Democracy’s Debt Ladder

Discussion in 'Economics' started by FireWalker, Oct 9, 2016.


    The IMF foretells of vulnerable banks in US and EU while enabling unsustainable debt-leveraging, says economist Michael Hudson.

    KIM BROWN, TRNN: Welcome to The Real News Network. I’m Kim Brown, in Baltimore. With the worst of the great recession, supposedly, behind us, economic analysts still see signs that we’re not yet completely out of the woods. A new report released Wednesday by the International Monetary Fund shows that some banks in the United States and Europe may not be strong enough to survive another downturn, even with States assistance.

    Joining us from New York is Michael Hudson. Michael is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His latest book is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Michael, thanks again for joining us.

    MICHAEL HUDSON: Its good to be here. But we can’t get out of the woods.

    BROWN: Okay, let’s get into that. The IMF report on financial stability says, in spite of banks being stronger now than before the economic crisis of 2007-2008, about twenty-five percent of US banks and about a third of European banks are too weak to even benefit from a potential rise in interest rates and any recovery aid, should the global economy take a downward turn. But before we get into any specific questions about the health of banks, Michael, are we still in a recession or are we firmly in a recovery now?

    HUDSON: We are not in a recovery and we’re not really in a traditional recession. People think of a business cycle, which is a boom followed by a recession and then automatic stabilizers revive the economy. But this time we can’t revive. The reason is that every recovery since 1945 has begun with a higher, and higher level of debt. The debt is so high now, that since 2008 we’ve been in what I call, debt deflation. People have to pay so much money to the banks that they don’t have enough money to buy the goods and services they produce. So there’s not much new investment, there’s not new employment (except minimum-wage “service” jobs), markets are shrinking, and people are defaulting. So many companies can’t pay their banks.

    The banks’ product is debt. They try to tell customers that “debts are good for you,” but the customers can’t afford any more debt, so there’s no way the banks can continue their current business plan. In fact, there’s no way that banks can be paid everything that they’re owed. That’s where the IMF doesn’t follow through its analysis, by saying, “Look, the banks are broke because the financial system is broke; and the financial system is broke because the whole idea of trying to get rich by running into debt doesn’t work.”

    It was a false model. So really, we’re at the end of long cycle that began in 1945, loading the economy with debt. We’re not going to be able to get out of it until you write down the debts. But that’s what the IMF believes is unthinkable. It can’t say that, because it’s supposed to represent the interest of the banks. So all the IMF can say is to wring their hands over the fact that the banks won’t make money even if there is a recovery.

    But there really isn’t a recovery, and no signs of it on the horizon, because people have to pay the banks. It’s a vicious circle – or rather, a downward spiral. Basically, the IMF economists are just throwing up their hands and admitting that they don’t know what to do, given the limits of their tunnel vision.

    BROWN: Well, Michael, help us figure out why growth has been so weak over these past eight to six years or so.

    HUDSON: If you take the average family budget – and I’ve said this on your show many times –we can go through the numbers. If you have to pay about forty to forty-three percent of your income for housing, you also have to pay fifteen percent of your paycheck for the FICA for Social Security wage withholding. You have to pay medical care, you have to pay the banks for your credit card debt, student loans. Then you only have about twenty-five or thirty-five percent, maybe one-third of your salary to buy goods and services. That’s all.

    The problem here is that the way you get a job is with a company that sells goods and services. The companies aren’t hiring, because consumers don’t have enough money to buy the goods and services.

    We’re in a chronic debt-deflation. There’s no way we can recover unless you write down the debts. And that’s what the IMF basically is implying (and it was explicit regarding Greece), but its not spelling it out, because that’s not what can be said in polite company.

    BROWN: Michael the headline from MarketWatch about this IMF report, it reads, “Forget too big to fail. The big concern is banks too weak to survive.” If big banks almost capsized the global financial system, are weaker banks actually better for consumers?

    HUDSON: Banks that are very narrow and do what banks used to do (before President Clinton abolished Glass-Steagall in 1999). Small banks that lend to consumers are fine. Most banks – with Deutsche Bank at the top of the spectrum here – have decided that they can’t make money lending to borrowers anymore, so they’re going to the second business plan: they lend money to casino capitalists. That is, to people who want to gamble on derivatives.

    A derivative is a bet on whether a stock, or a bond or a real estate asset, is going to go up or down. There’s a winner and a loser. It’s like betting on a horserace. So the biggest bank lending for gambles – not for real production, not for investment, but just for gambles – was Deutsche Bank. Borrowers borrowed from Deutsche Bank to gamble.

    What’s the best gamble in the world, right now? Its betting that Deutsche Bank stock is going to go down. Short sellers borrowed money from their banks to place bets that Deutsche Bank stock is going to go down. Now, it’s wringing its hands and saying, “Oh the speculators are killing us.” But it’s Deutsche Bank and the other banks that are providing the money to the speculators to bet on credit.

    BROWN: Michael, the IMF report says that in the Eurozone, if the Eurozone governments could help banks dump their bad loans, it would have a positive effect on bank capital. What would be the effect on consumers in the EU economy, at large, if banks were able to just dump these bad loans?

    HUDSON: Its really very simple mathematics. You have to abolish pension plans. You have to abolish social spending. You have to raise taxes. You have to have at least fifty percent of the European population emigrate, either to Russia or China. You would have to have mass starvation. Very simple. That’s the price that the Eurozone thinks is well worth paying. It’s the price that it thought Greece is worth paying. To save the banks, you would have to turn the entire Eurozone into Greece.

    You’ll have to have the governments sell off all of their public domains; sell off their railroads, sell off their public land. You’ll essentially have to introduce neo-feudalism. You’ll have to roll the clock of history back a thousand years, and reduce the European population to debt slavery. It’s as simple a solution as the Eurozone has imposed on Greece. And it’s a solution that the leaders and the banks are urging for responsible economists to promote for the population at large.

    BROWN: Let’s talk about the other little nugget of information released by the IMF about debt. Global debt has now reached about a hundred and fifty-two trillion dollars. This includes government debt, household debt, non-financial firms’ debt. What does all this debt mean for the global financial system and for everyday people here, Michael?

    HUDSON: It means that the only way people can repay the debt is by cutting their living standards very drastically. It means agreeing to shift their pension plans from defined benefit plans – when you know what you’re going to get – into just “defined contribution plans,” where you put money in, like into a roach motel, and you don’t know what’s coming out.

    To save the banks from making losses that would wipe out their net worth, you’ll have to get rid of Social Security. It means that you’ll essentially have to abolish government and turn it over to the banking system to run, with an idea that the role of governments is to extract income from the economy to pay to the bondholders and the banks.

    When you say “paying the banks,” what they really mean is paying the bank bondholders. They are basically the One Percent. What you’re really seeing right now in the IMF report, in this growth of debt, is that One Percent of the population owns maybe three-quarters of all this debt. This means that there’s a choice: either you can save the economy, or you can save the One Percent from losing a single penny.

    Every government, from the Obama administration right through to Angela Merkel, the Eurozone and the IMF, promise to save the banks, not the economy. No price is too high to pay to try to make the financial system go on a little bit longer. But ultimately it can’t be saved, because of the mathematics that are involved. Debts grow and grow. And the more they grow, the more they shrink the economy. When you shrink the economy, you shrink the ability to pay the debts, so it’s all an illusion that the system can be saved. The question is, how long are people going to be willing to live in this illusion?

    BROWN: That was my next question for you. Not only how long are people going to be able to live in this illusion, but how much longer is this illusion actually sustainable before we see another collapse of economies around the world? Is this something that is impending, that we should just be expecting to come, we should be readying ourselves for this?

    HUDSON: We’re still in the collapse that began after 2008. There’s not a new collapse, there hasn’t been a recovery. Wages for the ninety-nine percent have gone down, steadily, since 2008. They’ve gone down especially for the bottom twenty-five percent of the population. This means that they’ve gone down especially for Blacks and Hispanics and other blue-collar workers. Their net worth has actually turned negative, and they don’t have enough money to get by.

    In fact, one of the big consulting firms just did a study of the millennials. Ernst and Young did a study and they found seventy-eight percent of millennials are worried about not having enough good paying job opportunities to pay off their student loans. Seventy-four percent can’t pay the health care if they get sick. Seventy-nine percent don’t have enough money to live when they retire. So, already, we’re having a whole generation that’s coming on, not only here but also in Europe, that isn’t able to get good-paying jobs. The only way it can live the life they were promised is if they have rich enough parents who have given them a trust fund.

    BROWN: We’ve been speaking with Michael Hudson. Michael is a Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His latest book is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Michael, you said you had another book coming out, is that right?

    HUDSON: Yes, later this month. It’ll be J is for Junk Economics. And it’s a review of why the economists promise that somehow we’ll recover. Why this is basically junk, and why in order to be an economist these days, you have to participate in this fairy tale that somehow we can recover and still make the banks rich. And it is a fairy tale. J is for Junk Economics is about why it won’t work.

    BROWN: Coming to a bookstore, near you, later this year. Michael, we appreciate you lending your time and expertise to us, as always. Thank you.

    HUDSON: It was good to be here.
    bullmarket79, Simples and aex like this.
  2. Great post Firewalker, you can already hear the liberals, well we need debt forgiveness and the religious folks say we will have a year of jubilee (biblical debt forgiveness) like in biblical times and the conservatives say " it's personal responsibility" why take on debt you can't possibly repay. So the arguing begins and nothing gets done as usual, we can't get past our talking points and offer any solutions that a majority can agree on.
  3. ironchef


    One of the great economic puzzle for me is that macroeconomics and microeconomics contradict each other: On a macro level, spending is good, it lifts the economy; as an individual, spending is bad, saving is good as saving prepares us for the future when we do not work anymore. The painful lesson I learned years ago was that debt was like poison, with it my financial well being died a slow death. After years of deleveraging, My finance is now worry free.:finger:

    since the 1% hold most of the wealth, perhaps it makes sense to ask them to pay a little more into the system to help out the 99%. For the 99%, it is time to start the painful process of deleveraging no matter how painful.

    bullmarket79 likes this.
  4. USA worth $89.1 trillion, debt for households grew a little since people have been paying down some kinds of debt apparently. Household debt is $14.5 trillion so we have a ways to go, since the economy can't grow if they are only paying down debt from years gone by slowing down future expenditures.
  5. piezoe


    That's ridiculous. Of course we can. And the way we do that is to study the course of action that brought us to the current state, correct those things we did that produced an unsatisfactory result, and keep those thing that worked well in the past, assuming they are still applicable. When new challenges arrive for which the solutions are not yet known, we work on finding the solution. But these latter situations are few and far between. The solution to virtually every problem is known. It is politics and human nature that gets in the way; not lack of knowing what to do. We are an intelligent species, but our nature keeps us from being as efficient as we might otherwise be. Malcolm Muggeridge concluded that all human endeavor is driven by Vanity, Greed, or Instinct. He was correct, and there has never been a more succinct statement of why we do what we do. Reading E. O. Wilson is helpful in understanding what ails us. Wilson is the world's foremost expert on ants. Ants are a eusocial species, and it turns out eusocial species are rare. Bees and humans are two other rare examples of eusocial species.

    It is now known, there is a huge body of evidence, that supply-side economics did us no favors. There was a period when it seemed to be working, but its ill effects were not yet obvious. It is not working well for us at present -- that does not mean of course that it couldn't work well for us under other circumstances. On the other hand, we know that we need demand side stimulus at the present time; yet because of political inertia and misunderstanding we are still holding to failed supply side principles. That will change, we had rumblings of such in the recent political campaign, but politics still remain an impediment.

    We must leave some capital with the labor class. Once we return to that state, and we will, either through policy or revolution, the labor class will experience greater opportunity and the economy will accelerate in the desired direction. It will be awhile yet. Major nations have considerable economic inertia. Often a crisis is required to force major policy changes. In the meantime, a higher minimum wage would be of immense help.

    Some economists still haven't fully grasped that certain key elements of classical economics are wrong. Those that have, realize that markets, in the 21st century paradigm, often don't move spontaneously toward equilibrium, as in classical economics, and this is why wages that are too low do not necessarily self-correct. Low wages, under some conditions, can be self reinforcing. We have had some piecemeal movement toward higher wages. The regions in which this has occurred are the most progressive and economically strongest. A nationally mandated higher wage would be more effective, however, than piecemeal advances.

    The current debt to GDP ratio in the U.S. is not higher than it has ever been, as some think, but it is on the high side. Higher public debt was necessary in response to damage by malregulation in banking and finance. That's been corrected -- over corrected in instances. The debt to GDP ratio will come down over time, as further reforms are implemented, and the economy continues along its path of recovery from the financial crisis of 2007-2009.

    The nature of commerce has changed more rapidly than education and labor could adjust. That will correct itself in time with good political leadership, or via crisis with bad leadership, but it will correct.
    Last edited: Oct 14, 2016
    bullmarket79 likes this.
  6. I think you're right over the very long term, however bad leadership has learned to survive crisis. We've been under bad leadership for a few thousand years.
  7. fhl


    " Illustrated in the chart below is the actual trajectory of total U.S. debt outstanding (black) through March 2017 and a calculated parabolic curve (red). The parabolic curve uses 1951 as a starting point and a quarterly 1.82% compounding factor to create the best statistical fit to the actual debt curve. If we start with the $434 billion of debt outstanding on December 1951 and grow it by 1.82% each quarter thereafter, the result is the gray line. If debt outstanding continues to follow this parabolic curve, it will exceed $60 trillion by the first quarter of 2020, or nine quarters from now."


    "The power of compounding, extolled by Albert Einstein as the eighth wonder of the universe, is as damning in its demands as it is merciful in its generosity. Barring negative interest rates, debt service costs will be an insurmountable burden by 2020. However, if the debt trajectory slows as it did in 2008 that too will bring about painful consequences. In other words, all roads lead to trouble."

    Read more …

    Don't worry. The mmt boys have the answer. Dispense with debt and just start printing the money up. As if that's never been thought of before. smh
  8. There is nothing wrong with debt a priori... The devil is always in the details, rather than the headlines. In this particular case, it's the balance of assets (both tangible and hypothetical) and liabilities that matters, rather than just the total size of the liabilities.
    piezoe likes this.
  9. piezoe


    Martinghoul, not only do I like what you've written, I like it very much.

    Not only can deficits be too large, they can be too small! I don't think very many people realize that. Certainly the idea that the Federal budget should be balanced on some arbitrary time scale, a fiscal year for example, is absurd on its face. Also rather insane is the idea that we should have a balanced budget amendment.
  10. ironchef


    I wonder what would happen if everyone in the US carries the same philosophy: We should all have deficit spending beyond what we make, year after year. Our family budget should not be balanced on some arbitrary time scale, a fiscal year for example. And we should not be ask to balance our budget every year or at all, just like our Government...

    Just wondering, and what if no one can ever pay them back? Perhaps we can try print our own currency.:finger:
    #10     Sep 18, 2017