View Full Version : Interview Summary: Dr. Michael Hudson
http://www.itulip.com/images/politicaleconomy.jpgInterview Summary: Dr. Michael Hudson
by Eric Janszen - August 21, 2007
It's unanimous, at least between the two presidential candidates who have ideas about economic policy that are more than just more of the same: "Get rid of the Fed"
We caught up with Dr. Michael Hudson for an update interview last week. We interviewed him back in March 2007 (http://itulip.com/forums/showthread.php?p=8186#post8186) and interviewed him again in light of recent events in the markets and his yet to be officially announced appointment as Chief Economic Policy Adviser to Dennis Kucinich's presidential campaign.
Regardless of whether readers think Kucinich has a chance at winning the Democratic party primary or the election, in his new role Hudson's ideas will influence the economic debate just as Rep. Ron Paul's have. We are arranging an interview with Ron Paul to get his perspective on the same issues. (I spoke with a member of the Paul campaign yesterday and we are working on a time to talk either at the Hard Assets Conference in Las Vegas September 10 - 11 (http://www.iiconf.com/pebble.asp?relid=45254) where I am delivering the keynote speech, if Sen. Paul attends again this year, or on the phone. We'll let you know when we know.)
You can already see Hudson language showing up in Kucinich statements on the economy, such as this one that uses the Hudson-esque phrase "debt-financed capitalism."Kucinich calls for federal oversight to quell market volatility (http://www2.kucinich.us/node/4893)
Focusing on largely unregulated hedge funds and the scandalous practices of unscrupulous sub-prime lenders, Ohio Congressman and Democratic Presidential candidate Dennis Kucinich told a San Francisco audience that the Securities and Exchange Commissions and the Federal Reserve must step up their oversight responsibilities.
In a major economic policy address at the Commonwealth Club yesterday (Friday, August 10), Kucinich also warned that the "debt-financed capitalism" is reaching an economically dangerous level and could lead to a recession.
Kucinich's economic policies, now coming as they do largely from Hudson, appear virtually indistinguishable from Ron Paul's.
Both believe radical reform of the tax system is needed. But whereas Paul wants to abolish the IRS, Hudson believes that the income tax system needs to be rolled back to reflect its original intent, which was to support the growth of a strong middle class. Whether the new tax policies are carried out by the IRS or some other institution is not as relevant to Hudson as the tax policies themselves. In his view, tax policies need to encourage capital formation and capital investment in industry rather than in asset speculation, and Americans need to be rewarded for building wealth from productive work over earning capital gains from asset inflation. Sen. Paul is known to hold similar views.
In the interview, this perspective came as a surprise: Hudson, like Paul, believes that the Fed should be abolished. Hudson sees the Fed as an institution designed to support financial interests against the U.S. government.
The major difference between Hudson and Paul is that Paul's philosophies are rooted in Austrian economics whereas Hudson, as an economics historian, draws on an extended historical perspective. Paul is known to express the belief that government can be eliminated from economic planning, and that capitalist markets if allowed to work without interference from the Fed and other government and quasi-government agencies will take our economy in the right direction. Hudson, on the other hand, believes that conception is unscientific when viewed in the context of the past few thousand years of political economic development. To Hudson, the concept of free market economic determination is ideological, that the utopian ideal of a pure free market economy has never worked in practice.
According to Hudson, implementation of a pure free market economic model in practice means ceding economic planning to financial interests. Naturally, the economic planning that results tends to be self-serving, eventually leading to the kind of debt based money system and credit laden economy we see today. Paradoxically, in Hudson's view, the Fed–so loathed by the free market believers–is a creation of free markets, an institution designed to protect the interests of financial institutions which grew to fill the economic planning power void created by free market politics.
It's an intriguing argument. If that strikes readers as radical, some of the solutions that Hudson proposes, such as government participation in corporations as a shareholder, will make Milton Friedman libertarians jump out of their skin.
Before we dive into the interview, a quick note on iTulip's approach to gathering expert opinion.
iTulip seeks out expertise from across a broad spectrum of opinion on economics and finance. Our objective is to develop the best understanding of how the political economy actually works, versus how we'd like to imagine it works, in order to have the best chance of improving the predictive value of our models. We then talk to insiders to determine where we are in the process. Our record to date (Note: One call each, not over and over like a broken clock):
NASDAQ Bubble
How the NASDAQ Bubble will End: Nov. 1999 (http://www.bankrate.com/brm/news/investing/19991129f.asp?keyword=)
NASDAQ Crash: Mar. 2000 (http://www.bankrate.com/aolcan/news/investing/20000321l.asp)
NASDAQ Prediction Acknowledged by NYTimes, Boston Globe, etc. Aug. 2002
(http://www.itulip.com/GlobeArchiveJanszen.htm)
Gold price bottom: Aug. 2001 (Chapter in America's Bubble Economy, John Wiley & Sons, 2006) (http://www.itulip.com/gold.htm)Housing Bubble
Yes. It's a Housing Bubble: Aug. 2002 (http://www.itulip.com/qc082002.htm)
Housing Bubbles Are Not Like Stock Market Bubbles: Jan. 2004 (http://www.itulip.com/housingnotlikeequities.htm)
Housing Bubble Correction: Jan. 2005 (http://www.itulip.com/housingbubblecorrection.htm)
Housing Bubble Top: Jun. 2005 (http://www.itulip.com/forums/showthread.php?t=606)
Recession Q4 2007: Oct. 2006 (http://itulip.com/forums/showthread.php?t=550)
March Crash 2007: July 2007 (http://itulip.com/forums/showthread.php?p=12708)Economics and politics are inextricably intertwined, so our models take into account how possible economic outcomes may impact political outcomes and, conversely, how possible political outcomes may affect economic outcomes. However, we attempt to avoid political discussion to maintain our focus on finance and economics, and strive for as much political neutrality as possible. We consider ourselves to have succeeded at achieving political neutrality when we receive a more or less equal number of complaints of bias from both the right and the left.
These days we find the distinctions of left or right, Keynesian or Austrian, and so on, increasingly inutile.
The economists we interview generally fall into two categories: economists on the finance economy payroll and economists not on the finance economy payroll. One can usually tell whether or not an economist is on the finance economy payroll or not by his or her position on three key test issues. Call it the iTulip Economist Independence Test.
<table style="text-align: left; width: 647px; height: 366px;" border="1" cellpadding="2" cellspacing="2"><tbody><tr><td style="font-family: Verdana;" align="center"> </td><td style="font-family: Verdana;" align="center">Finance Economy Economist</td><td style="text-align: center; font-family: Verdana;">Independent Economist</td></tr><tr><td style="text-align: left; font-family: Verdana;">Housing Bubble</td><td style="text-align: left; font-family: Verdana;">Two years ago: "There is no housing bubble."
One year ago: "Ok, there was a housing bubble but it was no big deal."
Now: "Ok, it was a big deal, but not enough of a big deal that its collapse will lead to a recession."
One year from now, "Ok, it was enough of a big deal to cause a recession, an asset price deflation and decline of the finance economy, but when this is all over it's back to business as usual."</td><td style="text-align: left; vertical-align: top; font-family: Verdana;">Two years ago: "By holding interest rates down too far too long in the early 2000s the Fed created a housing bubble to prop up the economy after the collapse of the technology stock bubble, which was created when the Fed kept interest rates down too long in the 1990s."
One year ago: "The housing bubble is now collapsing."
Now: "The collapse will badly damage the economy, certainly leading to recession and quite possibly worse."
One year from now: "Told you so."</td></tr><tr><td style="text-align: left; font-family: Verdana;">Financial Assets Crash</td><td style="text-align: left; font-family: Verdana;">There is no crash, only temporary volatility that will quickly pass once loans to banks from the Fed calm investors. The DOW will soon resume its inexorable climb to 20,000.</td><td style="text-align: left; vertical-align: top; font-family: Verdana;">The asset markets are in a crash process that will not end until trillions of dollars in fictitious value reflected in inflated asset prices is written off or inflated away. </td></tr><tr><td style="text-align: left; font-family: Verdana;">Free Markets</td><td style="text-align: left; vertical-align: top; font-family: Verdana;">A "free market" is when you get laid off from your job making parts for GM cars because GM made bad bets on products and failed to compete effectively with foreign auto manufacturers. A "free market" is also when the Fed loans money to banks that made a fortune selling mortgage-backed securities to foreign pension funds when the bets turn out wrong and those securities turn out to be worthless. </td><td style="text-align: left; vertical-align: top; font-family: Verdana;">A "free market" is when you get laid off from your job making parts for GM cars because GM made bad bets on products and failed to compete effectively with foreign auto manufacturers. A "free market" is also when the Fed does not loan money to banks that made a fortune selling mortgage-backed securities to foreign pension funds when the bets turned out to be bad and securities worthless but instead allows the market to determine their fate. Or, if the Fed is going to loan money to failing banks because they made bad bets, then it should also loan money to the auto parts business so it can stay in business, too.</td></tr></tbody></table>
By this test, Dr. Michael Hudson is in the Independent Economist group.
Our interview with Dr. Hudson is available to iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032) subscribers here (http://itulip.com/forums/showthread.php?p=14541#post14541).
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nksantabarbara
08-21-07, 03:35 PM
Great summary on the economists. Funny how the guy who runs the NYC market operations for the Fed, Dudley I believe his name is, is from Goldman. Let me ask though from a practical standpoint, what does inflating asset value away mean for housing and stocks? For housing, do you mean they'll cut rates such that wages and rents rise so high that they catch up to the price of houses for instance? It suggests that you're stuck investing in stocks and real estate despite the huge risk that such assets end of deflating despite the Fed's efforts.
akrowne
08-21-07, 07:15 PM
I've come to the viewpoint that this debate (at least, among those who acknowledge that our system is horribly broken) between "the free market as utopia" and "government as wise overseer" is a false dilemma. In actuality, what we need is for the people to be ever-vigilant and never to surrender their self-sovereignty to ANYTHING; not "the man from the government", nor the corporate boss, nor the man from Wall Street.
What we're observing is that when society surrenders its self-sovereignty, either out of sloth or greed or ignorance, SOMEONE will come along and enslave it.
I certainly find it difficult to characterize what we have as "purely" a takeover of the country by Wall Street: at some point the rules that enslave us need to be voted in or passed as legislation by someone who was voted in, or put in place by executive order by some despot. It requires a complicit government status quo and a complicit or apathetic people.
A strong government is at the root of the problem: strong government will pollute any sort of regime that is in place, whether prevailingly socialist or prevailingly capitalist. I view the "proper" sort of government as one largely absent of coercion; representing the congress of a free and self-sovereign people coming together to create beneficial order -- not to enslave some portion of itself for the other's benefit.
All that said, I think a way to achieve a lot of this IS specifically to abolish the central bank. Why should there be a monopoly on money? Why should there be centralized control of the banking system? Why should the price of money be fixed, not determined by market forces like almost everything else? This system represents the worst of both capitalism AND government, and is certainly not free.
A system (or more accurately, non-system) where only the hardest money comes closest to being standard is a better one. It is the system that prevailed during the time when this country had its rise to greatness. It is the only system that allows the average man to save money simply by storing it securely as opposed to giving it up to some shylock, and to earn more as opposed to LESS every year by default. It is the system that two central banks prior to the Fed were dissolved to defend. And Wall Street/the Fed hopes that these facts stay wiped from the pages of history as we know it.
My great hope, and that which I see encouraging signs toward, is that the internet will help people to be more self-sovereign. Then, no matter what system is put in place, it will be harder to "pull one over" on everyone. I think the 20th century will be remembered as a historical oddity, where most information most people encountered came to them through broadcast mass-media channels that were especially easy for concentrated interests to control, while at the same time local communities were broken down, removing natural checks on these corrupting influences.
Now we have reversal: broadcast media being challenged by the freer, decentralized flow of ideas the internet facilitates. Sure, there are bad ideas and information out there, but there is a greater diversity of ideas and it is difficult to "drown another viewpoint" out. And person-to-person communities can form more easily, with distance much less of a factor. All of this is perhaps why the concentrated interests try so hard to simply shut the medium down (e.g., the Great Firewall in China, and SLAPP attacks in the US, such as the ml-implode lawsuit).
metalman
08-21-07, 09:24 PM
I've come to the viewpoint that this debate (at least, among those who acknowledge that our system is horribly broken) between "the free market as utopia" and "government as wise overseer" is a false dilemma. In actuality, what we need is for the people to be ever-vigilant and never to surrender their self-sovereignty to ANYTHING; not "the man from the government", nor the corporate boss, nor the man from Wall Street.
What we're observing is that when society surrenders its self-sovereignty, either out of sloth or greed or ignorance, SOMEONE will come along and enslave it.
I certainly find it difficult to characterize what we have as "purely" a takeover of the country by Wall Street: at some point the rules that enslave us need to be voted in or passed as legislation by someone who was voted in, or put in place by executive order by some despot. It requires a complicit government status quo and a complicit or apathetic people.
A strong government is at the root of the problem: strong government will pollute any sort of regime that is in place, whether prevailingly socialist or prevailingly capitalist. I view the "proper" sort of government as one largely absent of coercion; representing the congress of a free and self-sovereign people coming together to create beneficial order -- not to enslave some portion of itself for the other's benefit.
All that said, I think a way to achieve a lot of this IS specifically to abolish the central bank. Why should there be a monopoly on money? Why should there be centralized control of the banking system? Why should the price of money be fixed, not determined by market forces like almost everything else? This system represents the worst of both capitalism AND government, and is certainly not free.
A system (or more accurately, non-system) where only the hardest money comes closest to being standard is a better one. It is the system that prevailed during the time when this country had its rise to greatness. It is the only system that allows the average man to save money simply by storing it securely as opposed to giving it up to some shylock, and to earn more as opposed to LESS every year by default. It is the system that two central banks prior to the Fed were dissolved to defend. And Wall Street/the Fed hopes that these facts stay wiped from the pages of history as we know it.
My great hope, and that which I see encouraging signs toward, is that the internet will help people to be more self-sovereign. Then, no matter what system is put in place, it will be harder to "pull one over" on everyone. I think the 20th century will be remembered as a historical oddity, where most information most people encountered came to them through broadcast mass-media channels that were especially easy for concentrated interests to control, while at the same time local communities were broken down, removing natural checks on these corrupting influences.
Now we have reversal: broadcast media being challenged by the freer, decentralized flow of ideas the internet facilitates. Sure, there are bad ideas and information out there, but there is a greater diversity of ideas and it is difficult to "drown another viewpoint" out. And person-to-person communities can form more easily, with distance much less of a factor. All of this is perhaps why the concentrated interests try so hard to simply shut the medium down (e.g., the Great Firewall in China, and SLAPP attacks in the US, such as the ml-implode lawsuit).
like your spirit but, uh. i'm reading today words about utopia.
they are leaving the internet open now to collect data on who is who. later they will use the data.
i am so worried about how this will turn out...
I've come to the viewpoint that this debate (at least, among those who acknowledge that our system is horribly broken) between "the free market as utopia" and "government as wise overseer" is a false dilemma. In actuality, what we need is for the people to be ever-vigilant and never to surrender their self-sovereignty to ANYTHING; not "the man from the government", nor the corporate boss, nor the man from Wall Street...
...I certainly find it difficult to characterize what we have as "purely" a takeover of the country by Wall Street: ... It requires a complicit government status quo and a complicit or apathetic people...
...All that said, I think a way to achieve a lot of this IS specifically to abolish the central bank. Why should there be a monopoly on money? Why should there be centralized control of the banking system? Why should the price of money be fixed, not determined by market forces like almost everything else? This system represents the worst of both capitalism AND government, and is certainly not free...
...My great hope, and that which I see encouraging signs toward, is that the internet will help people to be more self-sovereign. Then, no matter what system is put in place, it will be harder to "pull one over" on everyone. I think the 20th century will be remembered as a historical oddity, where most information most people encountered came to them through broadcast mass-media channels that were especially easy for concentrated interests to control, while at the same time local communities were broken down, removing natural checks on these corrupting influences.
Now we have reversal: broadcast media being challenged by the freer, decentralized flow of ideas the internet facilitates. Sure, there are bad ideas and information out there, but there is a greater diversity of ideas and it is difficult to "drown another viewpoint" out. And person-to-person communities can form more easily, with distance much less of a factor. All of this is perhaps why the concentrated interests try so hard to simply shut the medium down (e.g., the Great Firewall in China, and SLAPP attacks in the US, such as the ml-implode lawsuit).
As one with libertarian inclinations I have a great deal of sympathy with akrowne's views. Two observations:
1. I no longer believe the Fed controls "the price of money". This week's gyrations in market yields is but the latest evidence. EJ wrote that the Fed will be behind the curve cutting rates all the way down and then all the way back up in the next reflation. It seems that the Fed following, not leading, rates has been the historical pattern also. The breathless attention paid to Fed rates by the financial media seems entirely misplaced.
2. I am more optimistic than metalman. What akrowne describes is happening in spades over here in the Middle East where I live. There is no effective separation of religion and state in Islam. Governments use this as reason to try to control virtually every aspect of citizen's lives. Governments here levy no income or property taxes and therefore have the luxury of adopting "no representation without taxation" (essentially the ruling family is the government). The kids have figured out how to make bootleg connections to the internet using salvaged/scavanged gear so even the poorest Shiite village is now able to bypass the official media/information sources and the secret police wiretaps on their government monopoly phone. The middle class in Saudi and Syria have smuggled in thousands of sat dishes (where they are officially banned), to the point where the authorties have largely given up. The "freer, decentralized flow of ideas" that Aaron describes is happening, there's no stopping it now, and this part of the world will be all the better off for it.
neverwin
08-22-07, 07:59 AM
The Itulip select inspired my new Tshirt
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Corporate Plebe
08-22-07, 03:37 PM
I would like to learn the ideals and values around "self-sovereignty."
Since there are good reasons to believe our financial models are un-sustainable, how will sustainable models be implemented through social institutions that promote "self-sovereignty."
Some of your questions may have an answer here (http://appropriate-economics.org/)
Many resources at Complementary Currency Resource Center (http://www.complementarycurrency.org/materials.php)
also Introduction to the foundation and practice of appropriate economics (http://appropriate-economics.org/introduction.html)
the Principles of Complementary Currency Systems (http://appropriate-economics.org/materials/principles_of_ccs/index.html)
We caught up with Dr. Michael Hudson for an update interview last week. We interviewed him back in March 2007 (http://itulip.com/forums/showthread.php?p=8186#post8186) and interviewed him again in light of recent events in the markets and his yet to be officially announced appointment as Chief Economic Policy Adviser to Dennis Kucinich's presidential campaign.
Let's review some of Mr. Kucinich's statements from the Iowa debate between democratic candidates on August 19.
STEPHANOPOULOS: We saw, on Friday, the Federal Reserve lowered the discount rate for banks. Should they lower rates for everyone else, yes or no?
Obvious nonsense. Fed's charter does not let it control "everybody's" rates, but let's ignore it for now and concentrate on the answer. Let's skip the answers of other candidates and go directly to Mr. Kucinich.
KUCINICH: The answer is no. The Fed is actually looking at bailing out the creditors. And what we're looking at is a continuation of the problem and a postponement of the day of reckoning.
So far so good.
We need to have a government take strong action where we'll loan money to those who are in trouble. But we need to do that in exchange for having the power, the money-lending power that the banks have right now, come back to the government;
"back to the government"?!! The gov't never had this power. The only "back" here may be back to the free maket, (i.e the gold standard).
government spends money into circulation; and then government can maintain control over the economy.
OOPS! This is not enough for the gov't to have control over money, it also has to control the economy!
If Mr. Hudson works for this guy, I'd stay away from him. Granted, he may be a brilliant economist, but so is Ben Bernanke and Alan Greenspan, and so was Karl Marx.
m.
Medved,
I have some questions for you --
according to Section 8 (http://www.usconstitution.net/const.html#A1Sec8) of the US constitution
The Congress shall have Power To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
So the US Govt can create money -- so how does it bring this money into circulation?
Does it lend it?
Does it spend it?
or
Does it give it away?
and how? and to whom?
Additionally
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
We can argue, that The Government shall borrow money for its own expenditure, and pay those debts by taxing and collecting fees for services.
But the question still remains as to how does the newly coined/printed money come into circulation?
Vanderbilt
08-23-07, 09:19 AM
In an article you posted on 4/13/07, "Are We Idiots?" (http://www.itulip.com/forums/showthread.php?t=1205) (accurately calling Carl Steidtmann a fool), you also made a point of calibrating your skeptic credentials by mentioning your skepticism of Michael Hudson's integrity:
Source of paycheck needs to be factored into any expert's opinion. We interviewed Dr. Hudson and interpret his views from the perspective of an expert who consults to the Chinese government. We'd be surprised if Dr. Hudson's public statements on China were wholly inconsistent with the interests of his clients.But I see no such questions about who's paying Hudson now. No mention of China. And no mention of who's paying for his advice to these presidential campaigns. Is it just the regular donors to these underfunded campaigns?
Are we sure he isn't being subsidized to insert his advice into campaigns that will not win the election, but will get policies inserted into the debate surrounding it?
I'm looking for a way to reconcile Hudson's symbol as covertly owned, secretly biased advice, with his presentation here as the voice of reason. The only difference between the two views is that they're presented in two different pages, one largely forgotten.
I think if you look at the body of Michael Hudson's writings, they are pretty consistent in terms of how his thinking has evolved over the years.
And yes politics is always a part of how one proposes, presents and implements policies.
Let's review some of Mr. Kucinich's statements from the Iowa debate between democratic candidates on August 19.
Obvious nonsense. Fed's charter does not let it control "everybody's" rates, but let's ignore it for now and concentrate on the answer. Let's skip the answers of other candidates and go directly to Mr. Kucinich.
So far so good.
"back to the government"?!! The gov't never had this power. The only "back" here may be back to the free maket, (i.e the gold standard).
OOPS! This is not enough for the gov't to have control over money, it also has to control the economy!
If Mr. Hudson works for this guy, I'd stay away from him. Granted, he may be a brilliant economist, but so is Ben Bernanke and Alan Greenspan, and so was Karl Marx.
m.
Hudson is promoting an idea that is heretical both to the left wing and the right wing. Editorially, it is not our role to agree or disagree with his perspective. We encourage heretical viewpoints based on the premise that learning happens when we intellectually stress test our favorite stories.
One of my own favorite stories is that free markets deliver better and more fair results to society than planned economies. Hudson challenges this, using his credentials as an economics historian, by saying that government organized around the concept of "free markets" has always led in the real world to economies planned by and run by financial institutions. He sees the Fed specifically as an institution designed to maintain banking and debt creation as the central force in the economic planning process in the U.S. He proposes as a solution that the economic planning process be restored to elected government where it can be focused on supporting the interests of the electorate, specifically the middle class.
If you are curious to know my personal opinion on this, I would say that I am listening to his solutions but the thought of government participation in private enterprise via securities ownership is so far outside my way of thinking that at this point don't see how I'd get there. I nervously watch the intellectual sea change that has occurred over the past 20 years years on the acceptance of government participation in markets and private enterprise. When the Bank of Japan stepped in to buy stocks to support the NIKKEI in the early 1990s, there was a huge outcry by free market thinkers about government interference in markets. A line had been crossed. The Fed recently said it is ready to step in and support mortgage securities prices at the discount window. It hasn't happened yet, but some day when the Fed buys asset backed securities and other mortgage paper this will raise the interesting question from a free markets perspective that is less relevant when the Fed is buying government paper: when should the Fed sell, to whom, and at what price? Yet I have heard little objection to the Fed's expansion into this area.
Another recent development is the rise of Sovereign Wealth Funds. Initially, more than $2 trillion in government funds are being invested in domestic and foreign private companies. Whether we like it or not, the fact of government and central bank participation in private enterprise via securities ownership is becoming a reality no matter who we vote for. I believe this development will have a profound impact on how markets and investments behave and a worthy topic of discussion here at iTulip.
In an article you posted on 4/13/07, "Are We Idiots?" (http://www.itulip.com/forums/showthread.php?t=1205) (accurately calling Carl Steidtmann a fool), you also made a point of calibrating your skeptic credentials by mentioning your skepticism of Michael Hudson's integrity:
Source of paycheck needs to be factored into any expert's opinion. We interviewed Dr. Hudson and interpret his views from the perspective of an expert who consults to the Chinese government. We'd be surprised if Dr. Hudson's public statements on China were wholly inconsistent with the interests of his clients.But I see no such questions about who's paying Hudson now. No mention of China. And no mention of who's paying for his advice to these presidential campaigns. Is it just the regular donors to these underfunded campaigns?
Are we sure he isn't being subsidized to insert his advice into campaigns that will not win the election, but will get policies inserted into the debate surrounding it?
I'm looking for a way to reconcile Hudson's symbol as covertly owned, secretly biased advice, with his presentation here as the voice of reason. The only difference between the two views is that they're presented in two different pages, one largely forgotten.
Everyone has bias: experiential, temperamental, ideological, not to mention a natural bias toward the client signing the paycheck. I consistently suggest that readers make themselves aware of potential sources of bias. In Hudson's case, I might have been unfair by suggesting that his views may conform to the interests of his government clients. There are people in this world who do not adapt their beliefs to their clients' desires but instead forge ahead with their convictions and principles, and it is for this reputation for sticking to their beliefs that they are hired in the first place. It's up to readers to weigh the evidence and decide whether Hudson is one of those.
Hudson has worked for many governments over the past several decades: Russia, China, Canada, Mexico, the USA. Before the U.S. went off the fractional reserve gold standard in the early 1970s, the White House hired Hudson to review a plan they had to go onto a treasury dollar based standard. What might happen? His report was that such a policy was destined to result in massive trade deficits as U.S. trade partners purchased dollars to prevent the trade value of their own currencies from appreciating and thus limited their trade with partners other than the U.S. The process would continue until the U.S. absorbed the entire economic surplus of its trade partners. Rather than taking this as a warning not to do it, the White House took it as a prescription for sound economic policy.
Hudson's views are interesting because of his decades of first person participation in events. Same goes for Martin Mayer and others we interview here. Whether or not you agree with Hudson, one thing you can say about him is that he's not a one handed economist–none of this "on the one hand this and the other hand that." At the end of the day, the measure of an economist is the predictive value of their forecasts. While the economists on the finance economy payroll, as we define them, have a consistently lousy record, only time will tell whether Hudson's is more accurate.
Vanderbilt
08-23-07, 11:03 AM
I think if you look at the body of Michael Hudson's writings, they are pretty consistent in terms of how his thinking has evolved over the years.
And yes politics is always a part of how one proposes, presents and implements policies.
So are you saying that the same people, including the Chinese government, have always "sponsored" Hudson's "politics"? And that therefore Hudson's advice to these presidential campaigns need not mention that mutual interest with those kinds of clients?
Finster
08-24-07, 08:46 PM
... Paradoxically, in Hudson's view, the Fed–so loathed by the free market believers–is a creation of free markets, an institution designed to protect the interests of financial institutions which grew to fill the economic planning power void created by free market politics...
The reason it seems so paradoxical is because the Fed is granted a monopoly not by free market institutions, but by the government. Hudson's objections to the "free" market all pretty much embed the same bait-and-switch reasoning: The problems he blames on free market interests derive from the power they exercise through the political process, not through real free market mechanisms. The paradox stems from a confusion in identifying wealthy individuals and institutions with the "free" market, even though they exercise much of their power through the agency of government and their financial influence over politicians who depend on them for campaign finance.
Here we can draw a sharp distinction with Paul. Paul sees the solution in limiting the power of government. A smaller and less powerful government provides less opportunity for business to profit without having to provide commensurate value in the marketplace.
Finance is only one example. In general, there is a tendency on the part of those who complain about the free market to overlook how much government has distorted it in the first place. Government grants a monopoply to the medical profession and those who accredit the schools that train them, gives preferential tax treatment to health insurance paid by employers, and regulates not only what drugs may be prescribed but for what conditions, and this barely even scratches the surface. Then free market detractors point to the resulting mess as evidence that the free market can't work on its own.
grapejelly
08-25-07, 06:18 AM
The reason it seems so paradoxical is because the Fed is granted a monopoly not by free market institutions, but by the government. Hudson's objections to the "free" market all pretty much embed the same bait-and-switch reasoning: The problems he blames on free market interests derive from the power they exercise through the political process, not through real free market mechanisms. The paradox stems from a confusion in identifying wealthy individuals and institutions with the "free" market, even though they exercise much of their power through the agency of government and their financial influence over politicians who depend on them for campaign finance.
Here we can draw a sharp distinction with Paul. Paul sees the solution in limiting the power of government. A smaller and less powerful government provides less opportunity for business to profit without having to provide commensurate value in the marketplace.
Finance is only one example. In general, there is a tendency on the part of those who complain about the free market to overlook how much government has distorted it in the first place. Government grants a monopoply to the medical profession and those who accredit the schools that train them, gives preferential tax treatment to health insurance paid by employers, and regulates not only what drugs may be prescribed but for what conditions, and this barely even scratches the surface. Then free market detractors point to the resulting mess as evidence that the free market can't work on its own.
This is spot on. If we are going to attack the free market for being bad, inefficient or whatever, let's try a free market first :)
One of the problems with free markets is that there has never been such a thing! Free markets are and always have been a theoretical construct. In practice, what happens is described below.
Most proponents of a free market, are in an advantaged position, relative to other players. Free trade is definitely not possible when the following occurs. I go up to you, rob you at gunpoint of all your wealth -- and then I say let us now engage in Free trade! This is how the world is currently -- both domestically and internationally. We do not start out with a level playing field -- and power concentrates over generations through inheritance.
Continuing my above post,
Why it is hard to share the wealth (http://www.newscientist.com/article.ns?id=dn7107)
The rich are getting richer while the poor remain poor. If you doubt it, ponder these numbers from the US, a country widely considered meritocratic, where talent and hard work are thought to be enough to propel anyone through the ranks of the rich. In 1979, the top 1% of the US population earned, on average, 33.1 times as much as the lowest 20%. In 2000, this multiplier had grown to 88.5. If inequality is growing in the US, what does this mean for other countries?
Almost certainly more of the same, if you believe physicists who are using new models based on simple physical laws to understand the distribution of wealth. Their studies indicate that inequality in market economies may be very hard to get rid of.
n 1897, a Paris-born engineer named Vilfredo Pareto showed that the distribution of wealth in Europe followed a simple power-law pattern, which essentially meant that the extremely rich hogged most of a nation's wealth (New Scientist print edition, 19 August 2000). Economists later realised that this law applied to just the very rich, and not necessarily to how wealth was distributed among the rest.
Now it seems that while the rich have Pareto's law to thank, the vast majority of people are governed by a completely different law. Physicist Victor Yakovenko of the University of Maryland in College Park, US, and his colleagues analysed income data from the US Internal Revenue Service from 1983 to 2001.
They found that while the income distribution among the super-wealthy - about 3% of the population - does follow Pareto's law, incomes for the remaining 97% fitted a different curve - one that also describes the spread of energies of atoms in a gas (see graphic).
A more sophisticated model developed by Bikas Chakrabarti of the SINP and his colleagues paints a slightly less bleak picture for the poor. His team adjusted the gas model to allow people to save various proportions of their money.
This model predicts both the wealth classes that Yakovenko found. It also suggests that if you save more you are more likely to end up rich, although there are no guarantees. Changing people's saving habits could be an effective way of making the wealth distribution fairer, rather than enforcing taxes, says Chakrabarti, who is one of the Kolkata conference organisers.
62
The idea that purely free markets ever existed or ever will exist is a wish for a utopia that can never be. I see political economies on a scale ranging from those with near complete market and private enterprise domination over government all the way to heavy government domination over markets and private enterprise on the other end of the scale, with most economies falling somewhere in between. Call it the mixed economy continuum. Also, I see each economy in both an historical and cultural context. Culture has a major influence on the level of government influence on markets and businesses. It's easy to forget how much American history and culture inform our perspective of US economic problems and solutions. I wonder how much most free market purists have traveled outside the US.
Having run a company with a subsidiary in Shanghai and others with offices all over Europe and Asia, I have experienced first hand how culture influences labor law and how profound an impact these have on markets and businesses there. Anti-taxation ethos is deeply rooted in American history and is part of our cultural DNA. In Europe, the suffering and deprivations of WWII that the US did not experience left a strong cultural bias toward making sure that the subsistence floor for European citizens is not below the level where, for example, health care is not available, and that means accepting a higher tax rate. As another example of cultural influence, most Asian societies are generally collectivist, notably Korea's, Japan's, and China's, with the individual's interests held below the interests of the group. This has profound influence on the relations between government and markets in those countries. US economists, tending to see the world as if it were one big American town, keep waiting for Japan to turn in to a debt and consumption based society, but it never will, at least never to the extent of the US model. Saving is a duty of a Japanese citizen as is deferred gratification. This is how little Japan, supposedly suffering under an economic deflation, managed to out-compete the US auto industry 20 years after Reagan administration pushed through laws opening up US markets to foreign competition. The result is not an indictment of those changes in law, but of the naive belief that these changes alone were going to make the US auto industry stronger. The younger Japanese generation is more inclined to buy now and save later, but don't expect the Japanese to turn into American consumers any time soon.
Just as important as the cultural context is the historical view of the mixed economy continuum. Starting from the point of maximum government domination over markets, an economy will be very unproductive, although distribution of wealth from production will be relatively even across percentiles, achieving an equal distribution of poverty. The only economic winners are those with high level political positions. Eventually, popular political movements succeed in creating reform to free markets and businesses from excessive government influence, via tax and labor laws and so on. Free enterprise grows and the economy begins to take off. The miracle of productivity gains, the only true "free lunch" in economics, starts to generate huge wealth gains for society, but of course those gains are not evenly distributed. We have been seeing this in China for the past few decades. The biggest winners are those who take the biggest risks and have access to both capital and know-how to build successful new enterprises.
In countries that employ democratic political systems, concentration of wealth begins to influence the political process in a way that is self-serving, whereas in autocratic systems such as China's preferential market policies are politically determined from day one. Institutions, such as regulatory bodies like the SEC in the US, come under political influence from the top quintile class that has money and privilege to offer those employed by those institutions. They are granted access to the top quintile salaries and benefits in return either non-enforcement of existing rules or selective enforcement. To get a top paying job at a US media company, make sure that stories that negatively impact the top quintile are either rarely covered or are stuck in the back of the paper. This principle applies to all institutions that were designed to regulate markets and which affect them, including those that measure the performance of the economy itself. Information becomes less transparent. Markets become inefficient. Huge imbalances build up both in society and within markets themselves.
The result on society, after a few decades, is the following:
http://www.itulip.com/CIID47-79vs79-01.gif
http://www.itulip.com/images/networth2.jpg
http://www.itulip.com/images/ahdpnw.gif
Imbalances make the system crisis-prone. In the current instance, the distribution of household debt and lack of liquid net worth is the most significant antecedent to economic and political crisis. Eventually, an event occurs that leads to crisis that cannot be contained by the re-doubling of efforts to impose factors that created the imbalances in the first place–giving households access to even more credit.
The political solution to the economic crisis is, historically, to move the economy toward the other side of the mixed economy continuum, to heavy government domination over markets and private enterprise.
That's where we are today.
iTulip's prediction record is not due to some miraculous, divine access to the market timing gods. Asset bubbles have come to dominate both markets and the economy, and asset bubbles are 90% psychological and political phenomena and 10% market phenomena. If you can accept this and try to understand both the psychology and politics, you can predict these outcomes, too. Likewise notions of free markets, a market philosophy employed for political purposes at certain times in the evolution of economies across the mixed economy continuum for political purposes.
grapejelly
08-25-07, 09:59 AM
I have come to believe that all governments march towards totalitarian control over their citizens, more coercion and compulsion, or simply more force. Citizens support this because, as Higgs has pointed out, various crises are whipped up and used to justify more government force, both internally and externally (through military force outside the country's borders.)
The major disruptor of this force towards more force is technology.
Laws and government control come after the fact. The technology moves along and people get rich and eventually the technology is collared under government control.
That's where we are with the Internet.
I am optimistic enough to believe, though, that government control will lose over the immense power of the individual and the Internet.
Governments will have to compete for brainy people, because brains are what count. And with other governments competing through guarantees of safe capital, private banking, and so forth, the means are there for people with a bit of capital to shop around and protect their capital and their persons from the ravages of government force.
In this environment, I can't see how governments in their present form will survive.
I see a new age of liberty, similar to the one that came before this one, in the 18th century that led to the United States.
Also relevant to this discussion is the issue of inheritance of wealth. If you look at Born on Third Base (http://www.faireconomy.org/press/archive/Pre_1999/forbes_400_study_1997.html) A 1997 study of the sources of wealth of the Forbes 400, you find that
42 % Born on Home Plate - inherited sufficient wealth to rank among the Forbes 400. This percentage is higher than that listed by Forbes for inheritors. The reason: Forbes listed as "self-made" people who actually inherited substantial sums or property and then later built that stake into a greater fortune. One example is Philip Anschutz (1997 net worth: $5.2 billion) who is listed as "self-made" even though he inherited a $500-million oil and gas field.
6 % Born on Third Base - inherited substantial wealth in excess of $50 million or a large and prosperous company and grew this initial fortune into membership in the Forbes 400.
7 % Born on Second Base - inherited a medium-sized business or wealth of more than $1 million or received substantial start-up capital for a business from a family member.
14 % Born on First Base - biography indicates wealthy or upper-class background that was to our knowledge less than $1 million, or received some start-up capital from a family member. Due to the study team's conservative coding rule, it is likely that some of those listed as born on first base actually belong on second or third base.
31 % Born in the Batter's Box -individuals and families whose parents did not have great wealth or own a business with more than a few employees.
However the Born on the Batters Box nimbers should not be taken to mean that these people were born in poverty - most likely, these are people who were born into the "Upper Middle class" or the "Marginally Wealthy class." My own cursory perusal of the list seems to indicate that this is indeed true.
Finster
08-25-07, 11:01 AM
The rich are getting richer while the poor remain poor. If you doubt it, ponder these numbers from the US, a country widely considered meritocratic, where talent and hard work are thought to be enough to propel anyone through the ranks of the rich...
But that skips right past the crucial question of why this has been the case. Glibly characterizing the US as "widely considered meritocratic" invokes the logical fallacy of appeal to the masses. Is it really?
Social engineers are very fond of citing statistics showing that the gap between rich and poor has grown substantially in recent years, usually in pursuit of the pre-ordained conclusion that the government needs to become more heavily involved in redistributionist activity.
But it already is! It's just redistributionist in favor of the financial and corporate elite. First, by inflating the currency and holding interest rates below market levels, it makes traditional saving unproductive. In order to avoid loss, the middle class must either spend on immediate consumption or put its savings in other places. Like corporate stock. This gave the corporate elite a whole new cadre of unsophisticated investors, ones that might not be quite so discriminating when it comes to various ways in in which it might be enriching itself at the expense of the shareholder. We see the tip of the iceberg every once in a while when an Enron, Worldcom, Tyco, Adelphia or one of the numerous stock options scandals surfaces. And the financial elite has never had it so good as it takes its cut of the torrents of cash pouring through Wall Street.
So before we hop up on our soapboxes with calls for yet more redistributionist programs to counteract the widening rich-poor gap, why not first consider de-fanging some of the ones that are actually doing the widening? Politicians won't like it, because selling their wares to competing constituencies is their stock in trade, but if you really want to solve problems you have to do better than fall for their marketing pitch.
But it already is! It's just redistributionist in favor of the financial and corporate elite. First, by inflating the currency and holding interest rates below market levels, it makes traditional saving unproductive. In order to avoid loss, the middle class must either spend on immediate consumption or put its savings in other places.
So before we hop up on our soapboxes with calls for yet more redistributionist programs to counteract the widening rich-poor gap, why not first consider de-fanging some of the ones that are actually doing the widening? Politicians won't like it, because selling their wares to competing constituencies is their stock in trade, but if you really want to solve problems you have to do better than fall for their marketing pitch.
I think both of us are on the same side. My only comment, and I believe you will agree, is that the power structure is currently quite entrenched, and it will take a tremendous counterbalance to remove that - and level the playing field - that is the only conclusion I can take away from the New Scientist article.
The only source of power that 90% of the population can perhaps access is either through the ballot box or revolution. It is also quite clear that few of the current politicians (and almost none of those running for President) represent that 90%.
metalman
08-25-07, 01:03 PM
I have come to believe that all governments march towards totalitarian control over their citizens, more coercion and compulsion, or simply more force. Citizens support this because, as Higgs has pointed out, various crises are whipped up and used to justify more government force, both internally and externally (through military force outside the country's borders.)
The major disruptor of this force towards more force is technology.
all completely controllable by governments. 90+% of chinese think the usa bombed their yugo embassy on purpose and think that pic of the guy standing in front of the tank at tiananmen sq. is photoshopped. true story.
Laws and government control come after the fact. The technology moves along and people get rich and eventually the technology is collared under government control.
That's where we are with the Internet.
I am optimistic enough to believe, though, that government control will lose over the immense power of the individual and the Internet.
nah. they'll just make two internets like there are two media. one that's slow and crappy and free where you can watch grainy little videos and one that's incredibly fast and offers high quality video. you get to express all of your objections to the gov't and all the lies on the first and no one will watch it and all the lies blare out the second 7/24 and everyone watches it. the second one comes into your home via sat and telcos owned by the government and the first from underground hacker types. try subscribing to al jazeera english on your cable lately? good luck!
Governments will have to compete for brainy people, because brains are what count. And with other governments competing through guarantees of safe capital, private banking, and so forth, the means are there for people with a bit of capital to shop around and protect their capital and their persons from the ravages of government force.
In this environment, I can't see how governments in their present form will survive.
I see a new age of liberty, similar to the one that came before this one, in the 18th century that led to the United States.
that liberty came from the barrel of a gun. the guys on the other end were not eager to give up their power.
But it already is! It's just redistributionist in favor of the financial and corporate elite. First, by inflating the currency and holding interest rates below market levels, it makes traditional saving unproductive. In order to avoid loss, the middle class must either spend on immediate consumption or put its savings in other places.
The only source of power that 90% of the population can perhaps access is either through the ballot box or revolution. It is also quite clear that few of the current politicians (and almost none of those running for President) represent that 90%.
Good points. I would like to note one thing though from the article Rajiv posted:
This model predicts both the wealth classes that Yakovenko found. It also suggests that if you save more you are more likely to end up rich, although there are no guarantees. Changing people's saving habits could be an effective way of making the wealth distribution fairer, rather than enforcing taxes, says Chakrabarti, who is one of the Kolkata conference organisers.
I think I'm about as cynical as anyone here, but I do believe this would make a difference. Not an everyone-walking-on-sunshine difference, but I think it would help if part of public schooling included serious, meaningful personal finance education. Maybe we could at least keep the personal savings rate (http://research.stlouisfed.org/fred2/series/PSAVERT/) above zero. Well, as long as the class used "official" CPI inflation instead of Bart/Finster/Shadowstats inflation vs current savings account rates.:rolleyes:
nah. they'll just make two internets like there are two media. one that's slow and crappy and free where you can watch grainy little videos and one that's incredibly fast and offers high quality video. you get to express all of your objections to the gov't and all the lies on the first and no one will watch it and all the lies blare out the second 7/24 and everyone watches it.
http://img440.imageshack.us/img440/2109/19841qb9.jpg (http://imageshack.us)
:D:eek:
Relevant papers by Chakrabarti
Pareto Law in a Kinetic Model of Market with Random Saving Propensity (http://arxiv.org/pdf/cond-mat/0301289.pdf)
We have numerically simulated the ideal-gas models of trading markets, where each agent is identified with a gas molecule and each trading as an elastic or money-conserving two-body collision. Unlike in the ideal gas, we introduce (quenched) saving propensity of the agents, distributed widely between the agents (0 ≤ l< 1). The system remarkably self-organizes to a critical Pareto distribution of money P(m) ∼ m^−(n+1) with ≃ 1. We analyse the robustness (universality) of the distribution in the model. We also argue that although the fractional saving ingredient is a bit unnatural one in the context of gas models, our model is the simplest so far, showing self-organized criticality, and combines two century-old distributions: Gibbs (1901) and Pareto (1897) distributions.
Economic Inequality: Is it Natural ? (http://arxiv.org/pdf/physics/0703201.pdf)
Mounting evidences are being gathered suggesting that income and wealth distribution in various countries or societies follow a robust pattern, close to the Gibbs distribution of energy in an ideal gas in equilibrium, but also deviating significantly for high income groups. Application of physics models seem to provide illuminating ideas and understanding, complimenting the observations.
other papers may be found at Articles by B.Chakrabarti (http://front.math.ucdavis.edu/author/B.Chakrabarti)
metalman
08-25-07, 09:06 PM
But that skips right past the crucial question of why this has been the case. Glibly characterizing the US as "widely considered meritocratic" invokes the logical fallacy of appeal to the masses. Is it really?
Social engineers are very fond of citing statistics showing that the gap between rich and poor has grown substantially in recent years, usually in pursuit of the pre-ordained conclusion that the government needs to become more heavily involved in redistributionist activity.
But it already is! It's just redistributionist in favor of the financial and corporate elite. First, by inflating the currency and holding interest rates below market levels, it makes traditional saving unproductive. In order to avoid loss, the middle class must either spend on immediate consumption or put its savings in other places. Like corporate stock. This gave the corporate elite a whole new cadre of unsophisticated investors, ones that might not be quite so discriminating when it comes to various ways in in which it might be enriching itself at the expense of the shareholder. We see the tip of the iceberg every once in a while when an Enron, Worldcom, Tyco, Adelphia or one of the numerous stock options scandals surfaces. And the financial elite has never had it so good as it takes its cut of the torrents of cash pouring through Wall Street.
So before we hop up on our soapboxes with calls for yet more redistributionist programs to counteract the widening rich-poor gap, why not first consider de-fanging some of the ones that are actually doing the widening? Politicians won't like it, because selling their wares to competing constituencies is their stock in trade, but if you really want to solve problems you have to do better than fall for their marketing pitch.
here, here! how's this for redistribution. step 1: take the $$$ that was stolen and give it back to the people it was stolen from. step 2: don't let them steal it again.
Finster
08-26-07, 08:24 AM
Good points. I would like to note one thing though from the article Rajiv posted:
I think I'm about as cynical as anyone here, but I do believe this would make a difference. Not an everyone-walking-on-sunshine difference, but I think it would help if part of public schooling included serious, meaningful personal finance education. Maybe we could at least keep the personal savings rate (http://research.stlouisfed.org/fred2/series/PSAVERT/) above zero. Well, as long as the class used "official" CPI inflation instead of Bart/Finster/Shadowstats inflation vs current savings account rates.:rolleyes:
Well as Rajiv suggested, we're pretty much on the same general page, so the rest is arguably nit picking. But what the heck. Apparently schooling in finance has been pretty adequate. At least according to this article (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a48XLSlOylJg) on Bloomberg:
High School Seniors in U.S. Test Well in Economics
(Update2)
By Matthew Keenan
Aug. 8 (Bloomberg) -- High school seniors in the U.S. know more about personal finance and the world economy than about reading or math, according to the first nationwide exam in economics...
Personally I think schools should be focusing more on the reading and math. But regardless you run into the same kind of problem when you try to teach about personal finance as with human origins or sex education: Exactly whose ideas and theories are you going to teach?
This takes us right back to the problem of the first instance. Do people really need to put funds which traditionally might have gone into a bank savings account into the stock market instead? That's what personal finance experts would tell them. This presents two problems: first that it takes more knowledge and trouble to do that, and second that it takes more money. Somebody has to be paid for the more sophisticated financial services. The folks on the lower rungs of the income ladder are just going to be disadvantaged. And there also remains the problem of having large amounts of money being invested in stocks by people who have neither the time nor the inclination to supervise how their capital is being used. So you still wind up with the rich getting richer at someone else's expense. Now I am not really a class warfare proponent, but it just seems to me we're all better off when the rich have to get that way by producing real wealth.
Real interest rates just have to be higher in order for capitalism to do its job and allocate capital properly. But we have a system that is designed to keep them low, often negative, at great cost to the economic viability of the United States. Its trade deficit is probably the clearest evidence of how serious the problem is. It highlights the gap between what the US consumes and what it produces. Artificially low real interest rates make it possible to profit merely by shorting the currency, that is, going into debt. That becomes a substitute for production, as vividly demonstrated over the past few years with the my-house-as-ATM effect. And more recently with the private-equity-hedge-fund wealth-through-leverage effect. Despite all the happy talk about our improving resilient economy, it's been exactly the opposite. That growing production-consumption gap means we're trading away real accumulated wealth and gutting the productive base of the United States.
Aug. 8 (Bloomberg) -- High school seniors in the U.S. know more about personal finance and the world economy than about reading or math, according to the first nationwide exam in economics...
That surprises me. Considering how poorly the average American seems to run their personal finances, it's frightening to imagine how inadequate their reading and math comprehension must be.:eek:
Personally I think schools should be focusing more on the reading and math. But regardless you run into the same kind of problem when you try to teach about personal finance as with human origins or sex education: Exactly whose ideas and theories are you going to teach?
.
.
.
Do people really need to put funds which traditionally might have gone into a bank savings account into the stock market instead? That's what personal finance experts would tell them.
Yeah, you're right. I was being naive. I guess I was wishing that the education would focus on one key idea: if at all possible, don't spend money you don't have. But the powers that be would never allow it, as our entire system is built on debt.
Real interest rates just have to be higher in order for capitalism to do its job and allocate capital properly. But we have a system that is designed to keep them low, often negative, at great cost to the economic viability of the United States. Its trade deficit is probably the clearest evidence of how serious the problem is. It highlights the gap between what the US consumes and what it produces. Artificially low real interest rates make it possible to profit merely by shorting the currency, that is, going into debt. That becomes a substitute for production, as vividly demonstrated over the past few years with the my-house-as-ATM effect. And more recently with the private-equity-hedge-fund wealth-through-leverage effect. Despite all the happy talk about our improving resilient economy, it's been exactly the opposite. That growing production-consumption gap means we're trading away real accumulated wealth and gutting the productive base of the United States.
Well-stated as usual.
On a lighter note, Saturday Night Live's Get out of Debt (http://www.youtube.com/watch?v=cmAm8GNJ_IA) infomercial.:D:p
Real interest rates just have to be higher in order for capitalism to do its job and allocate capital properly.
There are problems with the whole concept of interest. It is a very good short term tool -- but a very poor long term one.
We also have to differentiate between debt for consumption, versus debt for investment (by this I mean the real meaning of investment -- that is investment for production capital)
One of my mentors (now deceased) said that the problem with the concept of interest is that it does not allow for future generations to exist! It rewards current consumption at the cost of future existence.
The primary flaw with the concept of interest is that continued real exponential growth or even linear growth is not possible on a finite planet. The debt soon outstrips the capacity to pay resulting in the declaration of bankruptcy by the debtor -- and a net transfer of assets from the debtor to creditor. This is one of the primary causes of business cycles.
see Margrit Kennedy (http://www.margritkennedy.de/index.php?lang=EN)'s Why Do We Need Monetary Innovation? Three common Misconceptions - Three threatening Results - Three possible Solutions. (http://www.margritkennedy.de/pdf/PRE_moneypres.pdf)
1. The Growth Misconception
Money with interest and compound interest can grow forever
2. The Transparency Misconception
Interest is paid only when we borrow money
3. The Fairness Misconception
Everybody is treated equally in the system
Artificially low real interest rates make it possible to profit merely by shorting the currency, that is, going into debt. That becomes a substitute for production, as vividly demonstrated over the past few years with the my-house-as-ATM effect.
profit from shorting the currency, i.e. going into debt, is obtained in 2 ways- using the borrowed funds to buy appreciating assets, or by having incomes grow beyond productivity gains. incomes have been stagnant for some time, unlike the 70's when the acronym "cola" [cost-of-living adjustment] became common. now that housing is on the way down, the only people who can profit from debt are those who can find a different rising asset. this reminds me of will rodger's stock advice: buy a stock and, after it goes up, sell it. if it doesn't go up, don't buy it.
Finster
08-26-07, 10:02 AM
... I guess I was wishing that the education would focus on one key idea: if at all possible, don't spend money you don't have. But the powers that be would never allow it, as our entire system is built on debt...
Here you've zeroed right in on the nub of the issue. Let's cast it as a question. Is the American habit of spending money he doesn't have some kind of congenital character defect, or is it a rational response to having been trained by long experience with high inflation and low interest rates?
My argument is that it's the latter. In stating a couple posts back that "In order to avoid loss, the middle class must either spend on immediate consumption or put its savings in other places.", the inclusion of both factors was deliberate. Not only are we incentivized to put marginal savings into the stock market, but also to spend, spend, spend. Even to the point of spending in excess of one's earnings. This is how America's accumulated wealth is being transferred to producing nations and at least partly explains why economies like China's just grow, grow, grow. In saying that "our entire system is built on debt", you recongize that someone in this system is profiting handsomely off this flow. We can get clues as to where by looking to the Hamptons, Greenwich, the Cayman Islands, the District of Columbia...
if we globalize out viewpoints, maybe it's all ok [said pangloss]. the rich of the world are transferring real wealth to the poor, who are working hard to earn it. it's like the the grandchildren of the wealthy frittering away their inheritances.
so what if we have a trade deficit. hypohetically, perhaps virginia has a trade deficit with the rest of the country. do we worry about it? someone tell me why we should be so nationalistic in our concerns.
the rich of the world are transferring real wealth to the poor
Unfortunately, that is not how it is. It is the rich of the Rich Countries transferring wealth to the rich of the Poor Countries. The "not rich" of both sides get it on the chin! "Trickle Down Economics" does not really work.
Unfortunately, that is not how it is. It is the rich of the Rich Countries transferring wealth to the rich of the Poor Countries. The "not rich" of both sides get it on the chin! "Trickle Down Economics" does not really work.
my impression is that in india it is indeed a small minority who are seeing better living standards, but that elsewhere in asia it is not just the rich who are benefitting.
My impression is that the upper middle class is extending downwards a bit -- but the bottom quartile is not coming up significantly. It is perhaps different in China because they started from a more even playing field (primarily because of the efforts of Mao Tse Tung & Co to brutally eliminate the Rich Class in the 40 years preceding "Liberalization"!)
Finster
08-26-07, 12:13 PM
Unfortunately, that is not how it is. It is the rich of the Rich Countries transferring wealth to the rich of the Poor Countries. The "not rich" of both sides get it on the chin! "Trickle Down Economics" does not really work.
I wouldn't use the term "trickle down economics", but I agree. And would amplify by saying that the rich are transferring out the wealth of the middle, creating more poor in America while getting richer in the process.
as long as 3rd world labor can be arbitraged against american labor, our income distribution will tend toward increasing resemblance to the income distribution of the rest of the world. the odd man out is europe, which as a matter of social policy has a more even distribution supported by higher tax rates and more regulation of the labor market.
I don't know if you consider this adequate schooling!
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I don't know if you consider this adequate schooling!
Wow. That's embarrassing.:o
Some people don't have to rely on an education to take them through life...
As a related off-topic observation about our pitiful geography skills in this country, today I was riding public transit, and two 20-something's in front of me struck up a conversation.
Girl: "I recently moved here from Vermont."
Guy: "Oh... that's in Canada, right?"
To be fair to her, here is a follow up
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quigleydoor
08-30-07, 08:45 AM
For a deeper look into this topic, I recommend a book by Kevin Phillips, <i>Wealth and Democracy</i>. He examines the concentration, dispersion and destruction of wealth throughout American history.
In one section he attempts to follow parallel histories of America with the Spanish, Dutch, and British Empires, in order to draw some general conclusions about imperial lifecycles. This section requires the heavy lifting that Phillips typically inflicts on his readers.
The rest of the book is a pretty quick read. Largely in line with EJ and Rajiv, and it is interesting to see these factors at work at the birth of the Constitution and in the 19th century.
Wealth and democracy: A political history of the American rich
A book discussion and reception — Thursday, June 13, 2002 (http://archive.epinet.org/real_media/020613/index.html)
Kevin Phillips has been tracking the political and economic history of American wealth for a long time. Ten years ago his best-selling book on the politics of rich and poor influenced the 1992 elections. Phillips joined the Economic Policy Institute, the AFL-CIO, Campaign for America's Future, and The American Prospect to talk about his new book—Wealth and Democracy: A Political History of the American Rich—and how big money and political power are the invisible hand in the story of the American experience. Mr. Phillips was introduced by EPI Vice President Lawrence Mishel.
Listen to an audio transcript of the event (approx. 1 hour 12 min.):
http://archive.epinet.org/real_media/020613/06-13-2002.mp3
I guess I am a skunk
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