The West Is Traveling The Road To Economic RuinBy Paul Craig Roberts
February 01, 2016 "Information Clearing House"
- Michael Hudson is the best economist in the world. Indeed, I could
almost say that he is the only economist in the world. Almost all of the
rest are neoliberals, who are not economists but shills for financial
interests.
If
you have not heard of Michael Hudson it merely shows the power of the
Matrix. Hudson should have won several Nobel prizes in economics, but he
will never get one.
Hudson
did not intend to be an economist. At the University of Chicago, which
had a leading economics faculty, Hudson studied music and cultural
history. He went to New York City to work in publishing. He thought he
could set out on his own when he was assigned rights to the writings and
archives of George Lukacs and Leon Trotsky, but publishing houses were
not interested in the work of two Jewish Marxists who had a significant
impact on the 20th century.
Friendships
connected Hudson to a former economist for General Electric who taught
him the flow of funds through the economic system and explained how
crises develop when debt outgrows the economy. Hooked, Hudson enrolled
in the economics graduate program at NYU and took a job in the financial
sector calculating how savings were recycled into new mortgage loans.
Hudson
learned more economics from his work experience than from his Ph.D.
courses. On Wall Street he learned how bank lending inflates land prices
and, thereby, interest payments to the financial sector. The more banks
lend, the higher real estate prices rise, thus encouraging more bank
lending. As mortgage debt service rises, more of household income and
more of the rental value of real estate are paid to the financial
sector. When the imbalance becomes too large, the bubble bursts. Despite
its importance, the analysis of land rent and property valuation was
not part of his Ph.D. studies in economics.
Hudson’s
next job was with Chase Manhattan, where he used the export earnings of
South American countries to calculate how much debt service the
countries could afford to pay to US banks. Hudson learned that just as
mortgage lenders regard the rental income from property as a flow of
money that can be diverted to interest payments, international banks
regard the export earnings of foreign countries as revenues that can be
used to pay interest on foreign loans. Hudson learned that the goal of
creditors is to capture the entire economic surplus of a country into
payments of debt service.
Soon
the American creditors and the IMF were lending indebted countries
money with which to pay interest. This caused the countries’ foreign
debts to rise at compound interest. Hudson predicted that the indebted
countries would not be able to pay their debts, an unwelcome prediction
that was confirmed when Mexico announced it could not pay. This crisis
was resolved with “Brady bonds” named after the US Treasury Secretary,
but when the 2008 US mortgage crisis hit, just as Hudson predicted,
nothing was done for the American homeowners. If you are not a
mega-bank, your problems are not a focus of US economic policy.
Chase
Manhattan next had Hudson develop an accounting format to analyze the
US oil industry balance of payments. Here Hudson learned another lesson
about the difference between official statistics and reality. Using
“transfer pricing,” oil companies managed to avoid paying taxes by
creating the illusion of zero profits. Oil company affiliates in tax
avoidance locations buy oil at low prices from producers. From these
flags of convenience locations, which have no tax on profits, the oil
was then sold to Western refineries at prices marked up to eliminate
profits. The profits were recorded by the oil companies’ affiliates in
non-tax jurisdictions. (Tax authorities have cracked down to some extent
on the use of transfer pricing to escape taxation.)
Hudson’s
next task was to estimate the amount of money from crime going into
Switzerland’s secret banking system. In this investigation, his last for
Chase, Hudson discovered that under US State Department direction Chase
and other large banks had established banks in the Caribbean for the
purpose of attracting money into dollar holdings from drug dealers in
order to support the dollar (by raising the demand for dollars by
criminals) in order to balance or offset Washington’s foreign military
outflows of dollars. If dollars flowed out of the US, but demand did not
rise to absorb the larger supply of dollars, the dollar’s exchange rate
would fall, thus threatenting the basis of US power. By providing
offshore banks in which criminals could deposit illicit dollars, the US
government supported the dollar’s exchange value.
Hudson
discovered that the US balance of payments deficit, a source of
pressure on the value of the US dollar, was entirely military in
character. The US Treasury and State Department supported the Caribbean
safe haven for illegal profits in order to offset the negative impact on
the US balance of payments of US military operations abroad. In other
words, if criminality can be used in support of the US dollar, the US
government is all for criminality.
When
it came to the economics of the situation, economic theory had not a
clue. Neither trade flows nor direct investments were important in
determining exchange rates. What was important was “errors and
omissions,” which Hudson discovered was an euphemism for the hot, liquid
money of drug dealers and government officials embezzling the export
earnings of their countries.
The
problem for Americans is that both political parties regard the needs
of the American people as a liability and as an obstacle to the profits
of the military/security complex, Wall Street and the mega-banks, and
Washington’s world hegemony. The government in Washington represents
powerful interest groups, not American citizens. This is why the 21st
century consists of an attack on the constitutional protections of
citizens so that citizens can be moved out of the way of the needs of
the Empire and its beneficiaries.
Hudson
learned that economic theory is really a device for ripping off the
untermenschen. International trade theory concludes that countries can
service huge debts simply by lowering domestic wages in order to pay
creditors. This is the policy currently being applied to Greece today,
and it has been the basis of the IMF’s structural adjustment or
austerity programs imposed on debtor countries, essentially a form of
looting that turns over national resources to foreign lenders.
Hudson
learned that monetary theory concerns itself only with wages and
consumer prices, not with the inflation of asset prices such as real
estate and stocks. He saw that economic theory serves as a cover for the
polarization of the world economy between rich and poor. The promises
of globalism are a myth. Even left-wing and Marxist economists think of
exploitation in terms of wages and are unaware that the main instrument
of exploitation is the financial system’s extraction of value into
interest payments.
Economic
theory’s neglect of debt as an instrument of exploitation caused Hudson
to look into the history of how earlier civilizations handled the build
up of debt. His research was so ground-breaking that Harvard University
appointed him Research Fellow in Babylonian economic history in the
Peabody Museum.
Meanwhile
he continued to be sought after by financial firms. He was hired to
calculate the number of years that Argentina, Brazil, and Mexico would
be able to pay the extremely high interest rates on their bonds. On the
basis of Hudson’s work, the Scudder Fund achieved the second highest
rate of return in the world in 1990.
Hudson’s
investigations into the problems of our time took him through the
history of economic thought. He discovered that 18th and 19th century
economists understood the disabling power of debt far better than
today’s neoliberal economists who essentially neglect it in order to
better cater to the interest of the financial sector.
Hudson
shows that Western economies have been financialized in a predatory way
that sacrifices the public interest to the interests of the financial
sector. That is why the economy no longer works for ordinary people.
Finance is no longer productive. It has become a parasite on the
economy. Hudson tells this story in his recent book, Killing the Host (2015).
Readers
often ask me how they can learn economics. My answer is to spend many
hours with Hudson’s book. First, read the book through once or twice in
order to get an idea of what is covered. Then study it closely section
by section. When you understand the book, you will understand economics
better than any Nobel prize-winning economist.
Treat
this column as an introduction to the book. I will be writing more
about it as current events and time permit. As far as I am concerned,
many current events cannot be understood independently of Hudson’s
explanation of the financialized Western economy. Indeed, as most
Russian and Chinese economists are themselves trained in neoliberal
economics, these two countries might follow the same downward path as
the West.
If
you put Hudson’s analysis of financialization together with my analysis
of the adverse impact of jobs offshoring, you will understand that the
present economic path of the Western world is the road to destruction.
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