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Not to be missed interview with Michael Hudson

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Trouble in Europe, China

May 5, 2010


Based on an interview with Eric Janszen of iTulip

April 10, 2010

On April 10, 2010 I caught up with Michael Hudson and he was in rare form. Readers know that my personal view is that much of the right wing of the political spectrum doesn’t know what the problem is and all of the left wing, while nailing the problem, doesn’t know how to solve it. No one is too left wing or too right wing to get an interview here.

Interviewer (EJ): Thank you for your time this morning.

Hudson (MH): Glad to be here.

EJ: It’s been a while since I’ve interviewed you so let’s have a wide-ranging discussion today. I want to include your Thursday Financial Times article on the fate of the ex-Soviet debtor nations, the Bank of International Settlement report I sent you on New Europe and other industrialized debtors, and China, and see where it goes. Let’s start with the BIS report.

MH: I skimmed through it quickly, and it’s the same class war junk economics that the Peterson Institute for International Economics (the lobbyist for international banks) and other neoliberal (that is, anti-labor and pro-financial) lobbying organizations have mounted against public obligations to any parties but the Finance, Insurance and Real Estate (FIRE) sector. The aim is to prepare the ground for President Obama’s recently appointed “bipartisan” commission to scale back Social Security and Medicare.

The argument is that these two programs need to be pre-funded, with savings levied regressively in advance, to promote a balanced federal budget. The effect would be to prevent fiscal policy from providing the growth in money and credit that economies need. This would all be provided by private-sector banks – at interest. So recent focus on government “over-spending” (meaning spending on infrastructure and social betterment, as opposed to subsidies and bailouts for the

financial sector and its real estate market) is a cover story intended to prepare populations for austerity plans IMF-style.

If you look at the origins of the BIS, you see an irony. It was created as part of the Young Plan back in 1929 to deal in a less financially destructive way with German reparations. As a result of the arguments put forth mainly by Keynes (which I discuss in my history of international trade and financial theories, Trade, Development and Foreign Debt (new ed. 2009), the BIS aim was to see how much foreign-currency reparations debt Germany could pay without destabilizing its economy. The BIS was supposed to take a structural view of Germany’s capacity to pay, and scale back its foreign debt service to this capacity. Otherwise, demands for foreign debt would turn into asset stripping.

This broader context of the “ability to pay” is what is needed today from Greece to the Baltics and Iceland. These countries are being directed to pay the financial sector first – international bankers, creditor-nation governments, the IMF and World Bank, and financial institutions – before they spend money on sustaining their own employment and economic growth. So instead of government spending being counter-cyclical as these countries are pushed into debt deflation, they are “pro-cyclical,” that is, squeezing a government budget surplus to pay creditors rather than mounting the public infrastructure and related spending programs that we are seeing in the United States and other countries that put their own populations first.

The twist is that the BIS, Peterson Institute and other creditor-oriented organizations are now telling the United States as well to put creditors first, not the “real” economy. Governments are to run a “balanced budget” (which, former President Clinton told his appreciative Peterson Institute audience, his home state of Arkansas is required to do by constitutional requirement, as are many other U.S. states and cities). They then put forth a junk-economics calculation of Social Security and Medicare claiming that the money will not be there in a few decades under current arrangements.

But these current arrangements insist that money to pay Social Security and Medicare are saved up in advance. This was the trick gimmicked by the Greenspan Commission in 1982-83.This policy demand is hypocritical, unless they say that military wars and bailouts to the financial sector also have to be pre-funded as user fees, levied on the military-industrial complex and Wall Street respectively.

According to their reasoning, America will go bankrupt unless it levies a $30 trillion tax on wealth. Wages have to be cut by 90 percent and assets in the public domain need to be sold off, because on their logic, in order to pay for a $3 trillion war you need to have a $60 trillion savings already pre-saved at 5% interest.

Let’s extend their logic to the $13 trillion bailout last year. America would need to have saved up $100 trillion or $200 trillion in order to yield that much in interest to make this payment. And inasmuch as the bailout was a vain attempt to keep the exponential growth of debt intact, there will need to be more and more bailouts. But all they’re talking about is the rise in medical insurance to the health monopoly.

They’re applying an anti-labor economic logic to Social Security and Medicare, and pro-financial logic to the military and financial bailouts. In both cases it’s labor and industry that must pay.

EJ: Whom does the BIS represent, in your opinion?

MH: They’ve become board of directors for the international financial class, standing up for the banks against labor and now also against the “real” industrial economy. So anything they say should be looked at as class warfare and paid propaganda. If adopted, their recommendations would destroy industry and impose a neo-feudal economy run by creditors. They have no understanding of what credit is, for example. People who do understand the basic monetary principles of credit are considered unfit to work at the BIS. Junk economics likes team players.

EJ: So what is your theory about the role of Simon Johnson who was Chief Economist for the IMF, now a professor at the MIT Sloan School of Management and a member of the CBO’s Panel of Economic Advisers? He was the first of rank to note that our political system as run by a financial oligarchy.

MH: He’s trying to promote monetarism with a friendly face. A lot of the things he writes are correct so he’s sort of the good cop setting things up for the bad cop. But he’s a Senior Fellow at the Peterson Institute, which carefully excludes economists whose idea do not make lobbying points for high finance.

[To continue reading the interview with Michael Hudson, click on the link below]


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