groups that said “We’re sorry, the wrong side won World War II. We wished Germany conquered Russia”. Well, you can imagine the effect this has on the Russians.
Karl: In the background of course is Ukraine’s prime location as a major throughfare for the Russian gas. And so, again, it seems like pipeline politics, that’s caused so much trouble in the Middle East, is here turning up in Eastern Europe. Michael, what sort of deals have been arranged and are the Ukrainians receiving a realistic payment for the incredible access rights for the Russian gas to go through, remembering that the Russian gas Putin has ensured is still owned by Russian-based companies in the large?
Michael: Well, Russia has accused the Ukraine of just siphoning off this gas for itself and not paying for it. The American-backed Right Sector has said “We want to blow up the pipelines”. Russia hasn’t come out and said it, but obviously Putin is going I think to China in a week or two to negotiate selling the gas to China instead. So obviously Russia would like to keep the European market, it doesn’t want to be in the hands of just a single customer such as China, but the effect of the American revolution in the Ukraine is to turn Russia towards China as a market for its gas. And the beneficiary, of course, will be China. The loser will be Germany, which is why the Germans have taken the lead in coming out and saying “Wait a minute, this is crazy. You’re hurting us, not Russia”. Russia’s going to get by, one way or another, because it’s largely self-sufficient but this is going to vastly increase the German costs of industry and, in fact, how are they going to do their cooking and how are they going to run many factories if the gas is turned off?
So about a week or two ago the Russian TV station ARD sent an investigative team into Ukraine to find out what was behind all of this Maidan shooting and the sniping. And they found out that Obama and Kerry were lying through their teeth and they talked to the witnesses, they talked to the doctors, they talked to the relatives of the shooters. The shooting came from the Ukraine Hotel which is where the American-backed snipers were shooting from and it was all essentially pushed by what’s called the Right Sector. These are really the Pinochet people. America’s trying to do in Ukraine what it did in Chile. It’s backing a terrorist organisation to come in and just shoot people who oppose American policy, meaning people who believe they should be paid for their gas and so forth.
So you’re seeing a replay of Chile under Pinochet and the military dictatorship in the Ukraine now. And the result, of course, will be to tear Ukraine apart – it’s bankrupt, no matter what, there no doubt will be civil war there. The Americans are hoping to use the civil war as an opportunity to move in NATO and to move H-bombs right onto the Russian border. This is risking a threat of war. This is crazy.
Karl: With the added side benefit of undermining Germany’s economic sovereignty with their energy prices. And I find that geopolitical play a very interesting one following on the heels of the very embarrassing NSA phone hacking of Merkel, and it sounds like this is another little side play to undermine another country’s growing importance on the world stage.
Michael: Well, I guess an American would reply that if you can’t tap their phone, how do you know who to shoot? It’s obvious they’re control freaks by now and to the Germans, especially to Angela Merkel who came out of East Germany with the Stasi tapping everybody’s phones, you can just imagine the effect there. America is losing its cache as a democratic country and people are beginning to think that it’s moving into the position that Russia used to be in, while you’re having Russia act as the reasonable party trying to avoid war in this case. They’re turning the Cold War inside out and the result is that European politics are being torn apart with it.
Karl: And so are you saying that out of this that Vladimir Putin really, he’s not the bad guy? Is that what you’re saying? Because it looked very suss as this invasion and all this hoo-ha over Ukraine happened just four days after the Winter Olympics.
Michael: I would not say that any politician is not a bad guy. The question is his hand is being forced. You can be a bad guy and still have your position forced and you can still be attacked. You know what President Nixon said in our country: paranoids have enemies too. So even if you don’t like Vladimir Putin, you can say Vladimir Putin can also be attacked and maligned and forced into a situation where he has to protect himself and his own position within Russia by responding and by protecting Crimea from the American attempt to pry the naval base in Sevastopol away from Russia. Of course he had to act, he had no choice. That doesn’t mean he’s a good guy or a bad guy; it means that the Americans forced these events on him.
Karl: Well, let’s hope more people start to look at this natural resource wealth that underpins such geopolitical machinations because really things seem to be speeding up faster and faster and it’s becoming more and more obvious to people like yourself, Michael, what’s going on. But to see the Paul Krugmans, to see them just so surprised that such wealth inequality is occurring is just staggering.
And I just wanted to finish off today’s interview with a bit of discussion on a new economic law that’s perhaps coming through, Michael. It’s called Hudson’s Law. What’s this all about?
Michael: I think the neo-Liberals have found out that – it’s essentially the Stockholm syndrome on a political scale. For years people thought that, well, in a democracy, if people are getting poorer and poorer and wealth is becoming more and more unequal, the poor are going to fight back and they’re going to elect different leaders who are going to change the tax laws and get out of their poverty. But what they found is exactly the opposite.
You have the most unequal impoverished neo-Liberal economy in Europe, Latvia that continues to vote for the neo-Liberals, putting almost the entire tax on labour, not on real estate, not on the oligarchs. And they found that the more labour is oppressed, the more emotionally depressed and frightened they become. That when workers are very badly paid they’re so frightened of losing the job, they’re so frightened of being one paycheque away from homelessness that they won’t strike, they won’t protest. They’ll just say “I’ll do whatever you say, Master”. They thought if they are obedient enough and support the rich that the rich will somehow treat them nice in a kind of patron-client relationship, such as you had at the end of the Roman Empire. And, of course, that’s not really what happens. Once the rich begin to abuse the poor and they find the poor take it, the abuse gets worse and worse and worse and that corruption of democracy is one of the political counterparts to the disparity in wealth that Piketty’s been tracing.
Karl: And so what you’re saying there is that the greater the wealth gap, the more the weak identify with the strong and they hope to really be helped out by their oppressors?
Michael: Because the wealthy become celebrities. In America, the most widely admired people are people like Donald Trump or the rich Wall Street bankers that have made their money basically through what my colleague Bill Black calls “control fraud”. They admire people who are rich, no matter how they get their richness, and basically they imagine that somehow they could get rich in the same way if only they’re obedient enough and follow the system. It’s unrealistic, but that’s psychology.
Karl: Michael, just to finish off then, you must have a few stories on Donald Trump and the incredible unearned income he’s benefited from. Is there one play that defines his ride to uber-wealthdom through unearned income?
Michael: Well, as one friend of mine at the NYU real estate department said, when Trump buys a building and puts his name on it, just putting his name on it adds 10% to the building’s value. Somehow, so many people want to identify with him personally because he’s rich that just putting his name on, without earning money, will add to the value of the building. And in terms of earning money, his former wife wrote about ten years ago that they were walking down the street and they passed a homeless guy sitting begging for quarters. And Donald said “You know, that man is as rich as I am” and the wife said “You mean, he’s a billionaire?” and Donald said “No, he has at least a zero net worth. I have a negative net worth, I’m so much in hock to the banks”.
Well, what Trump did was, he simply didn’t pay the banks. And the banks are so desperate for real estate people to come in, borrow the money and manage the properties to make enough interest to pay them, that they let him scale back the money to the banks. He did the same thing with his gambling casinos in Atlantic City and managed to avoid paying. So you have Trump, who made his money by extreme debt leverage, by having negative net worth at various times in his life, somehow coming out on top thanks to the fact that the Federal Reserve under Alan Greenspan was flooding the economy with enough money to inflate the price of his property above water and to create a Rentier class rich enough to buy property in his buildings and pay him the price that he was asking for.
Karl: Well, Professor Michael Hudson, thanks very much for joining us.
Michael Hudson: No, but I have worked on the statistics that he uses for the last 50 years, so I know the problems with the statistics and what they can do and what they can’t do. And I’ve read what he’s been publishing all along with his colleague in California,
Emanuel Saez, about the concentration of wealth and income at the top of the pyramid.
Karl: And that’s the big point is that he’s renowned, along with Saez, for working on income inequality, but this book really looks at wealth inequality.
Michael: The problem with Piketty’s statistics are that it vastly understates how unequal the world really is and that’s because – you may know in Australia that our Queen of Mean, the hotel lady Leona Helmsley said “Only the little people pay taxes”. What she means is only the little people earn income. Rich people in America don’t earn income, they make capital gains and capital gains are not in everybody’s income statistics, they’re not in the statistics basically that are reported. And the IRS, the Internal Revenue Service of the United States, only conducts a study of capital gains once every ten years or so, and countries like England and many European countries don’t even have a tax on capital gains, so they’re not going to appear in the statistics.
So one of important results of Piketty’s work, if you know what you’re reading, is that the disparity in wealth is much greater than the disparity of income, and that’s because of tax avoidance by the rich. They don’t earn an income. And the same is true of corporations. The largest American corporations I think in the world are Google and Apple. Apple takes all of its income in Ireland, not in the United States, so how are you going to treat all of this? That’s the element that’s left out of this, that rich people don’t earn an income.
The other thing that is left out of the income tax statistics is of course how fortunes are really made, and that’s crime and fraud. The good thing about Piketty is he points out, why is it that French novelists and English novelists tell you much more about wealth than economics? And he points out that in the 19th century novels by Jane Austen and Balzac, the way to make a fortune is to marry into it. That’s true, but what Balzac also said is that behind every fortune is a great theft.
Now, let’s look at Forbes’ list of the richest people in Russia, China, the Ukraine or the post-Soviet economies. I can guarantee you that they didn’t make this wealth by saving up income, they didn’t earn a higher income; they stole the property by fraud and internal bribery, the same way that the great fortunes were made in the United States. The History of Really Great American Fortunes by Gustavus Myers shows how the railroad land grants made fortunes by bribing congressmen and by privatising the land. The great fortunes are made by privatising natural resources, land and the public domain, and since 1980, when the concentration of wealth and income have really taken off, as Piketty shows, this is the age of privatisation, of Margaret Thatcher, of Ronald Reagan, and Boris Yeltsin in Russia.
Karl: But that’s been the interesting point is even with these limited statistics, he’s had to delve into the tax records to try and find this incredible wealth that’s come through privatisation, that’s come through this rent-seeking. That even with all those limitations you’ve pointed out, he has still come up with some incredibly strong statistics that people like Paul Krugman are just floored by. And it seems like it’s slapped the economics profession in the face to say look, we’ve got to get beyond income inequality and really focus on this wealth issue and have a look at how this wealth is created and what we can do to redirect economics, to look at the distributive side of the equation.
Michael: You’re right. He’s started the discussion by showing the fact of vast inequality. What needs to be done now is to explain how did this inequality come about and what do you do about it? And as you and I have talked on this show before, the solution of simply taxing fortunes, which is very hard to do, is a very broad hammer. And you and I have spoken about particular kinds of wealth and particular kinds of making fortunes are predatory, and that’s namely economic rent, whether it’s land rent, natural resource rent, monopoly rent or the kind of money that the financial sector makes. So Piketty’s book, large as it is, didn’t discuss this except at the end to say “Well, you need to somehow tax the wealth away”. Well, that’s true, but that’s for another book in the future. How do you tax it away? What’s the best kind of tax to make economies grow?
One of the things that Piketty does not discuss when it comes to making fortunes is the role of debt, that most of these fortunes that have taken off since 1980 have taken off because of the increased debt leverage. As interest rates have fallen since 1980, you’ve had more and more bank credit going in to just bid up real estate prices, stock prices, bond prices, every kind of price, not to mention fine arts trophies that have gone with this. So, just as you’ve had the rising ratio of wealth to income of the 1%, you also have a rising ratio of debt to income. And so this indebtedness and the net worth again is very unequally distributed. Most peoples’ families, the major asset they have is in their home but these homes are also very heavily mortgaged and the mortgage payments they make, basically the 99% makes interest payments to the 1%.
And what to me really has been accelerating wealth at the very top is the financial sector, is the ability of the 1% to get the other 99% in debt to them by saying “Look, we’re controlling the access point to buying a home, to buying basic needs, in America to getting an education, and you can’t afford to buy a home or get an education or even a car without borrowing money. And we’re going to charge you enough interest so that everything you earn in effect you’re going to be paying us for interest”. And that’s the same thing that is leading the corporate raiders and the activist shareholders to try to raid corporations and say “Pay up more of your money as dividends”.
So you’ve actually had a dismantling of tangible wealth and an increase in what used to be called fictitious capital or fictitious wealth, which is all basically debt leveraged wealth.
Karl: Now one of the things Thomas Piketty goes into great detail and has earned him quite a few plaudits is looking at the difference between economic growth rates and the return on investments. And his general thesis is that when the economic growth rate falls below the long term average of 5% that the wealth gap accelerates because the wealthy, who own all this land, the mines, the privatised utilities, they can claim a greater return than what the rest of the people who actually have to rely on earning income when there’s low growth rates. And the thesis is that with an ageing demographic we have a period of low growth coming and from that we’re going to see an increased inequality in wealth. So this Gilded Age has really only just begun. What did you think of that thesis?
Michael: I think his conclusion, the gilded age is just beginning, is correct but the logic is not the logic that I’m following in my exposition. He’s saying the exact opposite of Adam Smith. Adam Smith said that the rate of interest is often highest in countries going fastest to ruin. So the fact is you can go to ruin for high interest or low interest.
When he talks about the rate of return the largest sector in the United States, and other countries also, is the real estate sector. If you look at from 1945 to today, the real estate sector doesn’t make an income. As you know, real estate by the billionaires is run as a personal charity. They don’t pay any income – if they made an income, of course, they would pay an income tax and declare it, but they don’t make any income. Almost all the rent they make is paid out either as interest or they charge depreciation as a cost. So what Piketty is referring to is not earnings before interest, taxes, depreciation and amortisation, but one portion of declared earnings excluding taxes, excluding interest, excluding depreciation and amortisation. The next highest wealth industry is oil and gas, they don’t declare any income because either they have a depletion allowance that makes them tax-exempt or they make all their income offshore in the flags of convenience countries. So the actual returns that are made, including the capital gains and total returns, simply are not available in the statistics that he looks at.
Secondly, what is growth? If you look at the American National Income & Product Accounts, for instance, 40% of all corporate profits in America a year ago when the statistics came out were made by the banks, by the financial sector. Now, these returns are basically a transfer payment. They don’t really add to growth. Financial services are not a service, unless you believe that a hold-up man that comes up to you in front of an ATM machine and says “Your money or your life” is giving you the service of giving you your life; it’s actually a transfer payment. He’s taking your money.
So there’s a question about whether all this financial activity and the real estate speculation and all this money paid to Wall Street and to bank managers and corporate managers really is growth or is it just a kind of fictitious growth to go hand-in-hand with the fictitious capital formation? You’re having the statistics take on an increasingly fictitious element, to the degree that they’re made by corporate tax accountants that pay enormous sums to the government not to tax the income they have. I think you have that in Australia in the mining sector where the richest lady in Australia pays a lot of money to make sure that she doesn’t earn a penny. Although she obtains for herself billions per year, none of this is really earned.
Karl: This week we’re with distinguished research professor Michael Hudson, the author of The Bubble & Beyond.
So Michael, what you’re saying there is that, shocking as Piketty’s statistics are, they’re drastically understated and part of the reason that people such as Paul Krugman – you know, he’s written a book review where he says here “Even if the surge in US inequality to-date has been driven mainly by wage income, capital has nonetheless been significant too”. So why does Paul Krugman continue to ignore this incredible wealth advantage that some people have by owning the Earth and the rest of us struggle to keep up with good old wages?
Michael: The simple answer is that Krugman is a neoclassical economist. Neoclassical means anti-classical. He does not recognise that there is such a thing as economic rent. He also got in a big argument with your Australian Steve Keen two years ago saying that banks don’t create credit. “All banks do,” Krugman said, “is lend out savings.” He said it’s inconceivable that a bank can actually create credit or inflate asset prices.
So Krugman is applauded by the right-wing to be their liberal of choice not because he understands the economy, but because he doesn’t understand the economy. If he understood how the economy worked he wouldn’t have won the Nobel Price, because that’s a prize for people pretending that there’s no such thing as economic rent; there’s no such thing as unearned income. And that’s why Krugman’s focus is on, well, the real problem is that these managers of companies are paid so much more and they earn so much more income. But he’s even wrong as to his statistics and, remember, he’s a professional bank lobbyist. He’s paid by the banks. He went to Iceland to support the banks against the government trying to rein them in. So, of course the bankers love Krugman because he’s their lobbyist.
Take the Wall Street incomes that he’s pointing to. In the United States, under US Tax Law the income they make is not really an earned income; they make most of their money through stock options and trading gains, speculation. These are countered as capital gains and not taxed as normal income, but taxed much lower. So once again we have this fictitious accountant’s view of the world of what is income and what isn’t income. And looking at the tax returns one’s obliged to use, the categories that these tax accountants who’ve paid enormous sums to governments to distort content of and to make it appear as if the wealth really doesn’t exist. That’s why they call financial wealth “invisible wealth” in comparison to real estate, which is visible wealth. The whole idea of wealthy people is to make their wealth invisible because if it’s seen it will be taxed and it’ll be resented.
Well, what Piketty has done is make this wealth seen. So at least by his wealth statistics he says “Look, we see it there and we can measure it and we can see how unequal it is. What we can’t see is really how they got this wealth. All we have to show is the income tax statements that reflect the degree to which this wealth finds its counterpart in income”. But it’s sort of like looking – if you drop your keys you look where the light is instead of where you dropped the keys. All he has to go on statistically are the income tax records and he’s done an enormous technical job there, and that’s the only job that one can do as a starting point.
But one would really have to spend even more time reworking the statistics to untangle them to find out what is the actual reality behind this. You’d have to say “What are the capital gains that have enabled these Wall Street and financial managers to make an income?” And their contracts are very clear as to what makes it. To the extent that a corporate manager’s income is tied to the stock price, they get either a bonus or they get a stock option. Well, if they get a bonus based on the stock price what are they going to do with corporate earnings? They’re going to take the corporate income and instead of investing in new equipment and plant, instead of developing a new market, instead of producing more, they’re going to use the money simply to buy up their own stock instead of capital investment. So by buying up the stock, the stock price goes up and they can say “Look at how my management of the company has increased the price of the stock, give me my higher compensation and my stock options and my bonuses”.
So the failure to tax these capital gains away, the sort of free lunch, is leading to the warping of the economy that produces the statistics that Piketty’s come up with.
Karl: So Piketty’s book Capital in the 21st Century is essentially a retake of Marx’s Das Kapital?
Michael: I don’t believe that one bit. That his public relations at work. This has nothing whatsoever to do with Marx. Marx’s Das Kapital focused on depreciation. It was Marx who coined the term “primitive accumulation” meaning privatisation and fraud. Piketty’s analysis is completely different from Marx, despite the fact that his parents were Trotskyists.
Karl: So he talks about a drift towards oligarchy, he’s pointing out this rising inequality. But in Marx’s theory, Michael, I just wanted you to try and clarify things because I like looking at these economic issues from different perspectives. And the one Marxist concept they say is the most important economic law of all is this tendency for the fall in the rate of profit.
Michael: Oh my God, there’s nothing that is more misunderstood than that. What Marx said was that as capital increases relative to labour in production, as you mechanise production and buy capital, more and more of the return to capital is going to be taken in the form of depreciation that is a return of capital, not as a profit. He was talking about cost accounting. The example he uses is – and he’s criticising the Physiocrats and Quesnay there.
When Quesnay made the Tableau Economique he talked about the circulation of income in the economy and what landlords did with the rent they got, and they spend some of it, they invest some of it. What they left out was the amount of rental income that has to be used as seed grain, to buy the new seed grain. Marx says that in a factory and under industrial capitalism if you’re going to spend $1million building a factory with machinery and you want to make a profit on that, you’ll not only get the profit on the $1million – let’s say at 5%, $50,000 a year – you also get your $1million back. So of the price they charge the price includes not only the $50,000 a year profit, it includes enough money to pay back the $1million they put into the factory in equipment as it wears out or as it becomes obsolescent.
So there’s a misinterpretation of almost all people who have not read Marx or read his theories of surplus value where he explains the falling rate of profit. I explain all of this in my book, The Bubble & Beyond, I go into what Marx meant by this. But when a non-Marxist talks about Marx and talks about the falling rate of profit you should just sort of walk away, because they don’t have a clue as to what they’re talking about.
Karl: So it’s part automation, it’s part competition pushing down the price, but also you’re saying it’s a depreciation element that is wound up to hide the profits, in a way, so that these aren’t taxed?
Michael: In the case of real estate it becomes more bizarre. In the United States you’re able to pretend that while your real estate is going way up in value, the building is actually losing value because it has a lifetime and the landlord is allowed to recapture the capital as if real estate, which in effect means the land, as if real estate somehow wears out, like a machine, or becomes obsolescent, like you buy a computer and after three years you have to upgrade it and buy a new computer. But that’s nonsense.
In New York City, where I live, the older the building, the more valuable it is because it doesn’t wear out, it’s maintained – most landlords spend about 10% of their income on maintenance and repairs. So the pretence is landlords pretend that their building is like a machine, wearing out, they charge depreciation and because of that they say “I didn’t make any profit, this is a return of capital”. And as soon as they’ve depreciated a building in full they then sell it among themselves or they buy it all over again and start the whole process all over, so you can depreciate the same building, say it’s 100 years old, you can keep depreciating it again and again and again and again as if it’s worn out all these times, and it’s the same building. But the owners and the next owners and the next owner and the next owner doesn’t have to pay any tax on this.
Karl: Right, so that’s why when this law is critiqued and people say “Look, the falling rate of profit can’t continue for hundreds of years, this is wrong” you’re saying really it is still a valid analysis for the wealth gap?
Michael: Marx was talking about the composition of EBIT, of cash flow. Cash flow is earnings before interest, taxes, depreciation and amortisation. And Marx said within cash flow, to the extent that industry becomes more capital-intensive with machinery, you will have a rising role of depreciation relative to what’s left as profit. So it’s the relationship between the return of capital and the return to employing labour and other expenses.
Karl: Okay, well, let’s switch over to the Ukraine now and since 1991 Russia has suffered this huge capital flight, some $25billion a year leaving the country annually, that’s mounted up to over half-a-trillion dollars. There’s been a huge drain on their economy because this drift to oligarchy has continued and the Ukrainians are now suffering, they can’t afford to maintain the gas payments to Russia, this has escalated tensions there, ethnic tensions. And Michael, I wonder, you’ve done a number of interviews on this topic of recent. It must be so frustrating for you to see what the West has done with the economic policy reform encouraging this sense of reliance by undermining the public finance system?
Michael: What happened in Ukraine is what happened in Russia and all the other post-Soviet economies. American advisors came in and said “Just give away all the public property to individuals. It doesn’t make any difference who you give it to; property has its own logic”. Well, Ukraine was the most inequitable, the most rapacious country of all, except maybe Moldova. They call it the “Nigeria of the North”. Its income and wealth are almost all in the hands of kleptocrats. This is not the kind of thing that Piketty’s analysis can explain. The kleptocrats have sort of taken everything in the Ukraine and, as a result, there’s no money left to run the government because the kleptocrats, both in the West and the East, have been taking all the money.
So the IMF came in and said “Look, you borrowed money, you’ve got to pay. We’re going to insist you stop subsidising the price of gas to your people, you have to remove the gas subsidy and begin charging them more”. And so they said “Well, if we do that they won’t have enough money to keep stealing at the rate we’re stealing, so we’re going to stop paying for the gas”. So Mr Obama and the Secretary of State of America said Russia must give its gas free to the Ukraine. It must give a half-a-billion dollars a month free and not charge anything so that Ukraine will have enough money to buy military arms and invite NATO in to put hydrogen bombs on our border, so we can bomb you if you don’t do what we say.
This is the most despicable misrepresenting in the public media of anything that I’ve ever seen. Material has been coming out today, the Americans trained a group of neo-Nazis, wearing Nazi symbols, wearing Nazi uniforms, in Poland to be trained for two or three weeks as snipers, brought them in to the Maidan Square and had them begin shooting at the police and their own people and then trying to blame this false flag operation on the Russians, when actually it was all done by the Americans. And all this was caught on the telephone, the Americans said “We want our thug to take over the country”, their thug being Yatsun, the bank lobbyist that they put in. So they put in a thug and they’ve been sending these neo-Nazi assassination groups out to the West to get American sympathy. The neo-Nazi’s published anti-Semitic pamphlets, pretended that they were given by the Russians, even though most of the Russian speakers in the Ukraine are Jewish. That’s where Trotsky came from, from Odessa. Ukraine has huge Jewish communities.
So they pretended that the Russians are threatening the Jews, when actually immediately the Jewish synagogues in the Ukraine said “No, these are the Americans that are doing this. These are false flag. The Russians are not doing this”. They forged the signature of a Russian speaker as if he was doing it and Obama and Secretary of State Kerry come right on and lie blatantly as if they can somehow convince people that these lies are true and trying to get the Americans to build up hate. And people are wondering why on Earth is Obama doing this? Is he trying to start World War III? Why are they sending warships with atomic weapons right off Crimea surrounding Russia? I mean, what is this nonsense? It’s absolutely crazy. It’s as if Obama has decided to reinvigorate class war by taking the side of the Nazis in World War II, by these neo-Nazi groups that said “We’re sorry, the wrong side won World War II. We wished Germany conquered Russia”. Well, you can imagine the effect this has on the Russians.
Karl: In the background of course is Ukraine’s prime location as a major throughfare for the Russian gas. And so, again, it seems like pipeline politics, that’s caused so much trouble in the Middle East, is here turning up in Eastern Europe. Michael, what sort of deals have been arranged and are the Ukrainians receiving a realistic payment for the incredible access rights for the Russian gas to go through, remembering that the Russian gas Putin has ensured is still owned by Russian-based companies in the large?
Michael: Well, Russia has accused the Ukraine of just siphoning off this gas for itself and not paying for it. The American-backed Right Sector has said “We want to blow up the pipelines”. Russia hasn’t come out and said it, but obviously Putin is going I think to China in a week or two to negotiate selling the gas to China instead. So obviously Russia would like to keep the European market, it doesn’t want to be in the hands of just a single customer such as China, but the effect of the American revolution in the Ukraine is to turn Russia towards China as a market for its gas. And the beneficiary, of course, will be China. The loser will be Germany, which is why the Germans have taken the lead in coming out and saying “Wait a minute, this is crazy. You’re hurting us, not Russia”. Russia’s going to get by, one way or another, because it’s largely self-sufficient but this is going to vastly increase the German costs of industry and, in fact, how are they going to do their cooking and how are they going to run many factories if the gas is turned off?
So about a week or two ago the Russian TV station ARD sent an investigative team into Ukraine to find out what was behind all of this Maidan shooting and the sniping. And they found out that Obama and Kerry were lying through their teeth and they talked to the witnesses, they talked to the doctors, they talked to the relatives of the shooters. The shooting came from the Ukraine Hotel which is where the American-backed snipers were shooting from and it was all essentially pushed by what’s called the Right Sector. These are really the Pinochet people. America’s trying to do in Ukraine what it did in Chile. It’s backing a terrorist organisation to come in and just shoot people who oppose American policy, meaning people who believe they should be paid for their gas and so forth.
So you’re seeing a replay of Chile under Pinochet and the military dictatorship in the Ukraine now. And the result, of course, will be to tear Ukraine apart – it’s bankrupt, no matter what, there no doubt will be civil war there. The Americans are hoping to use the civil war as an opportunity to move in NATO and to move H-bombs right onto the Russian border. This is risking a threat of war. This is crazy.
Karl: With the added side benefit of undermining Germany’s economic sovereignty with their energy prices. And I find that geopolitical play a very interesting one following on the heels of the very embarrassing NSA phone hacking of Merkel, and it sounds like this is another little side play to undermine another country’s growing importance on the world stage.
Michael: Well, I guess an American would reply that if you can’t tap their phone, how do you know who to shoot? It’s obvious they’re control freaks by now and to the Germans, especially to Angela Merkel who came out of East Germany with the Stasi tapping everybody’s phones, you can just imagine the effect there. America is losing its cache as a democratic country and people are beginning to think that it’s moving into the position that Russia used to be in, while you’re having Russia act as the reasonable party trying to avoid war in this case. They’re turning the Cold War inside out and the result is that European politics are being torn apart with it.
Karl: And so are you saying that out of this that Vladimir Putin really, he’s not the bad guy? Is that what you’re saying? Because it looked very suss as this invasion and all this hoo-ha over Ukraine happened just four days after the Winter Olympics.
Michael: I would not say that any politician is not a bad guy. The question is his hand is being forced. You can be a bad guy and still have your position forced and you can still be attacked. You know what President Nixon said in our country: paranoids have enemies too. So even if you don’t like Vladimir Putin, you can say Vladimir Putin can also be attacked and maligned and forced into a situation where he has to protect himself and his own position within Russia by responding and by protecting Crimea from the American attempt to pry the naval base in Sevastopol away from Russia. Of course he had to act, he had no choice. That doesn’t mean he’s a good guy or a bad guy; it means that the Americans forced these events on him.
Karl: Well, let’s hope more people start to look at this natural resource wealth that underpins such geopolitical machinations because really things seem to be speeding up faster and faster and it’s becoming more and more obvious to people like yourself, Michael, what’s going on. But to see the Paul Krugmans, to see them just so surprised that such wealth inequality is occurring is just staggering.
And I just wanted to finish off today’s interview with a bit of discussion on a new economic law that’s perhaps coming through, Michael. It’s called Hudson’s Law. What’s this all about?
Michael: I think the neo-Liberals have found out that – it’s essentially the Stockholm syndrome on a political scale. For years people thought that, well, in a democracy, if people are getting poorer and poorer and wealth is becoming more and more unequal, the poor are going to fight back and they’re going to elect different leaders who are going to change the tax laws and get out of their poverty. But what they found is exactly the opposite.
You have the most unequal impoverished neo-Liberal economy in Europe, Latvia that continues to vote for the neo-Liberals, putting almost the entire tax on labour, not on real estate, not on the oligarchs. And they found that the more labour is oppressed, the more emotionally depressed and frightened they become. That when workers are very badly paid they’re so frightened of losing the job, they’re so frightened of being one paycheque away from homelessness that they won’t strike, they won’t protest. They’ll just say “I’ll do whatever you say, Master”. They thought if they are obedient enough and support the rich that the rich will somehow treat them nice in a kind of patron-client relationship, such as you had at the end of the Roman Empire. And, of course, that’s not really what happens. Once the rich begin to abuse the poor and they find the poor take it, the abuse gets worse and worse and worse and that corruption of democracy is one of the political counterparts to the disparity in wealth that Piketty’s been tracing.
Karl: And so what you’re saying there is that the greater the wealth gap, the more the weak identify with the strong and they hope to really be helped out by their oppressors?
Michael: Because the wealthy become celebrities. In America, the most widely admired people are people like Donald Trump or the rich Wall Street bankers that have made their money basically through what my colleague Bill Black calls “control fraud”. They admire people who are rich, no matter how they get their richness, and basically they imagine that somehow they could get rich in the same way if only they’re obedient enough and follow the system. It’s unrealistic, but that’s psychology.
Karl: Michael, just to finish off then, you must have a few stories on Donald Trump and the incredible unearned income he’s benefited from. Is there one play that defines his ride to uber-wealthdom through unearned income?
Michael: Well, as one friend of mine at the NYU real estate department said, when Trump buys a building and puts his name on it, just putting his name on it adds 10% to the building’s value. Somehow, so many people want to identify with him personally because he’s rich that just putting his name on, without earning money, will add to the value of the building. And in terms of earning money, his former wife wrote about ten years ago that they were walking down the street and they passed a homeless guy sitting begging for quarters. And Donald said “You know, that man is as rich as I am” and the wife said “You mean, he’s a billionaire?” and Donald said “No, he has at least a zero net worth. I have a negative net worth, I’m so much in hock to the banks”.
Well, what Trump did was, he simply didn’t pay the banks. And the banks are so desperate for real estate people to come in, borrow the money and manage the properties to make enough interest to pay them, that they let him scale back the money to the banks. He did the same thing with his gambling casinos in Atlantic City and managed to avoid paying. So you have Trump, who made his money by extreme debt leverage, by having negative net worth at various times in his life, somehow coming out on top thanks to the fact that the Federal Reserve under Alan Greenspan was flooding the economy with enough money to inflate the price of his property above water and to create a Rentier class rich enough to buy property in his buildings and pay him the price that he was asking for.
Karl: Well, Professor Michael Hudson, thanks very much for joining us.
It explains a lot.
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