Emotion is the key to control people...
Tuesday, May 31, 2016
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Reflections on the effects of War as compared to the effects of Fiat Money Hugo Salinas Price
24/September/2012
Reflections on the effects of War as compared to the effects of Fiat Money
Hugo Salinas Price
Modern warfare is highly destructive. A couple of centuries ago, wars involved fighting between armies; civilians were spared. Cannons were directed at the opposing army.
Today, war means general destruction; civilians on the losing side can expect to be plundered, killed or raped. Cities are targeted for mass destruction. We rode a bus through post-war Germany in 1948, and recall that the city of Bremen was simply miles of rubble piled up on either side of a road cleared for traffic.
WW II leveled some cities of Europe in the countries which were part of the Axis, and killed millions of soldiers and civilians.
After the war, both the winners and the losers turned to re-building their countries. The devastated cities began to heal; new, modern factories were built. People went back to doing what they had been doing before the war. By 1970, a traveler could hardly tell there had been such terrible destruction and loss of life just twenty-five years earlier.
Now let us consider fiat money and its consequences.
At Bretton Woods in 1944 Henry Morgenthau and Harry Dexter White outmaneuvered John Maynard Keynes, the British Delegate to the Monetary Conference, and the Conference ended by accepting the American “diktat” for the post-war monetary structure of the world: the dollar was to be as good as gold for purposes of international payments, and the US promised to redeem for gold dollars held by other national central banks at the rate of one ounce of gold for each $35 dollars tendered for redemption.
This was a structure doomed to failure from the start, and men such as Jacques Rueff of France understood this quite clearly.
The US promptly began to abuse its “exorbitant privilege”, as France’s General de Gaulle called it, and to send dollars abroad in payment of its trade deficits. However, the promise of redemption of dollars for gold did act to restrain somewhat the expansion of credit in the US. There was a general respect for the dollar and its relative scarcity produced only mild inflations in the countries that received dollars.
The post-war US ran a mild but constant fever of credit expansion. In the 60’s, the credit expansion fever surged to finance the Vietnam war and the loss of US gold in payment of dollar-redemption accelerated to an unacceptable pace.
Came the fateful day, August 15, 1971, and the US had to default on its promise to redeem dollars for gold – it was going to be only a “temporary” suspension, Nixon assured the American people. Alas, in politics nothing is more permanent than a temporary measure. The dollar became the full-fledged fiat currency of the world.
Thus the world entered into the era of Globalization; torrents of dollars inflated the reserves of the Central Banks of the world; world trade boomed because trade deficits were now easily “settled” with fiat dollars.
World trade had heretofore been an exchange of goods for goods, with gold only moving to settle transitory differences. That was now not the case: goods were no longer paid for with goods; in international trade, imported goods were now paid for with exported goods and with dollars, of which the supply was abundant.
Here we begin to see the effects of fiat money as the world’s currency.
Cheap goods from the under-developed countries began to flood the economies of the developed countries, with insufficient compensating purchases of goods on the part of the under-developed countries. Industries began to move out of the developed countries and into the under-developed countries which enjoyed burgeoning export sales.
De-industrialization of the West set in under globalization, which was constantly extolled as the new, modern and progressive structure of the world’s economy. Old industrial buildings were transformed into structures harboring cafés, restaurants and art shops.
The de-industrialization was masked with credit expansion facilitating consumption, not production, which was un-economic under the globalization scheme. Stagnant or falling wage earnings were supplemented with easy credit for the masses.
This all happened because the money the world has been using since 1971 is fiat money, not real money. But still, at this date, you hear very few voices recognizing this fundamental fact.
Modern war means destruction and death for masses of people. When WW II was over, the destruction began to heal. The cities were rebuilt, the survivors went back to what they had been doing when the war broke out: they returned to earning their livings with work, doing what they knew how to do. Normality returned, generally speaking.
But consider the effect of fiat money on the whole world.
The whole productive structure of the world has been overthrown. The factories that have vanished in the developed nations cannot be rebuilt. Globalization makes them un-economic.
The apparent prosperity of the developed nations of the world today has been sustained by credit expansion, not by savings. The West has been living like an heir to a great fortune, wasting away its inheritance. It is now bankrupt. The continuance of a whole way of life is now in danger of collapse, because it is becoming impossible to expand credit any further. The Chinese are in no better situation: their supposed prosperity will crumble when the policy of expanding credit in the West has to come to a halt and the markets which China has supplied fade away.
The Welfare State, funded with fiat money, has produced millions upon millions of humans who have grown accustomed to a good life based on credit and welfare.
After WW II, the people of Europe went back to doing what they did before the war. Today, to what can the unemployed of the West return? There is nothing to which they can return, because the factories are gone. The people of the West have largely forgotten the accumulated productive know-how that was built up over centuries. City-dwellers and suburbanites cannot go back to farming, to raising live-stock, or to the thousand trades and manufactures that used to exist. And even if they could, they would not do so; the millions of unemployed in the West are no longer used to working hard to keep body and soul together; they no longer accept the proposition that life implies struggle.
Fiat money has destroyed humanity’s normal way of life; a way of life in which men and women could find their places and were thankful to have them. That old way of life is gone; the old attitudes toward life and work have been erased.
This is destruction many times worse than the worst destruction of any war. That is where we are today. This is what fiat money has brought to the world. Fiat money is the child of the arrogance of human intellect, which has sought to invalidate the laws of human nature which have regarded the precious metals as money for thousands of years, and sought to substitute an intellectual construct for the real thing. Now we are going to pay for that arrogance.
What now? Nobody knows. Unquestionably, we are headed straight into fearful problems never seen before. At least, owning physical gold and silver may be help some of us survive.
Don't Hire Killers - Use 'Real Bills' Hugo Salinas Price
11/March/2015
Don't Hire Killers - Use 'Real Bills'
Hugo Salinas Price
Leon, in the state of Guanajuato in Mexico, is a city of some 2,000,000 inhabitants and sprawls over miles of a countryside which used to be farmland. In the 1950's Leon was much smaller, with only about 250,000 inhabitants.
In the 1950's the city was the national center of a bustling shoe-manufacturing industry. Back then, the Mexican market for shoes was protected from foreign competition, and Mexico with a population of some 35 million obtained its shoes from Leon manufacturers.
The industrial activity in the production of shoes was intense, and Capital was always scarce. Money to finance the operations of a multitude of manufacturers of shoes and related industrial activities was very scarce and all business faced a constant struggle for liquidity to keep operations going.
Bank credit was extremely scarce; the productive enterprises related to the manufacture of shoes could not obtain any significant amount of bank credit; their discipline in accounting and elaborating financial statements was minimal - to produce, sell and collect was the immediate necessity - and could not meet the bureaucratic requirements of the banks.
The struggle to stay in business was an unrelenting ordeal.
The scarcity of money in the productive system led to entrepreneurial invention to cope with the problem; the entrepreneurs resorted to issuing post-dated checks, in lieu of money, which they did not have.
A successful businessman might have in a desk-drawer a number of post-dated checks. Some of the post-dated checks were signed by serious businessmen, and whoever received their post-dated checks in payment could rely on collecting cash for them at a future date; others were signed by less-creditworthy individuals who had a spotty history of not honoring their post-dated checks promptly on the stipulated date. The acceptability of an endorsed post-dated check depended on the reputation of the issuer.
The post-dated checks circulated among the producers, often with a long list (on adding-machine paper) of endorsers' signatures pasted to the check.
Collection of post-dated checks therefore depended on the character of the individuals that issued them. Collecting could be a time-consuming problem, but the pressing need of the entrepreneurs to remain in business offered no other alternative than to accept them in lieu of cash.
The legal process for collecting a post-dated check (in itself an illegal instrument) which had not been paid in cash was so time-consuming that it was rarely resorted to. The courts were so bureaucratic that if a post-dated check could not be cashed after several attempts at pressuring the issuer, it was simply put in a drawer and written-off.
Some businessmen, however, were of a rash temper and so cash-starved that they employed the services of a special "collection agency". For its special services, the "agency" charged a heavy fee.
This "collection agency" consisted of one man, known in Leon as "El Guero" Marquez. ("Guero" is a colloquial Spanish term used in Mexico and means
"yellow haired").
"yellow haired").
An un-cashable post-dated check would be handed over to El Guero, whose arrival at the office of the issuer of the check caused hands to tremble and faces to blanch with fear. El Guero would simply present the check and say, "I'll be around for payment tomorrow." Cash payment was almost invariably made the next day.
The reason for the speedy liquidation of the post-dated check was that those who received a visit from El Guero knew that their lives were over if they did not come forth with the cash to cover the check.
Upon his death, a few years later, one of his relatives revealed that El Guero had murdered at least 30 men in the course of his career as a collector of bad checks.
I have described the improvisation to which the entrepreneurs of Leon resorted to keep their production of shoes flowing. Necessity forced them, entirely spontaneously and illegally, to invent a cash-substitute; the system continued to operate up until the 1980's, when new banking regulations forced the system to close down; it was a system based principally on confidence that the debtor would fulfill his promise to have the funds in the bank, against which the post-dated check could be cashed.
I mention this improvisation which took place in Leon, because their problem - a problem which presents itself in all cases of production of consumer goods in the division of labor - would not have existed, had they enjoyed the system of "Real Bills" of the Scottish during the time of Adam Smith; a system which functioned admirably, supported by a strict legal penalty for not fulfilling promises of payment.
Briefly, the system of "Real Bills" functioned as follows:
The Manufacturer of shoes sold his shoes to the Retailer. The manufacturer presented his Bill, payable in 90 days. The retailer "accepted" the Bill and signed his name to it. This Bill was the next best thing to gold (which was used as money at that time) because according to the Scottish legal system, a Bill not paid within 24 hours of its presentation for payment placed the whole business and personal wealth of the Accepter - in this case, the Retailer - up for sale at auction; the proceeds to be used to pay the Bill which the Retailer had not been able to liquidate on time.
The legal system operated effectively to protect the "Real Bills" system from default by non-payment, and thus avoided the need to hire a paid killer to enforce payment, as happened from time to time in Leon.
However, the penalty of defaulting on a Bill presented for collection was not the only factor guaranteeing payment, because the default forever tarnished the reputation of the Acceptor of the Bill. Enterprises in England and Scotland proudly put the date of their foundation after their corporate names, to indicate that they had never once defaulted upon a Bill presented for collection.
The Manufacturer in possession of a credit instrument which, beyond any doubt, would be redeemed (in gold, in the XVIIIth Century) at the end of 90 days, went to the Banker (or in fact to anyone who wished to obtain gold at a discount) and sold his Bill to the Banker at a discount, receiving in exchange cash funds with which to continue his productive activity.
Alternatively, the Manufacturer might pay the Tanner for the leather he supplied by endorsing over to him, the Bill accepted by the Retailer.
Thus the whole productive system of Scotland was furnished with liquidity by the existence of the "Real Bills", a credit system not based on loans, but on the liquidation by the consumer, of merchandise produced for consumption within the period of 90 days. There was no need for scarce cash (gold) to pay for all exchanges.
The charge imposed by the system of "Real Bills" was not interest, but discount, which are two different concepts applied to differing operations.
A loan is a credit covered by a promissory note, and is not self-liquidating - the loan may be renewed. Interest is paid on loans. A Bill of Sale of merchandise payable in 90 days is self-liquidating because the merchandise will be sold for cash to the final consumer within 90 days. It is subject to a discount which varies with the intensity of consumption.
Producers of consumer goods in every part of the world, at any time in history, require self-liquidating credit to operate efficiently. When they do not enjoy a legal system which supports the existence of self-liquidating credit, they resort to improvised alternatives - one of which is to write post-dated checks, and another, to hire killers to collect dishonored post-dated checks.
For much more on "Real Bills", see www.professorfekete.com
One Trillion Dollars' Worth of Bonds Magically Turn into Cash Hugo Salinas Price
12/January/2016
One Trillion Dollars' Worth of Bonds Magically Turn into Cash
Hugo Salinas Price
Bloomberg is back and presents updated data on International Reserves held by Central Banks, excluding gold, as of Friday, January 8, 2016, after a hiatus on this information since December 11, 2015 (for reasons unexplained).
The data for Friday, January 8, 2016 are shocking, as expected: Total International Reserves held by Central Banks, excluding gold, expressed in US dollars, amount to $11.032 Trillion dollars as of that date.
The decrease in Reserves thus amounts to precisely $1 Trillion dollars, as of January 8, 2016. This gigantic fall, of 8.31% of the maximum amount of Reserves - $12.032 Trillion dollars recorded on August 1, 2014 - took place over the course of only 17 months, whereas the growth of Reserves to its maximum figure took some 70 years, roughly since the end of WW II.
The fall in International Reserves is a clear indicator of a world-wide economic slump, which will become a severe depression.
It would be much easier to stop the flow of water over Niagara Falls, than to halt the contraction in International Reserves.
World liquidation has set in. The Piper must be paid. Growth is gone. This will be story in this epic year 2016.
There is a One Trillion Dollar Question: What entity or entities have purchased - for cash - the $1 Trillion dollars worth of Government Bonds that the central banks of the world have sold off in the course of the past 17 months?
What discount on the value of the Bonds did the purchaser or purchasers of the Bonds apply? If there was no discount, why so?
$1 Trillion dollars' worth of Government Bonds has disappeared from the books of the world's central bankers, sold by them for cash. WHO DID THE BUYING? On what Balance Sheets do the acquired $1 Trillion dollars of Bonds now rest?
Are the parties to these gigantic transactions to remain unknown? And what happens to the world's confidence in its financial system, when $1 Trillion dollars' worth of Bonds, and counting, just magically turn into cas
The Mirage of Exports Hugo Salinas Price
26/April/2016
The Mirage of Exports
Hugo Salinas Price
This article published nineteen years ago, on April 17, 1997, appears to be as timely today, as when it was originally published.
***
All countries of the world, with the exception of the U.S., are very concerned about their exports. This is irrational and denotes a pathological condition in their economies.
There is no country in the world - with the exception we just noted - where the government is not striving to promote exports. Exports have become the sine qua non or essential pillar of prosperity. We might say that the “center of gravity” of each of the national economies of the world is not to be found within each country, in production and consumption for its own use, but rather outside its borders, in exports. We are, each and every one, off-center and unbalanced, seeking the market for our production outside our borders. And we are all also unbalanced - even in a psychological sense - seeking “foreign investment” to promote our progress.
This aberrant situation, is the meaning of “globalization”. Globalization means that no country is solidly built upon its own foundations, but rather that its center of gravity is outside its borders. Globalization is a sickness, not a sound condition or process.
The cause that promotes this sickness, is the world’s monetary system. The U.S. manufactures dollars, which are the principal reserve currency of all countries in the world. Without dollar reserves, any currency collapses: all currencies are paper and nothing more. Dollar reserves are indispensable. In order to have reserves, it is necessary to export more than is imported. All countries in the world, the U.S. excepted, seek to export more than they import.
It doesn’t take more than five minutes of thought, to understand that this is impossible. Someone has to buy more than they export. If that were not so, where are all the surplus exports going to wind up? In fact, the U.S. imports more than it exports, and pays... with dollars, which are only paper vouchers. But the U.S. does not actually pay, because imported goods must be paid with exported goods. Dollars are simply promises to pay.
There is also a worldwide thirst for “foreign investment”, another pathological condition. If so many countries are hunting for foreign investment, where is it going to come from? Again, we look to the U.S.. However, we know that savings in the U.S. are meager. So, when we receive capital from the U.S., what are we really getting? We are getting dollars, which are nothing more than promises to pay, vouchers which the U.S. manufactures. With papers, American interests obtain property rights over tangible resources all over the world. That is “globalization”.
The road we are traveling is based on falsity. It will not endure. The consequence of this madness of globalization, will be a world economic breakdown, inevitably.
We are certainly not saying that exports are unimportant. They are of course, beneficial for any country, when the exporting country is using some productive advantage that allows it to offer the world some good or service at a competitive price. But, what sense is there, for instance, in impoverishing the Mexican worker by consciously and deliberately devaluing his peso, to cheapen his product? Exports won this way, are not gained by exploiting some advantage, but by creating an advantage out of impoverishment. This is madness.
Foreign investment can also be beneficial, but only when it purchases goods with other goods, not with papers; or when the foreign investor brings tangible goods which he owns, to the country he is investing in, and puts them to work there. In fact, the “privatization” of government-owned enterprises all over the world, has really been nothing more than shifting ownership of these enterprises, from national governments, to foreign finance which only provides paper dollars in return for ownership of real assets. Is the foreigner to come to our countries to purchase our resources, with papers or glass beads? That is insane.
The health of Mexico, and of all countries, calls for a monetary system that is not parasitic on the dollar. Our money must be worth something on its own, as has been the case for centuries. This is the only way we can build a country whose foundations rest within itself. For the time being, we are an alienated or schizophrenic country - and this is reflected in the breakdown of our social structure - blindly following the mirage of exports, more than the solid and orderly development of the
Thursday, May 26, 2016
Wednesday, May 25, 2016
Thursday, May 19, 2016
The Great Ponzi Scheme of the Global Economy
The Great Ponzi Scheme of the Global Economy
CHRIS HEDGES: We’re going to be discussing a great Ponzi scheme that not only defines not only the U.S. but the global economy, how we got there and where we’re going. And with me to discuss this issue is the economist Michael Hudson, author of Killing the Host: How Financial Parasites and Debt Destroy the Global Economy. A professor of economics who worked for many years on Wall Street, where you don’t succeed if you don’t grasp Marx’s dictum that capitalism is about exploitation. And he is also, I should mention, the godson of Leon Trotsky.
I want to open this discussion by reading a passage from your book, which I admire very much, which I think gets to the core of what you discuss. You write,
Adam Smith long ago remarked that profits often are highest in nations going fastest to ruin. There are many ways to create economic suicide on a national level. The major way through history has been through indebting the economy. Debt always expands to reach a point where it cannot be paid by a large swathe of the economy. This is the point where austerity is imposed and ownership of wealth polarizes between the One Percent and the 99 Percent. Today is not the first time this has occurred in history. But it is the first time that running into debt has occurred deliberately.” Applauded. “As if most debtors can get rich by borrowing, not reduced to a condition of debt peonage.
So let’s start with the classical economists, who certainly understood this. They were reacting of course to feudalism. And what happened to the study of economics so that it became gamed by ideologues?
HUDSON: The essence of classical economics was to reform industrial capitalism, to streamline it, and to free the European economies from the legacy of feudalism. The legacy of feudalism was landlords extracting land-rent, and living as a class that took income without producing anything. Also, banks that were not funding industry. The leading industrialists from James Watt, with his steam engine, to the railroads …
HEDGES: From your book you make the point that banks almost never funded industry.
HUDSON: That’s the point: They never have. By the time you got to Marx later in the 19th century, you had a discussion, largely in Germany, over how to make banks do something they did not do under feudalism. Right now we’re having the economic surplus beingdrained not by the landlords but also by banks and bondholders.
Adam Smith was very much against colonialism because that lead to wars, and wars led to public debt. He said the solution to prevent this financial class of bondholders burdening the economy by imposing more and more taxes on consumer goods every time they went to war was to finance wars on a pay-as-you-go basis. Instead of borrowing, you’d tax the people. Then, he thought, if everybody felt the burden of war in the form of paying taxes, they’d be against it. Well, it took all of the 19th century to fight for democracy and to extend the vote so that instead of landlords controlling Parliament and its law-making and tax system through the House of Lords, you’d extend the vote to labor, to women and everybody. The theory was that society as a whole would vote in its self-interest. It would vote for the 99 Percent, not for the One Percent.
By the time Marx wrote in the 1870s, he could see what was happening in Germany. German banks were trying to make money in conjunction with the government, by lending to heavy industry, largely to the military-industrial complex.
HEDGES: This was Bismarck’s kind of social – I don’t know what we’d call it. It was a form of capitalist socialism…
HUDSON: They called it State Capitalism. There was a long discussion by Engels, saying, wait a minute. We’re for Socialism. State Capitalism isn’t what we mean by socialism. There are two kinds of state-oriented–.
HEDGES: I’m going to interject that there was a kind of brilliance behind Bismarck’s policy because he created state pensions, he provided health benefits, and he directed banking toward industry, toward the industrialization of Germany which, as you point out, was very different in Britain and the United States.
HUDSON: German banking was so successful that by the time World War I broke out, there were discussions in English economic journals worrying that Germany and the Axis powers were going to win because their banks were more suited to fund industry. Without industry you can’t have really a military. But British banks only lent for foreign trade and for speculation. Their stock market was a hit-and-run operation. They wanted quick in-and-out profits, while German banks didn’t insist that their clients pay as much in dividends. German banks owned stocks as well as bonds, and there was much more of a mutual partnership.
That’s what most of the 19th century imagined was going to happen – that the world was on the way to socializing banking. And toward moving capitalism beyond the feudal level, getting rid of the landlord class, getting rid of the rent, getting rid of interest. It was going to be labor and capital, profits and wages, with profits being reinvested in more capital. You’d have an expansion of technology. By the early twentieth century most futurists imagined that we’d be living in a leisure economy by now.
HEDGES: Including Karl Marx.
HUDSON: That’s right. A ten-hour workweek. To Marx, socialism was to be an outgrowth of the reformed state of capitalism, as seemed likely at the time – if labor organized in its self-interest.
HEDGES: Isn’t what happened in large part because of the defeat of Germany in World War I? But also, because we took the understanding of economists like Adam Smith and maybe Keynes. I don’t know who you would blame for this, whether Ricardo or others, but we created a fictitious economic theory to praise a rentier or rent-derived, interest-derived capitalism that countered productive forces within the economy. Perhaps you can address that.
HUDSON: Here’s what happened. Marx traumatized classical economics by taking the concepts of Adam Smith and John Stuart Mill and others, and pushing them to their logical conclusion. 
Progressive capitalist advocates – Ricardian socialists such as John Stuart Mill – wanted to tax away the land or nationalize it. Marx wanted governments to take over heavy industry and build infrastructure to provide low-cost and ultimately free basic services. This was traumatizing the landlord class and the One Percent. And they fought back. They wanted to make everything part of “the market,” which functioned on credit supplied by them and paid rent to them.
Progressive capitalist advocates – Ricardian socialists such as John Stuart Mill – wanted to tax away the land or nationalize it. Marx wanted governments to take over heavy industry and build infrastructure to provide low-cost and ultimately free basic services. This was traumatizing the landlord class and the One Percent. And they fought back. They wanted to make everything part of “the market,” which functioned on credit supplied by them and paid rent to them.
None of the classical economists imagined how the feudal interests – these great vested interests that had all the land and money – actually would fight back and succeed. They thought that the future was going to belong to capital and labor. But by the late 19th century, certainly in America, people like John Bates Clark came out with a completely different theory, rejecting the classical economics of Adam Smith, the Physiocrats and John Stuart Mill.
HEDGES: Physiocrats are, you’ve tried to explain, the enlightened French economists.
HUDSON: The common denominator among all these classical economists was the distinction between earned income and unearned income. Unearned income was rent and interest. Earned incomes were wages and profits. But John Bates Clark came and said that there’s no such thing as unearned income. He said that the landlord actually earns his rent by taking the effort to provide a house and land to renters, while banks provide credit to earn their interest. Every kind of income is thus “earned,” and everybody earns their income. So everybody who accumulates wealth, by definition, according to his formulas, get rich by adding to what is now called Gross Domestic Product (GDP).
HEDGES: One of the points you make in Killing the Host which I liked was that in almost all cases, those who had the capacity to make money parasitically off interest and rent had either – if you go back to the origins – looted and seized the land by force, or inherited it.
HUDSON: That’s correct. In other words, their income is unearned. The result of this anti-classical revolution you had just before World War I was that today, almost all the economic growth in the last decade has gone to the One Percent. It’s gone to Wall Street, to real estate …
HEDGES: But you blame this on what you call Junk Economics.
HUDSON: Junk Economics is the anti-classical reaction.
HEDGES: Explain a little bit how, in essence, it’s a fictitious form of measuring the economy.
HUDSON: Well, some time ago I went to a bank, a block away from here – a Chase Manhattan bank – and I took out money from the teller. As I turned around and took a few steps, there were two pickpockets. One pushed me over and the other grabbed the money and ran out. The guard stood there and saw it. So I asked for the money back. I said, look, I was robbed in your bank, right inside. And they said, “Well, we don’t arm our guards because if they shot someone, the thief could sue us and we don’t want that.” They gave me an equivalent amount of money back.
Well, imagine if you count all this crime, all the money that’s taken, as an addition to GDP. Because now the crook has provided the service of not stabbing me. Or suppose somebody’s held up at an ATM machine and the robber says, “Your money or your life.” You say, “Okay, here’s my money.” The crook has given you the choice of your life. In a way that’s how the Gross National Product accounts are put up. It’s not so different from how Wall Street extracts money from the economy. Then also you have landlords extracting …
HEDGES: Let’s go back. They’re extracting money from the economy by debt peonage. By raising …
HUDSON: By not playing a productive role, basically.
HEDGES: Right. So it’s credit card interest, mortgage interest, car loans, student loans. That’s how they make their funds.
HUDSON: That’s right. Money is not a factor of production. But in order to have access to credit, in order to get money, in order to get an education, you have to pay the banks. At New York University here, for instance, they have Citibank. I think Citibank people were on the board of directors at NYU. You get the students, when they come here, to start at the local bank. And once you are in a bank and have monthly funds taken out of your account for electric utilities, or whatever, it’s very cumbersome to change.
So basically you have what the classical economists called the rentierclass. The class that lives on economic rents. Landlords, monopolists charging more, and the banks. If you have a pharmaceutical company that raises the price of a drug from $12 a shot to $200 all of a sudden, their profits go up. Their increased price for the drug is counted in the national income accounts as if the economy is producing more. So all this presumed economic growth that has all been taken by the One Percent in the last ten years, and people say the economy is growing. But the economy isn’t growing …
HEDGES: Because it’s not reinvested.
HUDSON: That’s right. It’s not production, it’s not consumption. The wealth of the One Percent is obtained essentially by lending money to the 99 Percent and then charging interest on it, and recycling this interest at an exponentially growing rate.
HEDGES: And why is it important, as I think you point out in your book, that economic theory counts this rentier income as productive income? Explain why that’s important.
HUDSON: If you’re a rentier, you want to say that you earned your income by …
HEDGES: We’re talking about Goldman Sachs, by the way.
HUDSON: Yes, Goldman Sachs. The head of Goldman Sachs came out and said that Goldman Sachs workers are the most productive in the world. That’s why they’re paid what they are. The concept of productivity in America is income divided by labor. So if you’re Goldman Sachs and you pay yourself $20 million a year in salary and bonuses, you’re considered to have added $20 million to GDP, and that’s enormously productive. So we’re talking in a tautology. We’re talking with circular reasoning here.
So the issue is whether Goldman Sachs, Wall Street and predatory pharmaceutical firms, actually add “product” or whether they’re just exploiting other people. That’s why I used the word parasitism in my book’s title. People think of a parasite as simply taking money, taking blood out of a host or taking money out of the economy. But in nature it’s much more complicated. The parasite can’t simply come in and take something. First of all, it needs to numb the host. It has an enzyme so that the host doesn’t realize the parasite’s there. And then the parasites have another enzyme that takes over the host’s brain. It makes the host imagine that the parasite is part of its own body, actually part of itself and hence to be protected.
That’s basically what Wall Street has done. It depicts itself as part of the economy. Not as a wrapping around it, not as external to it, but actually the part that’s helping the body grow, and that actually is responsible for most of the growth. But in fact it’s the parasite that is taking over the growth.
The result is an inversion of classical economics. It turns Adam Smith upside down. It says what the classical economists said was unproductive – parasitism – actually is the real economy. And that the parasites are labor and industry that get in the way of what the parasite wants – which is to reproduce itself, not help the host, that is, labor and capital.
HEDGES: And then the classical economists like Adam Smith were quite clear that unless that rentier income, you know, the money made by things like hedge funds, was heavily taxed and put back into the economy, the economy would ultimately go into a kind of tailspin. And I think the example of that, which you point out in your book, is what’s happened in terms of large corporations with stock dividends and buybacks. And maybe you can explain that.
HUDSON: There’s an idea in superficial textbooks and the public media that if companies make a large profit, they make it by being productive. And with …
HEDGES: Which is still in textbooks, isn’t it?
HUDSON: Yes. And also that if a stock price goes up, you’re just capitalizing the profits – and the stock price reflects the productive role of the company. But that’s not what’s been happening in the last ten years. Just in the last two years, 92 percent of corporate profits in America have been spent either on buying back their own stock, or paid out as dividends to raise the price of the stock.
HEDGES: Explain why they do this.
HUDSON: About 15 years ago at Harvard, Professor Jensen said that the way to ensure that corporations are run most efficiently is to make the managers increase the price of the stock. So if you give the managers stock options, and you pay them not according to how much they’re producing or making the company bigger, or expanding production, but the price of the stock, then you’ll have the corporation run efficiently, financial style.
So the corporate managers find there are two ways that they can increase the price of the stock. The first thing is to cut back long-term investment, and use the money instead to buy back their own stock. But when you buy your own stock, that means you’re not putting the money into capital formation. You’re not building new factories. You’re not hiring more labor. You can actually increase the stock price by firing labor.
HEDGES: That strategy only works temporarily.
HUDSON: Temporarily. By using the income from past investments just to buy back stock, fire the labor force if you can, and work it more intensively. Pay it out as dividends. That basically is the corporate raider’s model. You use the money to pay off the junk bond holders at high interest. And of course, this gets the company in trouble after a while, because there is no new investment.
So markets shrink. You then go to the labor unions and say, gee, this company’s near bankruptcy, and we don’t want to have to fire you. The way that you can keep your job is if we downgrade your pensions. Instead of giving you what we promised, the defined benefit pension, we’ll turn it into a defined contribution plan. You know what you pay every month, but you don’t know what’s going to come out. Or, you wipe out the pension fund, push it on to the government’s Pension Benefit Guarantee Corporation, and use the money that you were going to pay for pensions to pay stock dividends. By then the whole economy is turning down. It’s hollowed out. It shrinks and collapses. But by that time the managers will have left the company. They will have taken their bonuses and salaries and run.
HEDGES: I want to read this quote from your book, written by David Harvey, in A Brief History of Neoliberalism, and have you comment on it.
The main substantive achievement of neoliberalism has been to redistribute rather than to generate wealth and income. [By] ‘accumulation by dispossession’ I mean … the commodification and privatization of land, and the forceful expulsion of peasant populations; conversion of various forms of property rights (common collective state, etc.) into exclusive private property rights; suppression of rights to the commons; … colonial, neocolonial, and the imperial processes of appropriation of assets (including natural resources); … and usury, the national debt and, most devastating at all, the use of the credit system as a radical means of accumulation by dispossession. … To this list of mechanisms, we may now add a raft of techniques such as the extraction of rents from patents, and intellectual property rights (such as the diminution or erasure of various forms of common property rights, such as state pensions, paid vacations, and access to education, health care) one through a generation or more of class struggle. The proposal to privatize all state pension rights, pioneered in Chile under the dictatorship is, for example, one of the cherished objectives of the Republicans in the US.
This explains the denouement. The final end result you speak about in your book is, in essence, allowing what you call the rentier or the speculative class to cannibalize the entire society until it collapses.
HUDSON: A property right is not a factor of production. Look at what happened in Chicago, the city where I grew up. Chicago didn’t want to raise taxes on real estate, especially on its expensive commercial real estate. So its budget ran a deficit. They needed money to pay the bondholders, so they sold off the parking rights to have meters – you know, along the curbs. The result is that they sold to Goldman Sachs 75 years of the right to put up parking meters. So now the cost of living and doing business in Chicago is raised by having to pay the parking meters. If Chicago is going to have a parade and block off traffic, it has to pay Goldman Sachs what the firm would have made if the streets wouldn’t have been closed off for a parade. All of a sudden it’s much more expensive to live in Chicago because of this.
But this added expense of having to pay parking rights to Goldman Sachs – to pay out interest to its bondholders – is counted as an increase in GDP, because you’ve created more product simply by charging more. If you sell off a road, a government or local road, and you put up a toll booth and make it into a toll road, all of a sudden GDP goes up.
If you go to war abroad, and you spend more money on the military-industrial complex, all this is counted as increased production. None of this is really part of the production system of the capital and labor building more factories and producing more things that people need to live and do business. All of this is overhead. But there’s no distinction between wealth and overhead.
Failing to draw that distinction means that the host doesn’t realize that there is a parasite there. The host economy, the industrial economy, doesn’t realize what the industrialists realized in the 19thcentury: If you want to be an efficient economy and be low-priced and under-sell competitors, you have to cut your prices by having the public sector provide roads freely. Medical care freely. Education freely.
If you charge for all of these, you get to the point that the U.S. economy is in today. What if American factory workers were to get allof their consumer goods for nothing. All their food, transportation, clothing, furniture, everything for nothing. They still couldn’t compete with Asians or other producers, because they have to pay up to 43% of their income for rent or mortgage interest, 10% or more of their income for student loans, credit card debt. 15% of their paycheck is automatic withholding to pay Social Security, to cut taxes on the rich or to pay for medical care.
So Americans built into the economy all this overhead. There’s no distinction between growth and overhead. It’s all made America so high-priced that we’re priced out of the market, regardless of what trade policy we have.
HEDGES: We should add that under this predatory form of economics, you game the system. So you privatize pension funds, you force them into the stock market, an overinflated stock market. But because of the way companies go public, it’s the hedge fund managers who profit. And it’s those citizens whose retirement savings are tied to the stock market who lose. Maybe we can just conclude by talking about how the system is fixed, not only in terms of burdening the citizen with debt peonage, but by forcing them into the market to fleece them again.
HUDSON: Well, we talk about an innovation economy as if that makes money. Suppose you have an innovation and a company goes public. They go to Goldman Sachs and other Wall Street investment banks to underwrite the stock to issue it at $40 a share. What’s considered a successful float is when, immediately, Goldman and the others will go to their insiders and tell them to buy this stock and make a quick killing. A “successful” flotation doubles the price in one day, so that at the end of the day the stock’s selling for $80.
HEDGES: They have the option to buy it before anyone else, knowing that by the end of the day it’ll be inflated, and then they sell it off.
HUDSON: That’s exactly right.
HEDGES: So the pension funds come in and buy it at an inflated price, and then it goes back down.
HUDSON: It may go back down, or it may be that the company just was shortchanged from the very beginning. The important thing is that the Wall Street underwriting firm, and the speculators it rounds up, get more in a single day than all the years it took to put the company together. The company gets $40. And the banks and their crony speculators also get $40.
So basically you have the financial sector ending up with much more of the gains. The name of the game if you’re on Wall Street isn’t profits. It’s capital gains. And that’s something that wasn’t even part of classical economics. They didn’t anticipate that the price of assets would go up for any other reason than earning more money and capitalizing on income. But what you have had in the last 50 years – really since World War II – has been asset-price inflation. Most middle-class families have gotten the wealth that they’ve got since 1945 not really by saving what they’ve earned by working, but by the price of their house going up. They’ve benefited by the price of the house. And they think that that’s made them rich and the whole economy rich.
The reason the price of housing has gone up is that a house is worth whatever a bank is going to lend against it. If banks made easier and easier credit, lower down payments, then you’re going to have a financial bubble. And now, you have real estate having gone up as high as it can. I don’t think it can take more than 43% of somebody’s income to buy it. But now, imagine if you’re joining the labor force. You’re not going to be able to buy a house at today’s prices, putting down a little bit of your money, and then somehow end up getting rich just on the house investment. All of this money you pay the bank is now going to be subtracted from the amount of money that you have available to spend on goods and services.
So we’ve turned the post-war economy that made America prosperous and rich inside out. Somehow most people believed they could get rich by going into debt to borrow assets that were going to rise in price. But you can’t get rich, ultimately, by going into debt. In the end the creditors always win. That’s why every society since Sumer and Babylonia have had to either cancel the debts, or you come to a society like Rome that didn’t cancel the debts, and then you have a dark age. Everything collapses.
Michael Hudson’s new book, Killing the Host is published in e-format by CounterPunch Books and in print by Islet. He can be reached via his website, mh@michael-hudson.com. Chris Hedges’s latest book is Days of Destruction, Days of Revolt, illustrated by Joe Sacco.
The original source of this article is Counterpunch
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