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The West Is Traveling the Road to Economic Ruin
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By Dr. Paul Craig Roberts
Global Research, February 08, 2016
Paul Craig Roberts 1 February 2016
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Url of this article:
http://www.globalresearch.ca/the-west-is-traveling-the-road-to-economic-ruin/5506430
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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.
Michael Hudson
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.
Dr. Paul Craig Roberts was Assistant Secretary
of the Treasury for Economic Policy and associate editor of the Wall
Street Journal. He was columnist for Business Week, Scripps Howard News
Service, and Creators Syndicate. He has had many university
appointments. His internet columns have attracted a worldwide following.
Roberts’ latest books are The Failure of Laissez Faire Capitalism and Economic Dissolution of the West,How America Was Lost, and The Neoconservative Threat to World Order.
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Disclaimer: The contents of this article are of sole
responsibility of the author(s). The Centre for Research on
Globalization will not be responsible for any inaccurate or incorrect
statement in this article.
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