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don

09-25-08, 08:29 AM

http://www.counterpunch.org/hudson09252008.html

The Big Bank Job

The Insanity of the $700 Billion Giveaway

Chris

09-25-08, 09:13 AM

Excellent article. Thanks for posting.

Tulpen

09-25-08, 09:32 AM

Good article!

FRED

09-25-08, 03:23 PM

http://www.itulip.com/images/paulsonkidding.jpgThe Big Bank Job

The Insanity of the $700 Billion Giveaway

By MICHAEL HUDSON

The banksters’ plan now is for icing on the cake – to take Mr. Paulson’s $700 billion and run. It’s not a “bailout of the financial system.” It’s as giveaway – to insiders, to sell out all their bad bets. Companies across the board will get rid of their bad mortgages, and also their bad car loans, furniture time payments, credit-card loans, student loans – all the debts that any competent actuary could have told them never could have been paid in the first place.

This is not what Treasury Secretary Paulson is acknowledging, and shame on him for it. Last Friday, Sept., he was joined by Fed Chairman Ben Bernanke singing in unison an advertising jingle for America’s new kleptocracy that rings so false that Congress and the American public must hear the off-notes. London’s Financial Times, as well as a host of Europeans realize it. That is what has been driving the dollar’s exchange rate this week. It seems easier for foreigners to recognize the threat to turn American democracy into a rapacious kleptocracy.

This change always is sudden, arranged under emergency conditions. Those with a 12-year memory will see George Bush as playing the role of Boris Yeltsin in Russia in 1996, paying off his campaign contributors by giving them all the economic surplus that the government could expropriate in the notorious “loans for shares” plan applauded and supported by Clinton Treasury Secretary (and current Obama advisor) Robert Rubin. (The moral: do we have a Putin in our near future to lock in the anti-democratic coup?)

Who really won the cold war?

How ironic all this is! Back in the 1970s there was theorizing that the Russian and American economies were converging. The idea was that both were moving toward more centralized state control, state financing, state subsidy, and a military-industrial complex. Nobody expected the convergence to occur Yeltsin-style in government giveaways to insiders to create a new group of financial billionaires – the “seven bankers” under Yeltsin in 1996, and Mr. Paulson’s Crony Capitalist gang today.

Let’s look at the euphemisms as an exercise in doublethink. Mr. Paulson defended his “troubled asset relief program” (TARP) by claiming that “illiquid mortgage assets … have lost value … choking off the flow of credit that is so vitally important to our economy.” The credit that is “so vitally important” has taken the form of bad loans. Contra Mr. Paulson’s pretense, the problem is not that they are “illiquid.” If that were the problem, it would be merely temporary. The Federal Reserve banks are designed to provide liquidity – on good collateral, of course.

As Financial Times columnist Martin Wolf noted on Wednesday, Sept. 24, the problem is that the face value of mortgage loans and a raft of other bad loans far exceeds current market prices or prices that are likely to be realized this year, next year or the year after that. They are packaged into what the financial press rightly calls “toxic.” The bailout is not efficient, he writes, “because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.” “The simplest way to recapitalize institutions,” He concludes, is “by forcing them to raise equity and halt dividends. If that did not work, there could be forced conversions of debt into equity. The attraction of debt-equity swaps is that they would create losses for creditors, which are essential for the long-run health of any financial system.” This is the key: if debts cannot be paid, then creditors must take losses.

These bad loans are toxic because they can only be sold at a loss – if at all, because foreign investors no longer trust the U.S. investment bankers or money managers to be honest. That is the problem that Congress is not willing to come out and face. Many of these loans are outright fraudulent. And they are being sold by crooks. Crooks who work for banks. Crooks who use accounting fraud – such as the fraud that led to the firing of Maurice Greenberg at A.I.G. and his counterparts at Fannie Mae, Freddie Mac and other companies engaging in Enron-type accounting.

The real mad money

This is not what the magic of compound interest promised. But it is where it had to end up, with mathematical inevitability. It was an advertising come-on for Wall Street money managers and promoters of “pension-fund capitalism” (or “peoples’ capitalism” as it was called in Chile by the Chicago Boys working for General Pinochet’s murderous regime, and Margaret Thatcher’s Conservatives in England). The promise is that if people consign these funds to individuals who make much, much more than they do but have the survival-of-the-fittest advantage of being much, much more greedy, they will receive a perpetual doubling of interest. That is how retirements for American workers are still supposed to be paid – by magic, not by direct investment. Prospective retirees are supposed to ensure a good life by investing savings in loans to corporate raiders who fire, lay off, downsize and outsource these very workers. The trick is to persuade employees to hand retirement funding over to financial managers whose idea was to make money off the economy by extracting interest and dividends off workers, homeowners and companies being bought on debt leverage. In the final analysis it is debt leverage by itself that is supposed to fuel capital gains.

This has led to madness. The maddest solution of all would be for the government to give the extractive financial sector even more money – funds that no private lenders have been willing to provide, not even vulture funds. No private firm has been able to discover what Mr. Paulson and the unfortunate Mr. Bernanke are sanctimoniously promising: that a viable deal, even an almost money-making one, can be made by buying junk now and waiting for “the economy” to make it good.

Just what is “the economy” that is supposed to perform this remarkable feat, if not its mortgage debtors and corporate debtors? The government is to do what law enforcement officials have moved to prevent Countrywide Financial and other predatory lenders from doing: squeezing exploding Adjustable Rate Mortgages and “negative equity” mortgages out of debtors, on terms that often were bait-and-switch to begin with. Private companies could be challenged and their array of penalty fees thrown out of court. But perhaps Congress can craft a law imposing these harsh terms on voters. It is not as if we live in a system where people vote their self-interest.

Promises that “taxpayers” will be able to recover a large part of this money are a fiction. If there were a hope of recovering this money, then investors abroad – foreign buyout funds, foreign banks, foreign sovereign wealth funds – would have been willing to buy Bear Stearns, Lehman Brothers, A.I.G. and other companies at some price. But they wouldn’t touch this at any price.

Why then should the U.S. Treasury pay three times as much as the Iraq War for money that will end up being lost after paying off the gamblers from their own bad bets. These are the bankers who already have placed all the risk onto their clients and, by lobbying to rewrite the bankruptcy laws, onto debtors. As matters now stand, the $700 billion is to be used to finance this year’s annual bonuses, this year’s million-dollar salaries and sales commission, and to contribute yet more to the retirement funds for the golden parachutes that financial managers have siphoned off to provide a safety net for themselves. So we are back to the basic motto these days: “You only have to make a fortune once in a lifetime.” Now is the time to make these fortunes as big as they’re going to get. Because it’s all down hill from here.

Why the banks won’t lend

Here’s why the government giveaway logic is fallacious: It’s a giveaway, not a bailout. A bailout is designed to keep the boat afloat. But the existing Wall Street boat crafted by the investment bankers seeking to unload their junk must sink. The question as it sinks is simply who will be able to grab the lifeboats, and who drowns.

There is a reason why the banks won’t lend: Housing and commercial real estate already are so heavily mortgaged that there is no rental value available (over and above operating expenses, current taxes and debt service) to pledge to the banks. It still costs more to buy a house than to rent it. No increase in the amount of credit, short of hyper-inflation can cure this. No lowering of interest rate, will lead banks to risk making a bad new loan – that is, a loan that probably will go bad and end up with the bank taking a loss after the borrower walks away or defaults.

Does Congress know what it is being told to do? Suppose that “taxpayers” are to squeeze money out of the “toxic” junk mortgages they buy from the investors that have bought these bad loans. The only way to do so would be for real estate prices to be raised to even higher levels. This means an even higher proportion of take-home pay by prospective homeowners.

Mr. Paulson realizes this. That’s why he’s directed Fannie Mae and Freddie Mac to inflate real estate prices all the more. At least, by the existing mortgage-holders to get paid off by existing debtors selling to the proverbial “greater fool.” The hope in Mr. Paulson’s plan is that there are enough “greater fools” with enough money to borrow from yet more foolish new mortgage lenders. Only Fannie Mae, Freddie Mac and the Federal Housing Agency are willing to make such foolish loans, and that is only because they are being directed to act in a foolish way by Mr. Paulson.

Here’s the problem with following Mr. Paulson’s orders and lending yet more: Every major real estate advisor on record has forecast a further drop of between 20 to 30 percent in property prices over the coming twelve months. This is now the standard forecast. It means that over and above the five million arrears and foreclosures that Mr. Paulson acknowledged already are on the books, yet more families are to give up the fight by this time next year. Is the $700 billion giveaway fund to try and recoup by evicting them too from their houses – to pay the “taxpayer” enough to bail out Countrywide, Washington Mutual and other predatory lenders for loans that state Attorneys General have accused of being fraudulent?

For the government to even begin to recover some of the value of the $700 billion in junk mortgages it has bought would force new homebuyers to pay even more of their income to the banks. And if they do that, they will have less income to spend on goods and services. The domestic market will shrink, and tax revenues will fall at the state, local and federal levels. The debt overhead will deflate the economy, causing shrinkage all down the line.

So here’s where the cognitive dissonance comes in: It is necessary, even inevitable, for the volume of debt to come down – not up – to restore equilibrium. The economy was well on its way to preparing the ground for this last week. As Alan Meltzer of the American Enterprise Institute (of all places!) explained on McNeill-Lehrer, Merrill Lynch was able to be sold at 22 cents on the dollar; and the economy survived Lehman Brothers and Bear Stearns being wiped out.

Such debt writes-offs are a precondition for writing down America’s mortgage debts to levels that are affordable. But Mr. Paulson’s plan is to fight against this tide. He wants the Wall Street to keep on raking in money at the expense of the economy at large. These are the big banks who lobbied Congress to appoint de-regulators, the banks whose officers paid themselves enormous bonuses and gave themselves enormous golden parachutes. They were the leaders in the great disinformation campaign about the magic of compound interest. And now they are to get their payoff.

The pretense is that not to pay them off would threaten “the economy.” The reality is that it only would stop their predatory behavior. Worse than that, for the economy at large a government take-over of these bad loans would prevent the debt write-down that the economy needs!

It gets worse. If Congress should be so destructive as to buy out $700 billion of bad loans (for starters), the sellers will do just what Russia’s kleptocrats did. They will take their money and move it abroad to a “hard” currency country. This will help collapse the dollar. Up will go gasoline costs and prices for other imports. America will be turned into a Russian-style post-Soviet economy, having endowed a new domestic kleptocracy of insiders, who use some of their gains to finance the campaigns of American Yeltsins such as McCain.

So let us admit that the economy has been taking a wrong track for a number of decades now. As John Kay noted : “When the dust settles, many banks and hedge funds will have lost more money on their trading activities in the past year or so than they had made in their entire history … The pursuit of shareholder value damaged both shareholder value and the business.”

I worry that Wednesday’s jump in the Dow Jones average signals that the big betters have decided that there is a good chance of the vast giveaway going through. The Republican protests seem to me to aim not so much at really stopping the measure, but on going on record that they opposed it – before they voted for it. When the public wakes up to the great giveaway, the Republicans can say, “It was a Democratic Congress that did it, not us. Read our anguished protests.” Everyone is trying to cover themselves. With good reason.

Don’t let them speak on behalf of voters and then act against the economy, claiming that they are trying to save it. A giveaway of unprecedented magnitude would cripple it for as far as the eye can see.

We have reached the point where it may finally be able to break through the membrane of cognitive dissonance that has been blinded people. The very first course in economics –starting in high school, followed up in college and then refined in graduate school – should explain to students why it is false to believe the advertisement that Wall Street has been trying to sell for the past half century: The deceptive promise that an economy can get rich off the mathematical “magic of compound interest.”

The unreality of this promise should be immediately apparent by looking at the math of exponential growth. Already at the time of the American Revolution, financial economists were popularizing the contrast that Malthus soon would imitate in his population theory: Debts grow at “geometric” rates, while the economy itself grows only “arithmetically,” in a slower and more linear way.

All that is needed is to put this idea together with the basic balance-sheet definition: One person’s savings are lent out to become other peoples’ debts. So the “magic of compound” interest to savers means an equal “magic of exploding debt” to somewhere else in the economy. And inasmuch as creditors insist on protecting themselves from inevitable default by possessing collateral, it is natural that most of the economy’s debts are owed on its largest asset: land and buildings. This explains why mortgage debts have become repayable and “gone toxic.”

The “magic of compound interest” refers to the tendency of savings to double and redouble exponentially, with a matching rise in what debtors owe on the other side of the balance sheet. These mathematics have been operated throughout history, ever since the charging of interest was invented in Sumer some time around 2750 BC. In every known society, the effect has been to concentrate wealth in the hands of people with money. In recent years, one’s own money is not even necessary to do this. The power to indebt others to oneself can be achieved by free credit creation. However, the resulting mushrooming exponential growth in indebtedness must collapse at the point where its interest and other carrying charges (now augmented by exorbitant late fees, bounced-check fees, credit-card costs and other penalties) absorb the entire economic surplus.

This is the point that has been reached – and passed – today. It has been developing for many decades. But there is a great reluctance to accept the fact that debts cannot be paid. “The poor are honest,” as one banker explained to me, and believe that “a debt is a debt” and must be paid. (This is not what Donald Trump, Bear Stearns or A.I.G. believe, but they are at the top of the economic pyramid, not its base.)

Numerous publishers turning down my proposed books on the subject over the years. As they have explained to me: “Nobody wants to read how the bubble will break – at least, not until after it bursts. Can’t you write a book on how you can make a million dollars off the coming economic collapse? That would be a winner, Prof. Hudson. But to tell people that they can’t put aside savings and pay for their retirement ‘in their sleep’ is like telling them that they will have bad sex after the age of 50. It’s a no-seller. Come back when you have good news.”

These are the words I’ve been hearing since the mid-1980s. I’ve spent much of my time looking through history to read up on how the failure to wipe out the debt overhead led to the collapse of Rome’s imperial republic, and to the Ottoman Empire as what was known as “the spoiling of Egypt” and “the ruin of Persia” toward the end of the 19th century. I’ve also published a series of four colloquia by assyriologists and archaeologists describing how earlier, from about 2500 to perhaps 300 BC, Babylonian and other Near Eastern rulers kept their citizens free and preserved their landholdings by annulling personal and agrarian debts when they took the throne – a true “tax holiday” – or when economic or military conditions warranted a general Clean Slate. (The series was funded and published by Harvard’s Peabody Museum and is now available from CDL Press.)

These Clean Slates were adopted literally, almost word for word, in the Biblical Jubilee Year of Leviticus 25. Even the same Hebrew word, deror, was used for the Babylonian andurarum proclaimed by rulers of Hammurapi’s dynasty from 2000 to 1600 BC. So it is remarkable to me that men claiming to be Christian leaders today should ignore the fact that in the very first sermon that Jesus gave, in Nazareth (Luke 4:14-30), he unrolled the scroll of Isaiah 61 and promised that he had come “to proclaim the Year of the Lord,” the Jubilee Year. That was the literal “good news” that the Bible preached, as the Dead Sea scrolls have abundantly illustrated.

Yet it is a sign of the power of creditor ideology that even the essence of this founding document of Western civilization has been ignored by a distorted view of what early Christianity, Judaism and other religions were all about. Hardly surprising. Luke’s passage on this founding sermon of Jesus concludes by pointing out that “all the people in the synagogue were furious when they heard this. They got up, drove him out of the town, and took him to the brow of the hill on which the town was built, in order to throw him down the cliff.”

Down the cliff! This is where the revolting right-wing Roman senators drove the followers of the Gracchi brothers on the Senate hill, in an exercise of political violence that prevented Rome from granting debt relief toward the end of the second century BC. Livy, Diodorus, Plutarch and other historians of the epoch attributed the prospective fall of the Roman Empire to its harsh creditor-oriented debt laws. But today, historians publish books speculating that perhaps the problem was lead piping or lead goblets for their wine, or disease, or imperial overreaching, or superstition – anything but the cause to which the Roman historians themselves pointed.

We are still living with the consequences of Rome’s oligarchic revolution. That is what makes this week’s Congressional hearings on the $700 billion giveaway so important. First with military force and then via debt bondage and serfdom, Rome bequeathed to Europe a property-based, creditor-oriented body of law. But since the 13th century, country after country has shifted the balance back to favor debtors – to save them from literal debt bondage, from debtor’s prisons, from permanent indebtedness, to give them Clean Slates on an individual level.

Handel arranged the first performance of The Messiah as a benefit to raise money to bail debtors out of Irish debtors’ prisons, and every year the oratorio was repeated for that charitable purpose. Martin Luther warned about the mathematics of compound interest as the monster Cacus, devouring all. Yet Luther’s denunciations of usury are excluded from his collected works in English, and are available in this language only in Vol. III of Marx’s Capital and Book III of his Theories of Surplus Value. The discussion of interest and banking has become so marginalized that even when I taught money and banking at the New School in New York City in the late 1960s and early ‘70s, it was not part of the core curriculum but treated as a special topic. (Fortunately, that is not the case where I am now happily situated at the University of Missouri in Kansas City. But it took a long time to get here.)

Behind this shift in legislative choice was the perception that no economy can keep up with the burden of debts growing at exponential rates faster than the economy itself is growing. No economy can grow at steady exponential rates; only debts can multiply in this way. That is why Mr. Paulson’s $700 billion giveaway to his Wall Street colleagues cannot work.

What it can do is provide a one-time transfer of wealth to insiders who already have been playing the debt-credit system and siphoning off its predatory financial proceeds to themselves. The Wall Street bankers, brokers and fund managers to whom I’ve been speaking for many decades all know this. That is why they pay themselves such large annual bonuses and large salaries each year. The idea is to take as much as you can. As the saying goes: “You only have to make a fortune once in a lifetime.” They have been salting away their fortunes year after year, mainly in hard assets: real estate (free of mortgages), fine furniture, boats and trophy art. One last $700 billion heist and they can make their getaway.

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

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The Outback Oracle

09-25-08, 04:13 PM

I have to work but I will return to this topic in some detail. Meanwhile I have to say that I am amazed at the almost syncophant acceptance of Hudson drivel by the normally rational itulip community.
Sure, this is a 'cash for trash' or a give-away to Wall St managers, who must be now busy thinking up ways they can rip tens of billions of this amount for themselves personally.
He then goes on to talk about exponentially rising debt as the problem - which is also true.
His diagnosis of how and why this debt arises is just plain tripe. His solutions are even worse and have been tried before one form and another and result in totalitarian soecieties.

icm63

09-25-08, 05:10 PM

Joing Itulip NOW, you will learn interesting insights to whats going on behind close doors, also as a bonus you will learn new exciting words.

For example todays new word : kleptocracy

Defined: .."a government or state in which those in power exploit national resources and steal; rule by a thief or thieves"...

I suggest all users keep this link VERY CLOSE : http://dictionary.reference.com/

WTF - Nice one Itulip !

Also on CNBC today a bearish chap said that as at today there is known $3.2 trillion dollars of toxic waste on balance sheets, and $700 Bn bailout was not enough. The CNBC producer was not interesting in any bad news on a rally day and his TV time was limited after that statement.

Ref: http://www.bloomberg.com/apps/news?pid=20601109&sid=ax3vfya_Vtdo&

Wall Street underwrote $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes from 2002 to 2007. Investment banks packaged much of that debt into investment pools that won AAA ratings, the gold standard, from New York-based Moody's and S&P. Flawed grades on securities that later turned to junk now lie at the root of the worst financial crisis since the Great Depression, says economist Joseph Stiglitz (http://search.bloomberg.com/search?q=Joseph+Stiglitz&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1).

Oooooouch !

By the way in my posts I will use only words that do not require 10 MBAs to understand. (Just joking, I am going to say this new word at several dinner functions this week. ha ha)

The Outback Oracle

09-25-08, 07:10 PM

Firstly, I know I am crossing swords with the venerable of itulip here. My notions are somewhat ‘old fashioned’ and ‘out of date’, perhaps even “Austiran” (shame! Shame!) I’m not much in favour of labels and I don’t care. I can promise you a couple of things about human behaviour. It does not require millions of dollars of research and no great intellect to figure out
The propensity to save is in direct proportion to the rewards from saving. Further, if there is negative reward (penalty), saving will be negative. Conversely, the more you reward spending and debt, the more debt and spending you will have.
The propensity to save is in inverse proportion to the expected time until reward for saving is experienced.

Now with those couple of basic facts in mind, let’s have a look at Hudson.

We have reached the point where it may finally be able to break through the membrane of cognitive dissonance that has been blinded people. The very first course in economics –starting in high school, followed up in college and then refined in graduate school – should explain to students why it is false to believe the advertisement that Wall Street has been trying to sell for the past half century: The deceptive promise that an economy can get rich off the mathematical “magic of compound interest.”
It would be doing people a service if they were told the facts about saving. That the whole system is designed to rip your savings from you, to steal from you, to impoverish you if you save. That the whole corrupt system is supported by all politicians, intellectuals (especially people like Hudson) and your fellow citizens.
I’m not sure where “Wall St” promised that the economy can get rich off the “magic of compound interest”. Certainly I hear the “magic” being touted by the odd advisor in MSM in terms of people becoming more wealthy through the process. The exhortation to save and reap the reward of “compound interest” has been roundly ignored by society in general, with good reason. Instead of growing wealth, it depleted wealth.

The unreality of this promise should be immediately apparent by looking at the math of exponential growth. Already at the time of the American Revolution, financial economists were popularizing the contrast that Malthus soon would imitate in his population theory: Debts grow at “geometric” rates, while the economy itself grows only “arithmetically,” in a slower and more linear way.
It is simply not true that the economy grows in a linear way. He uses the term ‘more linear’ to obfuscate. That immediately ought tell someone something about the porosity of his argument.
The reason debts have grown at geometric rates is twofold
1. Interest rates (after tax) have been pretty much continuously negative.
2. Debts do not match savings. The ‘magic’ that has been used that is wrong, is NOT compound interest! It is the leverage applied to savings to create debt. This naturally feeds back to 1. and becomes a continuous self feeding loop. Hence real interest rates become lower and lower while leverage multiplies.
All that is needed is to put this idea together with the basic balance-sheet definition: One person’s savings are lent out to become other peoples’ debts. So the “magic of compound” interest to savers means an equal “magic of exploding debt” to somewhere else in the economy.
The magic of exploding debt has nothing to do with compound interest. It has to do with exactly that there is no magic to compound interest because and interest earned is more than used up by tax and inflation. The exploding debt is caused by the ability to lever “savings” to the tune of 20, 30 50, …1000’s of times. If you had a society, where the only money that can be lent is that which is saved by someone else, you can bet anything you like that you would not have exponentially rising debt.

And inasmuch as creditors insist on protecting themselves from inevitable default by possessing collateral, it is natural that most of the economy’s debts are owed on its largest asset: land and buildings. This explains why mortgage debts have become repayable and “gone toxic.”
I fail to see a single word in this paragraph that ‘explains why mortgage debts have become repayable and “gone toxic.”’
We just have some jump across a logical chasm that could never be achieved with reason. Yes banks require land and buildings as collateral. The reason of course is they cannot be moved. This is an area of Banking that ought be looked at by legislators. The debate on that topic would derail this comment.
As we have seen these past few years, when you create money at a far greater pace than an economy grows, by inceasing leverage of debts to savings, that money has to go somewhere. In this case it has exploded the value of land and buildings. The flow of money (inflation) into land and buildings has been exacerbated by favourable tax treatments, especially for homes and favourable leveraging. Again you have a self-feeding loop. More money, favourable tax treatment, money to land and buildings, prices increase, more spending, more debt, more money…….etc etc
The “magic of compound interest” refers to the tendency of savings to double and redouble exponentially, with a matching rise in what debtors owe on the other side of the balance sheet. These mathematics have been operated throughout history, ever since the charging of interest was invented in Sumer some time around 2750 BC. In every known society, the effect has been to concentrate wealth in the hands of people with money. In recent years, one’s own money is not even necessary to do this. The power to indebt others to oneself can be achieved by free credit creation. However, the resulting mushrooming exponential growth in indebtedness must collapse at the point where its interest and other carrying charges (now augmented by exorbitant late fees, bounced-check fees, credit-card costs and other penalties) absorb the entire economic surplus.
There has been no ‘matching rise’ of debt to savings. Debt rose 20, 30, 50, 1000’s times savings!!! To claim otherwise as Hudson does is either dishonest or stupid…both in the extreme!
We have leveraged savings with debt to the extent that we have driven ‘nominal’ savings interest rate to near zero. As a result we now have no savings…so debt must collapse. We have not yet learned how to create an infinite debt by multiplying zero savings. In addition, the recall of debt (perhaps as a result of some of our creditors asking for money or indded some interest) results in a leveraged destruction of debt. I think I am in tune with itulip here.
So yes, the house of debt we built is now collapsing but it is NOT because of compound interest. It is more because we do not have positive compound interest.

This is the point that has been reached – and passed – today. It has been developing for many decades. But there is a great reluctance to accept the fact that debts cannot be paid. “The poor are honest,” as one banker explained to me, and believe that “a debt is a debt” and must be paid. (This is not what Donald Trump, Bear Stearns or A.I.G. believe, but they are at the top of the economic pyramid, not its base.)
Here we go with the old Socialist hogwash…”the poor are honest” and, by inference, those who save and own anything are dishonest!!!! Confusing isn’t it really…some of the poor also save. Some, through saving, hard work, ability, and a society that does make education available, are able to cross some of the boundaries that stratify our society…and can even do so without harming anyone else.

Numerous publishers turning down my proposed books on the subject over the years. As they have explained to me: “Nobody wants to read how the bubble will break – at least, not until after it bursts. Can’t you write a book on how you can make a million dollars off the coming economic collapse? That would be a winner, Prof. Hudson. But to tell people that they can’t put aside savings and pay for their retirement ‘in their sleep’ is like telling them that they will have bad sex after the age of 50. It’s a no-seller. Come back when you have good news.”
“Oh poor misunderstood Prof Hudson”

Then we go on to the “clean slate” drivel. In essence the “clean slate” is the same as the Paulson Giveaway. It has as its kernel, the idea that we can create money from nothing…just suddenly wipe away all those debts with no cost to anyone. What the hell is the difference in concept to Paulson? The only good thing is that it would not go to the ‘few’ as Paulson’s proposal does. I wonder exactly what he thinks the recipients of this largesse would do…”well interest rates remain negative…so let’s go that new boat/TV/house/spa/gold taps/before it gets any more expensive…and get some more debt. This is as sure as night follows day!!
As a solution for the economy the idea is at best stupid and at worst downright dangerous.

Let’s summarise Hudson’s proposals
1. We cannot have compound interest. Given that compound interest is only the postponement of expenditure to save a little more and NOT “magic”, we are basically saying we will not have saving.
2. We do not in any form address the problem of leverage and a society with no savings. As a matter of fact, since we are actively discouraging saving, we need to leverage ourselves a whole lot more
3. We are going to do the “clean slate” thing. Now as per his own argument about saving resulting in debt increase on the other side of the balance sheet. The cleaning away of debt means we also “clean away “ savings. This is a nice totalitarian solution!! So, in a society laded with debt, with debt as its core problem, if all savings are to be confiscated, you will have NO SAVINGS!!!!

One other SMALL problem is that I guess a few of us who have some savings, that we have worked bloody hard for, and our families have ‘done without’ so we have savings, might actually put up a bit of a struggle when they are taken off us…so once again…straight to the tumbrils!!! This type of society cannot tolerate dissention.
Now the sort of tripe I have had in itulip to this problem about the confiscation of savings has been typically “well…we don’t mean you” Then, who the hell does everyone mean? Who does Hudson mean? Whose wealth is he going to confiscate and who will be allowed to keep what they have? Is there some magical level of capital aka savings that one can have without being sent to the guillotine? What is it just so I can be prepared and get out and spend most of what I have!

Lastly, the question I posed elsewhere……..

Who will decide who amongst us is for the tumbrils, and who is to knit?

bart

09-25-08, 08:53 PM

Firstly, I know I am crossing swords with the venerable of itulip here. My notions are somewhat ‘old fashioned’ and ‘out of date’, perhaps even “Austrian”

In general, I don't disagree with anything you state... but I also urge you to read some more Hudson. He's not nearly as far from the Austrian view as you may think.

nathanhulick

09-25-08, 09:12 PM

I absolutely agree with you Outback. Some of what I've read of Hudson on this site has been pretty good, but this article is total garbage.

Hudson says
One person’s savings are lent out to become other peoples’ debts.

For a guy who claims he understands how money is created and destroyed so well, he sure doesn't seem to know that when using fractional reserve banking, one man's savings become one bank's reserves becomes many debtors loans.

By changing the reserve requirements, we can grow the debts exponentially without any additional savings.

I also liked how he calls McCain an "American Yeltsin". Not that I have any love for McCain, but it is interesting that he doesn't bother mentioning the other aspiring "American Yeltsin". I guess he can stand a guy who is a full blown socialist (Obama), but someone like McCain who is only 99% socialist is worthy of Hudson's derision.

vinoveri

09-25-08, 09:29 PM

Good post, thanks. I for one would love to have the O Oracle and Dr Hudson debate the relative merits and evils of USURY.

Who will decide who amongst us is for the tumbrils, and who is to knit?

I forgot which Greek it was who opined that the person who is most qualified to govern is the person who thinks he is least qualified to govern. modern day equivalent is the libertarian who doesn't want to rule the world but only herself.

Milton Kuo

09-25-08, 10:55 PM

I absolutely agree with you Outback. Some of what I've read of Hudson on this site has been pretty good, but this article is total garbage.

Dr. Hudson's recent articles are, unfortunately, colored by his political bias (it's very obvious he's a Democrat) and distract from his otherwise insightful analysis of the current economic system. Like a stereotypical Democrat, Hudson is under the delusion that the solutions for many of society's ills can only come from government. It's not clear to me whether he believes government management of resources can be efficient and absolutely altruistic (I assume that, at the very least, he believes it will be relatively less exploitative than what the FIRE economy offers).

For example, his proposal of taxing real estate more heavily so that usage fees (economic rent in his terminology) are collected by the government rather than the banking system. While this gives the use of the money to the government for use in infrastructure and social services rather than FIRE economy profit, I have yet to see the municipal or state government that will not end up needing even more money due to government inefficiency and tendency to bloat.

This is probably the basis for the iTulip thesis of PPPs playing a key role in the alternative energy and infrastructure boom (bubble?). Private enterprise will contribute its drive for efficiency while government will act as an overseer to limit the abuses seen in the FIRE economy.

For a guy who claims he understands how money is created and destroyed so well, he sure doesn't seem to know that when using fractional reserve banking, one man's savings become one bank's reserves becomes many debtors loans.

By changing the reserve requirements, we can grow the debts exponentially without any additional savings.

Replace Hudson's references to compound interest with fractional reserve banking (leverage) and his analysis makes tremendous sense. I can't remember if Hudson recommended full reserve banking but that would address his "compound interest" complaint.

c1ue

09-25-08, 11:07 PM

Outback,

Your views on Hudson are well known.

I am still unclear, however, on why getting interest on savings is necessarily itself good when that interest only gets paid because said savings is used (with or without leverage) to create loans which in turn are paid a much higher rate of interest.

The gain of interest paid on savings thus is a net loss when the interest paid for the loans made based on said savings is added in.

You also fail to address why people take on debt.

Sure, some of it is buying iPods and LCD TVs. But the biggest portion of debts is for business and for buying homes.

The carrot being dangled is the prospect of becoming a property owner - or in Hudson's terms, become a recipient of economic rent.

Unfortunately for the general population, this carrot is in reality the cheese on a monstrous debt mousetrap.

Even for those who started early in the asset price inflation cycle fail to understand that the reason they are getting the free economic rent is because of the cycle, and that by its very nature the cycle is unsustainable.

You never responded to my point about US residential real estate growing at an annual pace of 5% from 1970 to 2007, vs. the GDP at a 3% rate. This is exactly what Dr. Hudson talks about.

You don't like his solutions - perfectly understandable.

But attacking his thinking without learning from it is dangerous.

His point about total confiscation is absolutely possible and has occurred in the past.

Raging about how unfair it is that the bankster's are conspiring to inflation tax away savings and future income purchasing power doesn't help you to understand either how it is occurring or how to protect against it.

akrowne

09-25-08, 11:13 PM

Good comments. And Hudson's rant is good.

I take his railing against compound interest and "clean slate" discussion to mean that compound interest has been abused and that the best way to solve the imbalances after a long period of same is a "clean slate" for debtors.

I don't think he is arguing against all interest.

The underlying problem is fiat (debt-based) money. It will always tend to turn into a complex of too much debt. Always has. Hudson could have said more about that.

Sound money is a necessary (though not sufficient) solution to this problem.

Some people do make the argument that all "interest" is evil. I don't agree. It is good to have debt-like funding, as opposed to just equity-like. Here is why the "all interest is evil" argument is mathematically wrong-minded:

In a sound money system, you have gradual deflation (increase in the value of money) as economic progress happens. Equivalently, the total "value outstanding" relative to total money outstanding goes up.

Under such a system, even if you lend at 0%, you are still lending at a real rate of interest. If deflation is running at 2%, then you are really lending at 2%, even if the nominal interest rate is 0%.

I think that is more the sort of situation the ancients had in mind; not totally doing away with the notion of lending.

However, as currency became debased (as it always was at the twilight of empires), this system falls apart, and you need higher rates of interest and an ever-increasing debt burden to preserve your return. Every such period has culminated in collapse of empire or regime, and the wise rulers would then indeed engage in mass debt forgiveness.

In the modern era we are in many ways much, much less kind. The bankers and econo-technocrats have completely taken over; no more are there philosopher-kings to free the people from debt after such a period of deterioration. In this respect it seems the trend unfortunately seems to be towards a broadening base of economic slavery, worldwide =(

ronin

09-25-08, 11:19 PM

"...So it is remarkable to me that men claiming to be Christian leaders today should ignore the fact that in the very first sermon that Jesus gave, in Nazareth (Luke 4:14-30), he unrolled the scroll of Isaiah 61 and promised that he had come “to proclaim the Year of the Lord,” the Jubilee Year. That was the literal “good news” that the Bible preached, as the Dead Sea scrolls have abundantly illustrated...."

The Scripture is misinterpreted on several points; a few are mentioned below. The 'Year of the Lord's favor' was indicating the beginning of the Messianic age. Sins are spiritual debts that need forgiveness; the Messiah canceling debts of sin. The outrage to cast Jesus from the cliff came from his references to the rejection of some of Israel and acceptance of some Gentiles (Luke 4:23-28).
The anger of the crowd was not from a bunch of brain-washed debt serfs over the mention of the Jubilee Year. The 'good news' of the Gospel is the forgiveness of debt, but it is spritual debt (sin).
Sorry to step outside economics, but the article was wrong on this point.

akrowne

09-25-08, 11:29 PM

I'll respond for (or alongside) Outback, just for fun.

Outback,

Your views on Hudson are well known.

I am still unclear, however, on why getting interest on savings is necessarily itself good when that interest only gets paid because said savings is used (with or without leverage) to create loans which in turn are paid a much higher rate of interest.

The gain of interest paid on savings thus is a net loss when the interest paid for the loans made based on said savings is added in.

You are assuming the dysfunction here.

The way the savings should be getting used is that it is invested prudently in economically productive ventures.

While that may seem a big "if", recall that if the saver/investment agent are not shielded from the consequences of their decisions, they are likely to be very careful on how that money is placed.

There is absolutely no need to go out and simply try to place the initially lent money at a higher rate. That would not be investment; it would be a carry trade speculation. And yes indeed, much of the existing financial economy works that way. But that is the problem; not the normal, stable state of things.

You also fail to address why people take on debt.

Sure, some of it is buying iPods and LCD TVs. But the biggest portion of debts is for business and for buying homes.

The carrot being dangled is the prospect of becoming a property owner - or in Hudson's terms, become a recipient of economic rent.

Unfortunately for the general population, this carrot is in reality the cheese on a monstrous debt mousetrap.

Even for those who started early in the asset price inflation cycle fail to understand that the reason they are getting the free economic rent is because of the cycle, and that by its very nature the cycle is unsustainable.

You never responded to my point about US residential real estate growing at an annual pace of 5% from 1970 to 2007, vs. the GDP at a 3% rate. This is exactly what Dr. Hudson talks about.

I'm not sure exactly how this rebuts Outback's points.

Yes, it is important to understand the "swindle" pulled off to trick most regular citizens into taking on way too much debt.

But the problem is still that the debt expansion is being enabled as a core, fundamental property of the monetary system.

If we were to "crack down" on unsound housing lending, the unsound activity would simply move to some other area, where there has not yet been a crackdown. In fact as the history of bubbles amply discussed on this site shows, the bubbles always do move to a new area, as long as the the two main ingredients of debt-based/fiat money system and political buy-in are present.

If we are to ever really "solve the problem", we must reform either the political or monetary system. And I think there is a lot more hope for the latter than former, since changing the former is tantamount to changing human nature. By contrast, we have at times had much more sound monetary systems.

Admittedly, the real challenge with that is keeping the politicians' hands off a good monetary system.

marvenger

09-25-08, 11:33 PM

The Outback Oracle

09-25-08, 11:52 PM

akrowne

Thank you for your support:D

I seem to sense that we have all lived so long in debt and as debtor nations, that all we can think of is what might be good for us personally as debtors. We just are incapable of thinking what our society might be like with a better balance of savings vs debt. We're so used to screwing over the savers of our society that the problems of savers and their role in our society are not even considered in working out the "solutions"
Compound interest has only been abused in terms of we, as a society, have stolen from, ripped off, corruptly dealt with, (whatever term comes to mind) those who have been prudent. This has happened to the extent that Hudson now proposes to confiscate property and savings without giving one thought to the results of doing so. When i look at your post, I cannot help but feel that you think some "clean slating" is necessary and did not bother to explore the problems that arise on the other side of the balance sheet. You cannot advocate "clean slate" without explaining what you are going to do about the resultant confiscation of savings. Sorry!:(
There are dangers to that thinking and they are extreme! I find the notion, and the outcome, of this thinking at least as extreme and disturbing as any of the worst conspiracy theory outcomes that are explored in these pages.
To point the finger at compound interest, as the cause of all the problems, is to look totally in the wrong direction.

On the matter of interest, and whether it is necessary, how else does one cater for individuals? Personal choice of where, what and where to consume is reasonably fundamental. How else is this to be maintained except through interest earned? The answer is "we will tell you where what and when you can and will consume!"

The Outback Oracle

09-26-08, 12:00 AM

I agree with a lot of your points, I'm not a Hudson expert but I also don't hin he is against interest. What he is against is a system too biased towards creditors. The system needs to have lean more towards debtors so that creditors are wary of loses they will probably demand a higher risk premium that will lower growth in the short term but will benefit in the long term as there is a disincentive for bubbles and creditors are more likely to lend to productive endeavours to better ensure repayment. Hudson is right a creditor biased system is a kleptocaracy and will concentrate waelth and power in the few.

G'day Marv!
Here's the problem. We all have a picture in nour heads of the creditors being the big bad bankers. Now as things are currently structured that is , to some extent true. HOWEVER, what actually is the difference between a "creditor" and a "saver who lends money"? If there is a difference, just where is the line drawn?
I disagree that the balance favours creditors AKA savers) at the moment. As sure as hell, the debtors are the ones who get most of the benefit at the moment because they are PAID to borrow the money and receives a tax benefit! The "saver" gets his principle confiscated AND gets taxed.

The Outback Oracle

09-26-08, 12:47 AM

Outback,

Your views on Hudson are well known.I wish they were I'd be famous:D

I am still unclear, however, on why getting interest on savings is necessarily itself good when that interest only gets paid because said savings is used (with or without leverage) to create loans which in turn are paid a much higher rate of interest.

The gain of interest paid on savings thus is a net loss when the interest paid for the loans made based on said savings is added in.
Because you lever the savings to hell and gone! Nothing whatsoever to do with compound interest!

You also fail to address why people take on debt.
Adequately answered by others I think

Sure, some of it is buying iPods and LCD TVs. But the biggest portion of debts is for business and for buying homes.
You think housing should be provided by the state? And that business should not be allowed? What is so bad about human endeavour either in business or at home?

The carrot being dangled is the prospect of becoming a property owner - or in Hudson's terms, become a recipient of economic rent.

Unfortunately for the general population, this carrot is in reality the cheese on a monstrous debt mousetrap.
The difference between yourself and Hudson on the one hand and me on the other is that i just plain don't have the wisdom to select who is to have and who is not to have, who should get what, and who should rule and who not.

Even for those who started early in the asset price inflation cycle fail to understand that the reason they are getting the free economic rent is because of the cycle, and that by its very nature the cycle is unsustainable.
If i save and buy a warehouse for my business, how is that free rent?The process of saving involved foregone pleasures and oppurtunities. Now that i own the warehouse there is an oppurtunity cost of its capital

You never responded to my point about US residential real estate growing at an annual pace of 5% from 1970 to 2007, vs. the GDP at a 3% rate. This is exactly what Dr. Hudson talks about.

You don't like his solutions - perfectly understandable.

But attacking his thinking without learning from it is dangerous.
The reason I have come out so strongly on Hudson is that I regard him as dangerous. He is in a position far more influential than i could ever aspire to be. His position is totalitarian and i will oppose that. Oh you and he may not think so, but think through it all to the society you will have based on his writings.... Keeping in mind that there are no 'philosopher kings'

His point about total confiscation is absolutely possible and has occurred in the past.
My point about all this is that he is advocating total confiscation himself! That is exactly my problem with him. I regard him as a dangerous extremist. Based on his beliefs, yes confiscation has already happened and the results were not pretty

Raging about how unfair it is that the bankster's are conspiring to inflation tax away savings and future income purchasing power doesn't help you to understand either how it is occurring or how to protect against it.
Banksters with their leverage are only part of the probblem

You and I have a few problems C1ue

The first is that you stand on your thinking and don't even bother to read what i write.
I have read Hudson and his articles. The theme is always trhe same as far as I am concerned. The result of his thinking is totalitarianism. That it finds such blind support in here from people such as yourself bothers me.

akrowne has answered very adequately as to why we should have savings. Savings actually provide capital, for ourselves of for someone else. If someone else wishes to use the results of our endeavours, and we are willing to give it up for a price, that price is interest. He thinks he can produce more as a result of having the benefit of my capital. If you don't have savings, where do you get capital? Print it?

Re the growth of residential real estate at a greater rate than GDP has a few causes. I'll list a few but I'm sure others who know more than me could do better.
1. An inordinate part of your economy was deliberately directed at inflating housing. I don't know enough about your tax laws and i did tell you what happens in Aus. I suspect you have something the same policy settings in the US one way or another. Throughout this time, other parts of your economy have been allowed to languish and die. It is a straight misallocation of resources as a result of bad monetary and fiscal policy.
2. I guess this is really (1) restated to some extent.Your economy is bloated from borrowing. You have huge injections from external sources, it has to show up somewhere. This is a common itulip theme and I have never seen it refuted. I suppose I am saying it did not just start after the dotcom bubble. maybe in that I differ from itulip
3. Incredible growth in leverage creating excess money which has to go somewhere.
4. Natural desire for a "cave" for one's family tends to get a bit of priority in one's life at the expense of other things.

you accuse me of not answering your questions. I don't think you even read mine. So I'll ask the important one for you and Hudson one more time
WHO IS TO DECIDE WHO IS FOR THE TUMBRILS AND WHO IS TO KNIT?

rchdenton

09-26-08, 01:39 AM

Hmm, interesting discussion. I guess there is something malevolent at work in the banking system but tend to agree more with The Outback chap. Isn't it more about how to develop a sane and useful banking system rather than property is bad (or have I oversimplified Hudson)?

I certainly agree with Outback that those who borrowed most made most (due to inflation) over most of the past many years. Saving and lending are massively penalised, first by derisory real interest rates and second by exposure to taxation. Hence the negative savings rate that I think you guys also enjoy.

Usually I like Hudson's analysis as he has first hand experience and doesn't pull his punches, but surely everything in this instance depends on exactly how the policy is implemented not whether it is implemented or not.

Lukester

09-26-08, 02:18 AM

C1ue - I will second Outbacks observation - that discussions with you often give me the impression that you "skim hastily through objections to your views and proceed to set up straw man arguments which you can then handily debunk. Case in point?

Your employ of this "argument" which you "attribute" to Outback:

QUOTE: I am still unclear, however, on why getting interest on savings is necessarily itself good when that interest only gets paid because said savings is used (with or without leverage) to create loans which in turn are paid a much higher rate of interest

What you are ascribing to Outback as "his argument" here is in fact a picture postcard description of an abuse of savings (a.k.as. C1ue's straw man argument tactic). You are in effect cherry picking negative corollaries of the function of interest bearing loans in order to illustrate cartoon examples from the recent credit bubble of where interest bearing loans demonstrate no visible virtue whatsoever. In consquence to you employing stereotypes from the recent housing bubble to "illustrate the merit of interest bearing loans", you've reduced a potentially informative exploration of the topic to a hardened taking of opposing positions merely to serve polemical debate.

The notion that interest bearing loans in a non-credit abused environment have a higly constructive purpose is lost in your rhetorical treatment. I personally have encountered this debating style in you on (frequent) prior occasions. I've just made a comment on the putatively "self evident" nature of the toxicity of compound interest on one of Sapiens threads, wherein he once again indulges this pet theme of his. It is a Hudson theme, and apparently one you have fastened onto although I find it's endorsement coming from you fairly quixotic.

To me the notion that "(compound) interest" in all it's guises, is toxic axiomatically, and is a "mega destroyer" as Hudson would have us believe smacks immediately of a "pet thesis" seeking it's validation in history. It smacks of an assertion that I would wish to scrutinize very carefully before ever adopting it as an axiom. Apparently in your quixotic universe, the notion that "all interest bearing loans are bad" is an audacious but profound idea of Hudson's which you have swallowed whole, with a notable disinclination to skepticism, although you do clearly like to profess elaborate skepticism on a broad range of other topics virtually everywhere else (value of gold is questionable, reality of global warming is questionable, reality of oil depletion is questionable, Russian politicization of energy is questionable, etc).

Your adoption of Hudson's remarkably universal assertion on the evils of interest bearing loans is a standout here in antithesis to your preference for deep skepticism everywhere else.

Outback Oracle comments: " The first is that you stand on your thinking and don't even bother to read what i write ". I would second this, from my own experiences.

You and I have a few problems C1ue ... The first is that you stand on your thinking and don't even bother to read what i write. ... you accuse me of not answering your questions. I don't think you even read mine.

I'll respond for Outback ... You are assuming the dysfunction here. The way the savings should be getting used is that it is invested prudently in economically productive ventures. While that may seem a big "if", recall that if the saver/investment agent are not shielded from the consequences of their decisions, they are likely to be very careful on how that money is placed. There is absolutely no need to go out and simply try to place the initially lent money at a higher rate. That would not be investment; it would be a carry trade speculation.

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Outback, Your views on Hudson are well known. ... I am still unclear, however, on why getting interest on savings is necessarily itself good when that interest only gets paid because said savings is used (with or without leverage) to create loans which in turn are paid a much higher rate of interest.

</TD></TR></TBODY></TABLE>

marvenger

09-26-08, 04:10 AM

How are ya TOO, not too shabby i hope!

Good points, the paper shufflers have hijacked us all, we've given them too much power in the name of free markets and they are fleecing us all, so maybe the savers need to take a hair cut too and any future profits from wall street can go back to paying back savers, but as hudson points out in superimperialism book this kind of bondage does no one any good. So yeah creditors and savers maybe need to both take a hair cut and next time we wont let the paper shufflers do what they want with our savings because we'll make sure there are regulations in place to make sure they get hit before any savings do. The old reserve requirements were pretty good at this, but these free market deregulators always find a way around it in the name of bubble bonanza and the once in a lifetime fortune to be had. Rating agencies regulators etc need to be as far removed from the market as possible, ratings agencies getting paid by those they rate is obviously one of the most farken stupid things in this debarcle and shows how easily people and institutions can be bought. So strong regulation is needed. And i still agree with huson and the old religious dudes that to lend money at interest and have so much power over the debtor is usury, if you earn interest you must accept risk.

A few VB's and winnie blues await on this fine Friday evening

nathanhulick

09-26-08, 07:45 AM

In a sound money system, you have gradual deflation (increase in the value of money) as economic progress happens. Equivalently, the total "value outstanding" relative to total money outstanding goes up.

Under such a system, even if you lend at 0%, you are still lending at a real rate of interest. If deflation is running at 2%, then you are really lending at 2%, even if the nominal interest rate is 0%.

I think that is more the sort of situation the ancients had in mind; not totally doing away with the notion of lending.

My thoughts exactly. With a sound money system, the "interest" is the difference in price if you buy something today for $100 with borrowed money, or wait a year and buy it for $98 with money you earned.

Governments don't like those kind of transactions because there is no apparent "profit" for them to tax.

c1ue

09-26-08, 08:16 AM

akrowne has answered very adequately as to why we should have savings. Savings actually provide capital, for ourselves of for someone else. If someone else wishes to use the results of our endeavours, and we are willing to give it up for a price, that price is interest. He thinks he can produce more as a result of having the benefit of my capital. If you don't have savings, where do you get capital? Print it?

Outback,

I've never said savings are bad. I myself have zero debt. I merely point out that the consequence of interest means the result of creating debt and starting a compound interest cycle.

If, for example, usury was again banned as the Bible purportedly advocates - do you think it would affect your financial plan?

And by consequence - borrowing becoming extremely difficult - would the economic world as we know it be different?

The world back in the 'no usury' days was one where upward mobility was only via literal stealing or plunder. Because it was impossible to borrow money, which in turn meant that those with money only gave up their economic power through coercive means.

Re the growth of residential real estate at a greater rate than GDP has a few causes. I'll list a few but I'm sure others who know more than me could do better.
1. An inordinate part of your economy was deliberately directed at inflating housing. I don't know enough about your tax laws and i did tell you what happens in Aus. I suspect you have something the same policy settings in the US one way or another. Throughout this time, other parts of your economy have been allowed to languish and die. It is a straight misallocation of resources as a result of bad monetary and fiscal policy.
2. I guess this is really (1) restated to some extent.Your economy is bloated from borrowing. You have huge injections from external sources, it has to show up somewhere. This is a common itulip theme and I have never seen it refuted. I suppose I am saying it did not just start after the dotcom bubble. maybe in that I differ from itulip
3. Incredible growth in leverage creating excess money which has to go somewhere.
4. Natural desire for a "cave" for one's family tends to get a bit of priority in one's life at the expense of other things.

Outback,

The first 3 reasons above are exactly what Hudson has been saying:

1) Property taxes are skewed low to free up cash flow for asset price inflation
2) Income taxes are skewed negative for 'commercial property' to bias investment towards commercial property and simultaneously benefit commercial property ownership
3) The above 2 items bias the economy towards FIRE institutions

So you're really agreeing with Hudson's view here?

But you still didn't answer the 2nd part of my question: Now that we've had 35+ years of FIRE over-emphasis on real estate - would a similar strategy based on saving money to buy property work going forward?

Or saving money to gain interest payments?

Or in other words, can the past 5% real estate vs. 3% GDP growth continue for another 35 years with all of its attendant FIRE activities?

you accuse me of not answering your questions. I don't think you even read mine. So I'll ask the important one for you and Hudson one more time
WHO IS TO DECIDE WHO IS FOR THE TUMBRILS AND WHO IS TO KNIT?

Hudson's view is the 'government' - presumably Congress - will decide. That only government is in the position to divine the correct path towards a better future as well as mobilize the population and resources to do so.

In my opinion, I think Hudson is over-optimistic on the human component of said government.

From my own perusal of history (NOT study!), the United States has teetered on this precipice a number of times.

The first time was in the beginning: the states' rights vs. the national government led by the banker, Alexander Hamilton. In that instance, the banker won but it could be said that the harm was relatively small since unity was important for survival and the economy was not dependent on banking. But the precedent of national imperative over states' imperative, and by inference over the individual's imperative, was set.

The second time was the Civil War. Again, a reprise of the states' rights vs. the national government - or at least the tyranny of the majority. Again the states' rights were run roughshod.

The third time was the Industrial Revolution post WWII. This time, in the person of Teddy Roosevelt, there was push back. Teddy, then his socialist familial descendant FDR, both pushed back the power of bankers and big capital in government.

But Theodore Roosevelt is the one who really bucked the trend: fought against a rising tide which he did not have to, unlike FDR.

Of course WW I and WW II were such that the United States was given a monstrous leg up in the economies of the world; it is this huge advantage which has postponed the reckoning until now.

I don't see anyone who might, as Teddy did, buck the trend to fix the problem.

The problem is bad enough that an FDR might again arise, but of course where then is the WW II advantage?

The 'tumbriling' and the ownership of the knitting is not at all my concern; I'm not going to get 'tumbriled' nor am I lining up for my share of the knitting.

But the rise of a TR or performance (or lack of) of an FDR is going to make a huge difference in the future of everyone living in the United States, including myself.

All I am saying is that whatever happens, won't be what's happened before.

Perhaps can't be, but this is pure opinion.

I know EJ for one feels innovation is the way out. But there are still consequences to consider:

Innovation requires the rule of law. Only via patents and what not can the innovator reap the maximum rewards from his work, but unfortunately this same rule of law can equally be used to stymie innovation. See 'patent troll'

Innovation also only benefits an elite few. What about the 99.9% of the rest? With labor, taxation, and regulatory costs being what they are, what possible incentive is there for innovative new industries to be built anywhere with a relatively high standard of living? And does this process not lead to an equally stratified world: one of the innovator elite over the huddled masses as opposed to the capitalist/rentier elite?

This is what I thnk about.

Brooks Gracie

09-26-08, 01:24 PM

Chris Coles

09-26-08, 02:31 PM

... akrowne has answered very adequately as to why we should have savings. Savings actually provide capital, for ourselves of for someone else. If someone else wishes to use the results of our endeavours, and we are willing to give it up for a price, that price is interest. He thinks he can produce more as a result of having the benefit of my capital. If you don't have savings, where do you get capital? Print it?

Not wanting to come between two advisories full pelt in a good debate, but Outback, (do you have a real name, or is your work function so precious that you have to remain incognito?), has a very good point not addressed at all by Prof. Hudson who, I must add, is so steeped in Wall Street and MONEY that he has clearly forgotten that he is supposed to live in a CAPITALIST Society.

Savings are supposed to be invested, as capital, (equity for the uninitiated), right back into the communities they came from. Money is the result of the combination of profit created by the entrepreneur and the increased wealth of the entrepreneurs employees who have helped the capital to gain strength by putting in their own effort.

What has gone wrong is that savings institutions have been replaced with banks and thus capital has been replaced with debt. Along the way, (on this point Hudson is absolutely correct), the savings now diverted to the banks has been leveraged beyond belief to inflate the economy beyond anyones ability to pay.

What worries me about Prof Hudson's rant, is precisely that it is clearly a rant by someone obviously very angry. But by losing his cool, he shows us that there must be many in the system at their wits edge also losing it. That brings in the capacity for mistakes to be made on the hoof in short order.

The second thing is his reference to the potential for a "Putin" to rise from the rubble. As I see it, that must be a possibility. If this deal goes through, how many tax payers in the US will become so aggrieved as to stand behind any flag that is raised by a strong figure with no idea of what they are doing, but with the strength of enough people surrounding them to bring forward a new era?

My profound instincts tell me we must stand fast and debate this as a community of individuals here on iTulip that accept every point of view as a valid input to that debate. Anything else ends with "lists" of individuals to be eliminated if their view does not concur.

So, please, keep the debate friendly, we all ought to be able to laugh at each other, regardless that we disagree with another's opinions.

Chris.:)

bart

09-26-08, 05:58 PM

Sound money is a necessary (though not sufficient) solution to this problem.

Some people do make the argument that all "interest" is evil. I don't agree. It is good to have debt-like funding, as opposed to just equity-like. Here is why the "all interest is evil" argument is mathematically wrong-minded:

In a sound money system, you have gradual deflation (increase in the value of money) as economic progress happens. Equivalently, the total "value outstanding" relative to total money outstanding goes up.

Under such a system, even if you lend at 0%, you are still lending at a real rate of interest. If deflation is running at 2%, then you are really lending at 2%, even if the nominal interest rate is 0%.

I too agree that interest by itself is not "evil", and also that sound money by itself is not a sufficient overall solution.

One of the problems with the sound money system you note that includes a minor amount of deflation is that it also discourages investment. By doing nothing at all, one makes a virtually risk free 2% per year, year in and year out.

When one takes the performance of the DJIA since 1900 and includes all dividends, and then subtracts inflation as measured by CPI corrected with shadowstats info, the actual average return per year is about 2.7%. That 2.7% return is before commissions, fees, taxes, etc. are deducted.

Just wanted to add the additional perspective, especially for those who believe that a gold standard is the holy grail - it isn't. Just like every fiat standard has failed throughout history, the gold standard has also failed every time - just for different reasons.

jtabeb

09-26-08, 06:02 PM

The Outback Oracle

09-26-08, 09:48 PM

Not wanting to come between two advisories full pelt in a good debate, but Outback, (do you have a real name, or is your work function so precious that you have to remain incognito?), has a very good point not addressed at all by Prof. Hudson who, I must add, is so steeped in Wall Street and MONEY that he has clearly forgotten that he is supposed to live in a CAPITALIST Society.
FWIW My name is Bill McCormack I live in Brisbane Australia and run a small business employing 14 people. it's not easy!!! I am, unfortunately far too bloody old, 59, and maybe that explains a lot!!!!. i have three kids all of whom lead succesful lives,, and by that i do not mean money. My original University qualification is a Bachelor of Agricultural Science to which i added Economics and a bit of Accounting. I've studied a year or so of Chinese language in my later years.
I have been a farmer in semi-arid Australia(which is also not easy)...and at one time a regional economist and Business Management adviser in arid Australia...hence the Outback. The 'Oracle' stems from two personal traits. The first a willingness to engage in debate...and to the frustration of my friends, to often argue points i don't really believe in just for the mental exercise. I am regarded with a somewhat benign amusement. The second is a youthful fascination with Socrates/Plato. Socrates question to the Oracle of Delphi says a lot about myself. I doubt i have the wisdom to be wise and i am not arguing here that makes me wise!!! Here i borrow from Greenspan...perhaps Socrates question of the Oracle was the ultimate 'conundrum'. Mostly i debate at full throttle in order to learn.

Savings are supposed to be invested, as capital, (equity for the uninitiated), right back into the communities they came from. Money is the result of the combination of profit created by the entrepreneur and the increased wealth of the entrepreneurs employees who have helped the capital to gain strength by putting in their own effort.

What has gone wrong is that savings institutions have been replaced with banks and thus capital has been replaced with debt. Along the way, (on this point Hudson is absolutely correct), the savings now diverted to the banks has been leveraged beyond belief to inflate the economy beyond anyones ability to pay.
You're right about the confusion re savings vs banks etc. I doubt the bank is held in high regard by either the borrower or the lender. On this we all agree i reckon.
My whole argeument here is about two things...the first is the misallocation of 'resources' because of mis-pricing, in this case, of both of savings and borrowings. Hudson would create a more extreme mis-pricing and therefore a more extreme mis-allocation to the detriment of all concerned.
and i can't remember what the second was :D
Where Hudson is SOOOOOOOOOOO wrong is talking about "Interest' or as he prefers "Compound interest" rather than leverage (as one of the contributors to this thread so succinctly pointed out..and i aplogise i cannot recall who it was) Taking aim at savers, as he does, is both wrong from a desirable outcome view and a moral view.

What worries me about Prof Hudson's rant, is precisely that it is clearly a rant by someone obviously very angry. But by losing his cool, he shows us that there must be many in the system at their wits edge also losing it. That brings in the capacity for mistakes to be made on the hoof in short order.
Yeah well we are all guilty of that:o...and i don't think the world is worse off for that. A bit of passion from living beings is good as long as we stop and think from time to time

The second thing is his reference to the potential for a "Putin" to rise from the rubble. As I see it, that must be a possibility. If this deal goes through, how many tax payers in the US will become so aggrieved as to stand behind any flag that is raised by a strong figure with no idea of what they are doing, but with the strength of enough people surrounding them to bring forward a new era?
I have no argument with any of what you or he say about this. As a result of some unfortunate life experiences at a very young age I havbe a perticular dislike of authority and particularly sensitive (some would say over-sensitive) antennae for totalitarianism. Hence my problem with Hudson. not becauwse he means evil but if what he says is followed, it will lead to such.

My profound instincts tell me we must stand fast and debate this as a community of individuals here on iTulip that accept every point of view as a valid input to that debate. Anything else ends with "lists" of individuals to be eliminated if their view does not concur.So, please, keep the debate friendly, we all ought to be able to laugh at each other, regardless that we disagree with another's opinions.
Hmmmmmmmm as to C1ue, as he has been my main protagonist re Hudson...I'd be VERY surprised if we could not have a great night together on the booze debating whatever intellectual topic was to hand! If anything else is interpreted from what i have said i aplogise totally. In saying that i really do have problems with Hudson. What worried me most was that his proposals carried through lead to Totalitarianism. He is quoted so often,his articles published without question as to worth, and seeming held in such high regard in itulip, i felt i could not let it go unchallenged.

Chris.:)
akrowne your contributioon here is valued by me and i suspect by C1ue. I certainly need support to both, clarify my aruments from time to time, and to defend them :D
With regard to Hudson and his anger at the $700B that, as you point out, is surely both correct and understandable. You can just see these blokes having meetings to work out how they can 'divert' a hundred billion here and there! And they will!!! They're practised!

The Outback Oracle

09-26-08, 11:56 PM

Outback,

I've never said savings are bad. I myself have zero debt. I merely point out that the consequence of interest means the result of creating debt and starting a compound interest cycle.

If, for example, usury was again banned as the Bible purportedly advocates - do you think it would affect your financial plan?

And by consequence - borrowing becoming extremely difficult - would the economic world as we know it be different?

The world back in the 'no usury' days was one where upward mobility was only via literal stealing or plunder. Because it was impossible to borrow money, which in turn meant that those with money only gave up their economic power through coercive means.

Outback,

The first 3 reasons above are exactly what Hudson has been saying:

1) Property taxes are skewed low to free up cash flow for asset price inflation
2) Income taxes are skewed negative for 'commercial property' to bias investment towards commercial property and simultaneously benefit commercial property ownership
3) The above 2 items bias the economy towards FIRE institutions

So you're really agreeing with Hudson's view here?

But you still didn't answer the 2nd part of my question: Now that we've had 35+ years of FIRE over-emphasis on real estate - would a similar strategy based on saving money to buy property work going forward?

Or saving money to gain interest payments?

Or in other words, can the past 5% real estate vs. 3% GDP growth continue for another 35 years with all of its attendant FIRE activities?

Hudson's view is the 'government' - presumably Congress - will decide. That only government is in the position to divine the correct path towards a better future as well as mobilize the population and resources to do so.

In my opinion, I think Hudson is over-optimistic on the human component of said government.

From my own perusal of history (NOT study!), the United States has teetered on this precipice a number of times.

The first time was in the beginning: the states' rights vs. the national government led by the banker, Alexander Hamilton. In that instance, the banker won but it could be said that the harm was relatively small since unity was important for survival and the economy was not dependent on banking. But the precedent of national imperative over states' imperative, and by inference over the individual's imperative, was set.

The second time was the Civil War. Again, a reprise of the states' rights vs. the national government - or at least the tyranny of the majority. Again the states' rights were run roughshod.

The third time was the Industrial Revolution post WWII. This time, in the person of Teddy Roosevelt, there was push back. Teddy, then his socialist familial descendant FDR, both pushed back the power of bankers and big capital in government.

But Theodore Roosevelt is the one who really bucked the trend: fought against a rising tide which he did not have to, unlike FDR.

Of course WW I and WW II were such that the United States was given a monstrous leg up in the economies of the world; it is this huge advantage which has postponed the reckoning until now.

I don't see anyone who might, as Teddy did, buck the trend to fix the problem.

The problem is bad enough that an FDR might again arise, but of course where then is the WW II advantage?

The 'tumbriling' and the ownership of the knitting is not at all my concern; I'm not going to get 'tumbriled' nor am I lining up for my share of the knitting.

But the rise of a TR or performance (or lack of) of an FDR is going to make a huge difference in the future of everyone living in the United States, including myself.

All I am saying is that whatever happens, won't be what's happened before.

Perhaps can't be, but this is pure opinion.

I know EJ for one feels innovation is the way out. But there are still consequences to consider:

Innovation requires the rule of law. Only via patents and what not can the innovator reap the maximum rewards from his work, but unfortunately this same rule of law can equally be used to stymie innovation. See 'patent troll'

Innovation also only benefits an elite few. What about the 99.9% of the rest? With labor, taxation, and regulatory costs being what they are, what possible incentive is there for innovative new industries to be built anywhere with a relatively high standard of living? And does this process not lead to an equally stratified world: one of the innovator elite over the huddled masses as opposed to the capitalist/rentier elite?

This is what I thnk about.

C1ue...I drafted up a wow of a reply.well in my own opinion :)...but it took me a bottle of white wine to do it:D and then I lost it!!!! So as Mccarthur said..."I shall return:":D

Chris Coles

09-27-08, 02:06 AM

C1ue...I drafted up a wow of a reply.well in my own opinion :)...but it took me a bottle of white wine to do it:D and then I lost it!!!! So as Mccarthur said..."I shall return:":D

Bill,

There is nothing more frustrating than to work half the night on a real BLAST to lose it by the single press on a button. I have done the same in the past. Now, yes, I can laugh about such, but I am quite sure that, at that precise moment, you were devastated. Such is life, Ho, Hum!

My Grandfather, on arrival in Sydney, ~1840's discovered the last of the Prison ships, HMS Success had been scuppered to claim the insurance and he raised it back up, put it on display and that in turn led to his marrying a local girl who came along to borrow the bunting for her coming out ball. As a result, I have in my possession a copy of the first Blue Paper issued my the Australian Government on the subject of Penal Reform and have just sold the hand written manuscript of the first book ever written on the subject.

My father helped the construction of the Brown Coal fuelled power station at Yallorne, and just to top it off, I have two brothers in Australia but I have never visited but I do have friends that visit every year to fly gliders. As they say, it is a very small world.

Chris.

Chris Coles

09-27-08, 03:08 AM

Who are these mythical "savers"? From my understanding of the bailout package, financial institutions and other FIRE economy middlemen are the only ones being bailed out of their self-induced situation. Banks, insurers, hedge funds and brokerage firms not savers--they are speculators using OPM to leverage their returns. They make riskier and riskier speculative bets in order to reward their executives when the speculation scheme works. If they were "savers" they would have alot of cash and liquid investments on their balance sheets.

The "fresh start" idea is a good one. The Debt Slavery and Credit Card Protection Act of 2005 has made it nearly impossible for a worker to file for bankruptcy, unless he or she quits their job first (the earnings test was re-written to make most wage earners ineligible for debt discharge). And of course if you are debt-laden, you can't quit your job, which is why the Debt Slavery Act was enacted. Presto--you now have a totally stratified society which has ALWAYS led to economic ruin, whatever the empire involved.

How can innovators even get started if they have to keep full time jobs to just to get by with little access to capital?

At the start of the capitalist system, when there were individuals with money but no income from anything other than "Estates", someone came up with the idea of the Joint Stock Company whereby an innovator could find the means to employ ordinary people to do what were, at the time, extraordinary things. So it was the Joint Stock Company that underpinned the success of the capital based system. Sometime after that, Insurance became successful and from that starting point the income of the insurance companies became the new "Estates" which in turn had to be invested so that, when there were losses due to disasters, there was still something left in the pot to pay for the costs of the whole.

These insurance companies became the Savings Institutions.

But as anyone will easily see, there are limits to the potential to invest capital. The limit is set by the availability of innovation and innovators. (I must add a point well recognised by Japan recently when they ramped up the whole idea of teaching innovation in their schools). So from the outset, there was always a surplus of capital available in the coffers of the savings institutions.

In these now distant times the surplus was put to good use by lending the surplus as working capital for the same companies that were first invested into using equity capital.

I return to my previous post where I showed that money was always the result of the income of the innovator and the employees.

It is this viewpoint that has become so distorted.

I am an innovator. I hold patents in telecoms in the USA and Japan. I have a patent application in progress at this moment that has just been published GB 2 447 526 A so you can go and look at it. I am unfunded so in fact the full world rights have now been lost as I have been unable to fund the national phase applications which would certainly need something like £250,000 just for application and translation fees.

I have a book about gravity that is unfunded, (I want to retain my own publishing company because I believe the book will help me establish a completely new publishing house), and again, no one will fund anything unless they can have complete control. I refuse to hand over complete control.

So I can say with impunity, there is no source of funding for the individual inventor or innovator determined to remain free and in control of their own destiny at this time. The whole system has become completely distorted and is so far away from the original capital based joint stock company system as to be unrecognisable to anyone with a proper understanding of a free enterprise system in a free nation.

You all live in a totally feudal monetarist system and I have set out my thinking about this in a recent post.

Adventure and Essential Freedom The missing elements of a Rich Cultural Life in a Successful Economy

http://www.itulip.com/forums/showthread.php?t=5166

The overall problem is of such magnitude that I do not see any chance of change coming from anyone within government simply because they all support the present system. Tell me of any single politician anywhere that has a handle on this subject?

All credit to EJ and his belief that the change must come from innovation and I applaud him for sticking to his book about what to do next.

There, now I have had a good old fashioned rant too.

c1ue

09-27-08, 09:17 AM

C1ue...I drafted up a wow of a reply.well in my own opinion :)...but it took me a bottle of white wine to do it:D and then I lost it!!!! So as Mccarthur said..."I shall return:":D

Outback,

I hope the wine wasn't so that you could sink to my level...;)

Either way, I do share your anger and outrage. I merely have it pointed at a different direction.

I'll await the return of your inspiration...or another trip to the liquor cabinet...

World Traveler

09-27-08, 06:21 PM

We definitely need another Teddy Roosevelt right now, someone who is pro-capitalism, but insists on a FAIR capitalism, where a predatory few cannot exploit the rest, a capitalism that includes protections for workers and average citizens.

Teddy Roosevelt was also a strong environmentalist, and during his administration, the system of national parks that we have today, was set up.

The sad and scary part is that TR was never meant to be president. He was an activist governor of New York and stepping on the toes of a lot of vested interests there, so the NY Republicans bosses decided he should be "kicked upstairs", to get him out of the way and offered him vice-president on 1900 slate.

McKinley, the presidential candidate running for re-election, had a lot in common with the free market fundamentalists of today. It was only his assasination in 1901 that gave TR his first term. By 1904, TR was hugely popular, and earned a second term.

My opinion (and it's just my opinion), on today's candidates is that Obama has potential, but that he is a little too cautious to be a full-fledged TR and that McCain would be too captive to vested interests in the Republican Part to make an effective assault on free market fundamentalism (i.e., he'd be a McKinley).

Rajiv

09-27-08, 11:11 PM

See my reply to Lukester here (http://itulip.com/forums/showpost.php?p=50328&postcount=1)

The Outback Oracle

09-30-08, 04:10 AM

C!ue i am not trying to reopen a debate here, or kick this thread back into life. I am replying as a matter of courtesy. I apologise for the delay. i just could not gather enough energy to give what you wrote proper consideration. Whether i do so now is probably a moot point...Cheers

Outback,

I've never said savings are bad. I myself have zero debt. I merely point out that the consequence of interest means the result of creating debt and starting a compound interest cycle.
I'm in a little trouble trying to sort out what you are saying is cause and effect there. in my argument, contrary to what happens in the world now, you cannot have debt without first savings. So Interest is not the result of creating debt but of savings. i know it's a fine point but reasonably essential in my own view...which transcends all others!

If, for example, usury was again banned as the Bible purportedly advocates - do you think it would affect your financial plan?
I'm not personally a biblical man and while i had a fair bit of bible drummed into me as a youngun' I wouldn't care to debate its references to usury. 'Usury' in English has two meanings....the first is just plain interest and the second escessive interest. I'd worrry about what the Bible purpotedly said given the number of different interpretations there are aorund.
Plan????What plan? Hell i never had one that hung true for more than a few weeks! The wheat was always a bag an acre short of what i planned...the sheep always cut a pound less wool, the cows never had quite enough calves, and the cattle never fattened fast enough. I was alwys behind and it has effected my psyche!!!;) Now, seriously, if i couldn't borrow money, my 'plan' , better probably described as an 'idea' would not have changed one iota.

And by consequence - borrowing becoming extremely difficult - would the economic world as we know it be different?
Tthe world would be very different but are we starting from here or rewinding the clock to some starting point back in time?....Perhaps you and i could write a book on the subject but I doubt i can address the problem here. Re 'world'...first do we mean our Anglo -Saxon world or all those other funny coloured blokes as well? If we are rewinding clocks,for ourselves, given the time all this crap has been going on...i doubt materially we would be any worse off without credit than we are now. i'd guess however we would be less 'materialistic', we would have little debt and i'd guess a muich better society

The world back in the 'no usury' days was one where upward mobility was only via literal stealing or plunder. Because it was impossible to borrow money, which in turn meant that those with money only gave up their economic power through coercive means.
Actually, I have been going to China for some 20 odd years. So i have seen people grow through hard work and saving. I have seen lives change. i have seen a world change. So I don't think you are exactly correct. I guess it depends on the 'system' Mind you it helped a lot of you were a Colonel or above in the army!!!!

Outback,

The first 3 reasons above are exactly what Hudson has been saying:

1) Property taxes are skewed low to free up cash flow for asset price inflation
2) Income taxes are skewed negative for 'commercial property' to bias investment towards commercial property and simultaneously benefit commercial property ownership
3) The above 2 items bias the economy towards FIRE institutions

So you're really agreeing with Hudson's view here?
Yes

But you still didn't answer the 2nd part of my question: Now that we've had 35+ years of FIRE over-emphasis on real estate - would a similar strategy based on saving money to buy property work going forward?
No i don't think so for the next few years...however...as long as the tax system is skewed towards owning 'property' then it will pay to own it. If you'd saved over the last few years buying a bit of property in due course is likely to pay handsomely.[COLOR="Blue"] Everything overshoots!!!

Or saving money to gain interest payments?
You know my opinions here...saving gives you capital. In the next few years, the price of this credit binge or 'money for nothing' cult has to be paid...those who have savings will win...for the first damned time in how many years....20? 30? 70? otherwise savers get screwed![

Or in other words, can the past 5% real estate vs. 3% GDP growth continue for another 35 years with all of its attendant FIRE activities?
We both know the answer....'it's time'....mind you i have been saying that for a few years!:confused:

Hudson's view is the 'government' - presumably Congress - will decide. That only government is in the position to divine the correct path towards a better future as well as mobilize the population and resources to do so.

In my opinion, I think Hudson is over-optimistic on the human component of said government.

From my own perusal of history (NOT study!), the United States has teetered on this precipice a number of times.

The first time was in the beginning: the states' rights vs. the national government led by the banker, Alexander Hamilton. In that instance, the banker won but it could be said that the harm was relatively small since unity was important for survival and the economy was not dependent on banking. But the precedent of national imperative over states' imperative, and by inference over the individual's imperative, was set.

The second time was the Civil War. Again, a reprise of the states' rights vs. the national government - or at least the tyranny of the majority. Again the states' rights were run roughshod.

The third time was the Industrial Revolution post WWII. This time, in the person of Teddy Roosevelt, there was push back. Teddy, then his socialist familial descendant FDR, both pushed back the power of bankers and big capital in government.

But Theodore Roosevelt is the one who really bucked the trend: fought against a rising tide which he did not have to, unlike FDR.

Of course WW I and WW II were such that the United States was given a monstrous leg up in the economies of the world; it is this huge advantage which has postponed the reckoning until now.

I don't see anyone who might, as Teddy did, buck the trend to fix the problem.

The problem is bad enough that an FDR might again arise, but of course where then is the WW II advantage? Ah we need a 'Philosopher king' a benevolent dictator....the nearest i have seen in my lifetime was Lee Kwan Yew in Singapore. Singapore clearly has benefited from his rule.

The 'tumbriling' and the ownership of the knitting is not at all my concern; I'm not going to get 'tumbriled' nor am I lining up for my share of the knitting.
Hm..maybe i'm too old and you miss the point....it is an old saying based on Charles Dickens "Tale of two Cities" Madame Defarge knits the names of those who are to die by the guillotine and sits knitting while she watches them die. So my question was...in Hudson's new world order...who is to judge and who is to be sacrificed? Who is to say/ What are the criteria by which we will judge 'this man is to be rescued, while this man will have his savings confiscated in order that we rescue the first!" That's what bugs me about hudson!!!!!!! His solutions are totalitarian...he would deny this of course and claim to be sooooooooo in favour of liberty for all!!! Well so was madame Defarge!

But the rise of a TR or performance (or lack of) of an FDR is going to make a huge difference in the future of everyone living in the United States, including myself.

All I am saying is that whatever happens, won't be what's happened before.

Perhaps can't be, but this is pure opinion.

I know EJ for one feels innovation is the way out. But there are still consequences to consider:

Innovation requires the rule of law. Only via patents and what not can the innovator reap the maximum rewards from his work, but unfortunately this same rule of law can equally be used to stymie innovation. See 'patent troll'
As Chris said...only those with a lot of money can afford to lodge let alone defend their patents! I have personally given up on a couple. As to teh rule of law...the banksters are not the only ones who have set out to destroy our society and the rights of ordinary people. The lawyers are at least as responsible....then again we are all resopnsible ..no?
C1ue I think we agree that all the excesses have led us up some sort of blind alley. As to EJ...he thinks a little differently...he says.."this is what is going to happen as a result of what these bastards will do...right or wrong...you and i are "wasting' our time debating what 'ought' to happen...a thing my son constantly warns me against.

Innovation also only benefits an elite few. What about the 99.9% of the rest? With labor, taxation, and regulatory costs being what they are, what possible incentive is there for innovative new industries to be built anywhere with a relatively high standard of living? And does this process not lead to an equally stratified world: one of the innovator elite over the huddled masses as opposed to the capitalist/rentier elite?
I have few answers in this regard. The one thing i do know is that one cannot proscribe a world. That leads to totalitarianism with all its evils. I guess a 'free' society will always have 'levels' What we need to ensure is that we make it possible for people to move upwards. Secondly 'Man is born free AND he is everywhere in chains"...Rousseau's 'Social Contract' ...the contract we all make with our society, to contribute to it, to abide by its rules and mores, so that it accepts and looks after us for the benefit of all. The more each individual adheres to his 'social contract' the better we will all live.

This is what I thnk about.
Yeah well you do a lot of thinking and the world will be a better place for that! I'm another half a bottle of wine down!

c1ue

09-30-08, 05:37 PM

Outback,

Whatever my tone, let me be clear that I do appreciate the direct anecdotes you provide, and furthermore that I do share your outrage over what is happening.

I think from your responses that the only remaining item of discussion is the interest/usury.

Usury in the strict sense is all forms of requiring interest payments for loans.

Usury in the American sense is now defined as 'unreasonable' interest payments for loans.

<DT>Ezekiel 18:5 <DD>5 But if a man be just, and do that which is lawful and right, 6 [And] hath not eaten upon the mountains, neither hath lifted up his eyes to the idols of the house of Israel, neither hath defiled his neighbour's wife, neither hath come near to a menstruous woman,
Ezekiel 18:8 *

<DD>8 He [that] hath not given forth upon usury, neither hath taken any increase, [that] hath withdrawn his hand from iniquity, hath executed true judgment between man and man, 9 Hath walked in my statutes, and hath kept my judgments, to deal truly; he just, he shall surely live, saith the Lord GOD.
Ezekiel 18:13 *

<DD>13 Hath given forth upon [I]usury, and hath taken increase: shall he then live? he shall not live: he hath done all these abominations; he shall surely die; his blood shall be upon him.
Ezekiel 18:16

<DD>16 Neither hath oppressed any, hath not withholden the pledge, neither hath spoiled by violence, hath given his bread to the hungry, and hath covered the naked with a garment, 17 ** [That] hath taken off his hand from the poor, [B][that] hath not received usury nor increase, hath executed my judgments, hath walked in my statutes; he shall not die for the iniquity of his father, he shall surely live. 18 [As for] his father, because he cruelly oppressed, spoiled his brother by violence, and did [that] which [is] not good among his people, lo, even he shall die in his iniquity.

<DD>(Interest on money or equivalent is condemned) <HR><DT>Psalms 15:5 <DD>5 [He that] putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these [things] shall never be moved.

<DD>(Interest on money or equivalent is condemned) <HR><DT>Exodus 22:25 * <DD>25. If thou lend money to [any of] my people [that is] poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.

<DD>(Interest on money or equivalent charged to the poor in your country is condemned) <HR><DT>Deuteronomy 23:19 <DD>19 Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: 20 Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.
The Jewish scriptures supposedly separate the sin from usury to Jews, vs. moneylending to goyim (non-Jews).

Either way, the point I am stressing is that there have been historical periods where moneylending for interest payments was prohibited, and those periods were marked by a powerful disincentive to invest.

So I guess I'm saying that financial bubbles are a consequence of usury, and that usury itself can be good if controlled. But unfortunately it isn't being regulated well right now.

</DD>

Spartacus

12-11-08, 02:58 PM

Anyone have easy (interwebs stuff) links for these?

I can't seem to formulate searches to find the right docs.

variations on this aren't giving me much ...

plutarch rome fall "debt laws"
Livy roman decline "debt laws"
diodorus rome "favored creditors"

and so on ...

Or is this material all dead-tree stuff only?

http://www.counterpunch.org/hudson09252008.html

Livy, Diodorus, Plutarch and other historians of the epoch attributed the prospective fall of the Roman Empire to its harsh creditor-oriented debt laws. But today, historians publish books speculating that perhaps the problem was lead piping or lead goblets for their wine, or disease, or imperial overreaching, or superstition – anything but the cause to which the Roman historians themselves pointed

Or am I wrong to expect a cliff's Notes version, but the only existing ones are the much longer, unabridged versions - IOW Hudson's quote is the Cliff's Note?

Rajiv

12-11-08, 10:02 PM

This source may be useful - The Spirit of Laws By Charles de Secondat Montesquieu, (http://books.google.com/books?id=j6URLxeiwfIC&pg=PA200&lpg=PA200&dq=plutarch++roman+republic+creditor&source=web&ots=2QIJ5NfwYe&sig=gpBIM8HxPqFL6K6f5vEnPR2thpk&hl=en&sa=X&oi=book_result&resnum=4&ct=result)

See page 200 section 21 of the book titled - "Of the Cruelty of Laws in respect to Debtors in a Republic"