iTulip Interview: Dr. Michael Hudson - Parts I & II of IV

[FRED]

iTulip Interview: Dr. Michael Hudson - Parts I & II of IV (Free)

Eric Janszen interviews Dr. Michael Hudson on the FIRE economy, the dollar, asset inflation and deflation, and the economic growth ratchet.

Michael Hudson is a Wall Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri (Kansas City). He has written or edited over ten books on international finance, economic history and the history of economic thought, and has been an economic adviser to the U.S., Canadian, Mexican and other governments and United Nations agencies, as well as to international corporations and money managers. He is president of the Institute for the Study of Long-term Economic Trends (ISLET). His books have been translated into Japanese, Spanish and Russian.

As an advisor to the White House, State Dept. and Defense Department at the Hudson Institute, and subsequently to the United Nations Institute for Training and Research (UNITAR), he became one of the best known specialists in international finance.

Dr. Hudson is former balance-of-payments economist for the Chase Manhattan Bank and Arthur Anderson. In 1989 he organized the world’s first third world debt fund for Scudder Stevens & Clark (an offshore fund). He continues to conduct statistical research for financial and non-profit institutions, most recently for the Robert Schalkenbach Foundation and the Levy Economics Institute.

Michael Hudson is president of the Institute for the Study of Long-term Economic Trends (ISLET) in New York and London. Among his books on the politics of international finance are Super Imperialism - New Edition: The Origin and Fundamentals of U.S. World Dominance, and Global Fracture: The New International Economic Order. He formerly taught international economics at the New School for Social Research, Graduate Faculty (1969-72), and has traced the development of international trade and financial theory in Trade, Development and Foreign Debt (Pluto Press, 1993. He is editor of the ISLET assyriological colloquia on Debt and Economic Renewal in the Ancient Near East (CDL Press, 2002), Urbanization and Land Use in the Ancient Near East ((Harvard: Peabody Museum, 1999), and Privatization in the Ancient Near East and Classical Antiquity (Harvard 1996).

In 1984 Dr. Hudson joined Harvard’s Peabody Museum to design a program in the financial origins of civilization. He has edited three colloquia in this program: Privatization in the Ancient Near East and Classical Antiquity (1996), Urbanization and Land Ownership in the Ancient Near East (1999) and Debt and Economic Renewal in the Ancient Near East (2002). A fourth volume on the Origins of Money and Account-Keeping in the Ancient Near East is in preparation.

Background Reading

• Saving, Asset-Price Inflation, and Debt-Induced Deflation
• New Road to Serfdom

Part I (Free - 11:38)

1. The Finance, Insurance, and Real Estate (FIRE) envelopes the Industrial Economy and operates independently
2. There will be a "break in the chain of payments"
3. Hyper-inflation is a form of debt deflation
4. A break in the chain of payment can lead to commodity price deflation
5. Insiders get their money out before the event, in the case of the Soviet Union by means of money laundering
6. Others are able to buy bonds denominated in a foreign currency

Part II (Free - 10:28)

1. How a bread in the chain of payments may occur
2. The resulting economic dislocations will have no relationship to the dollar
3. The current dollar hegemony may be unseated only by an economic, political, and military break with the U.S.
4. A variable tariff that allows trading partners to not recycle dollars to prevent local currency appreciation can re-balance the system
5. No nation has ever repaid its foreign debts in full... ever

Part III (iTulip Select Subscribers Only - Available here)

1. Credit derivatives are the most likely cause of a financial system crash.
2. No one can hedge the risks posed by asset deflation except by selling inflated assets.
3. October 1987 is the model for the next financial crash.
4. The larger the debt, the bigger the debt deflation. Expect a long, slow economic crash.
5. The U.S. will not repay its foreign debt.
6. Hyperinflation of the dollar, if it happens, will be a political and not an economic or monetary event.
7. Since the time of the South Sea bubble, financial bubbles have been created by governments in order for governments to dispose of public debt.
8. The U.S. government wants to exchange social security claims for stocks so that stocks can be inflated and then allowed to crash, to wipe out the entitlement liability.
9. Most corporate balance sheet growth over the past few years is fictitious capital, what used to be called 'watered costs.'
10. The U.S. corp. sector is fragile due to excessive use of debt and leverage for the past several years.
11. There will be a huge asset grab and reimbursement.
12. Hardly any money is spent on goods and services, rather, 99.9% of monetary payments are for assets.
13. There will be mass defaults on mortgages and losses of houses to people with ready cash.
14. The banks will allow people to stay in their houses, payments owned will be added on to the mortgages, and debt will go up without any money changing hands.
15. US housing debt will mimic the 1970s Brazilian compound interest curve.

Part IV (iTulip Select Subscribers Only - Available here)

1. The future will not be "business as usual."
2. The global economy is likely to experience a financial system crash caused by a revelation of fraud or some kind of financial accident.
3. The main source of risk, the derivatives market, is so non-transparent that once there is a break in the chain of payments no one knows how it will wind up until after the dust settles.
4. As finance now dominates the economy, this crash will have serious economic and political consequences.
5. Political leaders who are expecting it may exploit the resulting turmoil. Unfortunately, the bad guys tend to plan better than the good guys, who tend to react ad hoc.
6. Russia and China are developing a competing economic and political block which will play a significant role in the future global economy and polity.

Previous iTulip Select Interviews:

• Jim Finkel, CEO Dynamic Credit - Parts I and II

Upcoming iTulip Select Interviews:

Rick Ackerman
Martin Mayer
Paul Tustain

Upcoming iTulip Select Book Reviews:

Debt and Delusion: Central Bank Follies that Threaten Economic Disaster (Deluxe Edition)

America's Suicidal Statecraft: The self-destruction of super power

[Sapiens]

Michael is a brilliant economist, his only faults are his huge ego and that he is an academic. I would guess that his huge ego is needed to deal with the mediocre and mundane economists in academia.

Buy his books and read them, they have been worth every penny to me in saving and growing my family’s wealth.

-Sapiens

[FRED]

Michael is a brilliant economist, his only faults are his huge ego and that he is an academic. I would guess that his huge ego is needed to deal with the mediocre and mundane economists in academia.

Buy his books and read them, they have been worth every penny to me in saving and growing my family’s wealth.

-Sapiens

Super Imperialism - New Edition: The Origin and Fundamentals of U.S. World Dominance

Global Fracture: The New International Economic Order

[grapejelly]

so trying to summarize what I thought I heard esp. in Part II:

Dr. Hudson believes that all the economies in the world are contributing their "economic surplus" to a greater or lesser degree to the US. Their contributions are rising and will end at the point where they have nothing left to contribute and/or some exogenous event intervenes. Dr. Hudson does not believe in the Ka-Poom theory because he says that the only thing that affects the dollar is the willingness of non-US economies to accept dollars in exchange for their economic surplus.

Why do other countries continue to engage in this game that, according to Dr. Hudson, has only one winner, the US?

Dr. Hudson doesn't know.

This feels like a half baked explanation. I believe that other governments operate in their own self-interests, not necessarily the self-interests of "the people" of their countries. So there must be something in their actions that lead them to contribute a greater percentage of their country's respective economic surplus? It must be in those other governments' self-interest. It has to be, or they wouldn't do it. It could be...

1. CONSPIRACY. There are the same shadowy figures behind all governments, pulling the strings...

2. HABIT. Other country's habits after World War 2 and Bretton Woods die hard.

3. PROTECTION MONEY. Other countries' governments fund the US with their economic surplus in order to gain the advantages of Pax Americana in these uncertain times when nuclear weapons must be contained. The US earns tribute in return for protection against catastrophic threats, in other words. Nobody may like it, but they still see the advantages of paying for the protection.

4. ECONOMIC DEPENDENCE. Their governments feel they get the better end of things economically.

Who knows.

I would say that Dr. Hudson has not a theory, but an observation. His observation seems true. But he doesn't have an explanatory theory for the observation. I am still looking for one!

And I can't understand why "Ka-Poom" theory, that the central banks continue inflating with periodic bouts of disinflation, is at odds with Dr. Hudson's observation either. Both co-exist.

Interesting interview, and thanks iTulip and EJ. I am looking forward to part 3.

[metalman]

so trying to summarize what I thought I heard esp. in Part II:

Dr. Hudson believes that all the economies in the world are contributing their "economic surplus" to a greater or lesser degree to the US. Their contributions are rising and will end at the point where they have nothing left to contribute and/or some exogenous event intervenes. Dr. Hudson does not believe in the Ka-Poom theory because he says that the only thing that affects the dollar is the willingness of non-US economies to accept dollars in exchange for their economic surplus.

Why do other countries continue to engage in this game that, according to Dr. Hudson, has only one winner, the US?

Dr. Hudson doesn't know.

This feels like a half baked explanation. I believe that other governments operate in their own self-interests, not necessarily the self-interests of "the people" of their countries. So there must be something in their actions that lead them to contribute a greater percentage of their country's respective economic surplus? It must be in those other governments' self-interest. It has to be, or they wouldn't do it. It could be...

1. CONSPIRACY. There are the same shadowy figures behind all governments, pulling the strings...

2. HABIT. Other country's habits after World War 2 and Bretton Woods die hard.

3. PROTECTION MONEY. Other countries' governments fund the US with their economic surplus in order to gain the advantages of Pax Americana in these uncertain times when nuclear weapons must be contained. The US earns tribute in return for protection against catastrophic threats, in other words. Nobody may like it, but they still see the advantages of paying for the protection.

4. ECONOMIC DEPENDENCE. Their governments feel they get the better end of things economically.

Who knows.

I would say that Dr. Hudson has not a theory, but an observation. His observation seems true. But he doesn't have an explanatory theory for the observation. I am still looking for one!

And I can't understand why "Ka-Poom" theory, that the central banks continue inflating with periodic bouts of disinflation, is at odds with Dr. Hudson's observation either. Both co-exist.

Interesting interview, and thanks iTulip and EJ. I am looking forward to part 3.

all of the above. good points. hadn't heard of vimeo. interesting site. here's a clip of the trade deficit in action. goods coming in from Asia. and on, and on, and on...






The Goods Train on Vimeo

[ennui6]

I have often used the expression that the US economy is the largest Ponzi backed by the largest protection racket in history. Enron keeps coming to mind. They leveraged against a suicidal regulatory environment in California to strip them bare, but still managed to go bankrupt overleveraging their advantage.

[Spartacus]

no Gold backing, no deflation (with many caveats)

No debt denominated in other currencies, no hyper-inflation(with many caveats)

[Tet]

iTulip Interview: Dr. Michael Hudson - Parts I & II of IV (Free)

Part II (Free - 10:28)

1. How a bread in the chain of payments may occur
2. The resulting economic dislocations will have no relationship to the dollar
3. The current dollar hegemony may be unseated only by an economic, political, and military break with the U.S.
4. A variable tariff that allows trading partners to not recycle dollars to prevent local currency appreciation can re-balance the system
5. No nation has ever repaid its foreign debts in full... ever

We are witnessing the break of the D0llar Hegemon on a daily basis, the political and military break occured the day Pandora's Box was opened with the US invasion of Iraq four years ago. This was an Iraq who at the time was exporting oil for Euros not d0llars. Russian oil/gas exports are no longer supporting the Petrol D0llar recyling like it once was. Gulf of Finland oil exports are up 25% in the first two months of this year after being up 15% last year, Russian oil exports to China are expected to grow over 30% this year. Soon, very soon as in by the end of this year Russia will close the d0llar oil pipeline that flows through Poland. Greece and Bulgaria just signed a nond0llar pipeline deal with Russia last week, scheduled completion is 2008. This is what is refered to as Old Europe and New Europe, New Europe being those countries Poland, Ukraine and Georgia that require the rest of Europe to use the d0llar to purchase their oil and gas from Russia. This is oil that is not trading through Wall Street or London in d0llars and is conducted contract by contract in a multitude of currencies. This summer Venezuela will start selling oil and gas to South America using something other than d0llars as well. The Sudan sells oil in Euro's and that should explain what all the fighting is about there.

Last summer Lebanon proved beyond a shadow of a doubt that a $1,000 military expense can counter a $1 million military expense. Million d0llar missiles counter billion d0llar assets. The rest of the world is no longer playing the Cold War strategy of tit for tat of billion d0llar military expenses being countered by billion d0llar military expenses. The Anglo Empire can no longer invade countries at will, this allows countries to form other economic alliances. Looks like the Korea's will unite sometime in the next year or two and that will bring the whole d0llar hegemon to it's knees.

What we have is a Central Banking system at war with a social credit or Chartalist system. Brazil, Russia, India, China, South Korea and South Africa are at war with the Anglo Central banks along with Israel and Japan. A united Asia has always been the British Empires biggest fear and it looks like there will be a united Asia sooner rather than later. We should find out if we have a multi-polar world or continue to have one super power controlling the world by the end of this year. When the Central Banks can no longer export inflation to the rest of the world, that means we have a stronger d0llar not a weaker d0llar like the current system.

[grapejelly]

[/list]What we have is a Central Banking system at war with a social credit or Chartalist system.

Where is your evidence? All the countries you mention have central banks. Nobody has a social credit system on any serious scale.

[Tet]

Where is your evidence? All the countries you mention have central banks. Nobody has a social credit system on any serious scale.

You're kidding aren't you? China has a huge social credit chartalist system but of course they run several systems at once. Look into the financing of the Three Gorges project for an example. For each private foreign business operating in China there is still a huge state business operating in parallel. How big do you think the Chinese economy really is? Number Four? Hardly, look into steel production, concrete production, grain production, copper production, automobile production, anything that represents real economy and China is in the number one or number two spot. I think when the US added burger flipping to manufacturing a few years ago that really screwed-up the numbers.

Russia will be making a huge bond offering sometime this summer as well, not done through the Central Bank. India and South America are getting ready to do the same. Venezuela is going to nationalize their central bank in the next few months, you don't get anymore charalist than that. Taking the profit out of money's creation is going to be an interesting development to watch and China, Russia and South America are headed on the fast track in that direction. I think the central banksters are going to be screwed in the next five to ten years if not sooner.

[grapejelly]

If the central bank is nationalized, how does that imply anything other than yet more irredeemable currency?

It isn't the interest on fiat currency that is the problem, it's the lack of backing by anything.

I can't see any government today or any country that has currency that is backed by anything.

[Tet]

If the central bank is nationalized, how does that imply anything other than yet more irredeemable currency?

Social Credit doesn't rely on redeemable currency, it's value comes from the states abilities to tax and provide social services, electricity, water, healthcare, or whatever service the state provides utilizing that currency for payment. I'd rather have electricity than gold or silver and I'd certainly rather have water than gold or silver.

It isn't the interest on fiat currency that is the problem, it's the lack of backing by anything. I can't see any government today or any country that has currency that is backed by anything.

The US D0llar is backed by a $100 billion CIA, a $600 billion military, a $800 billion Narco d0llar drug trade, it's no accident that opium exports from Afghanistan have skyrocketed since the invasion, the World Bank, IMF and Paris Club extortion racket and OPEC's trading for oil exclusively in Petrol d0llars. The US d0llar is clearly a gangster currency and the world is tired of getting their lunch money taken from them every morning.

The world is countering the CIA by denying the CIA to set-up shop through NGO's in their countries. The world has been countering the military via militia's that can deny the US ability to occupy, mainly in the form of surface to air missiles and well armed citizens. Russia's S-300 missile systems in Iran certainly counters a US invasion or even a Israeli bombing of Iran. The Narco d0llar is being countered through legalization of what used to be illegal drugs selling in their countries in d0llars. The world has countered the World Bank, IMF and Paris Club scam by no longer borrowing from them, loans are down almost 85% to the IMF in just the last three years. China is currently serving as the world's lender offering very favorable rates. The world is countering oil being sold almost exclusively using d0llars with Russian pipelines to free ports or via non d0llar demoninated trade agreements like China. Germany is paying $10 billion for a gas pipeline under the Baltic just to by-pass Polands gas pipeline that requires d0llars for payment. Looks to me like Poland's 1.6 million barrels per day of oil pipeline selling in d0llars will be closed down later this year. Helps explain why Poland sent troops to Iraq, Polands government is financed almost exclusively by their pipelines to Europe. Russia's Baltic exports should increase by about 50 million tons of crude this year selling in different currencies. Venezuela has been bartering oil with Cuba for doctors and nurses and this summer will start to sell oil in a South American currency with Brazil and Argentina.

The d0llar hegemon break has been made and it certainly doesn't surprise me that Dr. Michael Hudson acts like he doesn't notice. Surprisingly this will make the d0llar stronger not weaker, as Wall Street and London are forced to lower oil prices to match Russia, Venezeula, Sudan and maybe Iran's oil selling in other currencies. Promises to be a very interesting year for the worlds Imperial Coin. I doubt that the Federal Reserve and the Bank of England give up very easily though.

[grapejelly]

I believe in redeemable currencies but I don't see any governments today going that route. Governments really want to print their own money and use it the way the US does. They don't want a sound currency -- they want one they can print and get others to accept.

Dr. Hudson says other countries are subsidizing the US in order to keep their own currencies down, by recycling their dollars into US government bonds. He says these other countries are giving their economic surplus to the US.

I think at some point this will stop. But if anything, other countries will be even more irresponsible and opaque with their own currencies than the US is with the US$. Just look around and see the enormous inflation rates throughout the developing world.

BTW, Dr. Hudson on another interview seems to approve of "counter cyclical" government deficit spending a la Keynes. He has said that the US is pursuing "its self interests" while no other country is pursuing theirs.

[Sapiens]

http://www.cfeps.org/pubs/wp/wp46.htm

Very briefly, the broad propositions of Chartalism are:



The atomistic view of money emerging as a medium of exchange to minimize transaction costs of barter between utility-maximizing individuals finds no support in the historical record.
The appropriate context for the study of money is cultural and institutional, with special emphasis on social and political considerations.
Consequently, Chartalists locate the origins of money in the public sector, however broadly defined.
In its very nature money is a social relation of a particular kind—it is a credit-debt relationship.
Chartalism offers a stratified view of social debt relationships where definitive money (the liability of the ruling body) sits at the top of the hierarchy.
Money functions, first and foremost, as an abstract unit of account, which is then used as a means of payment and the settling of debt. Silver, paper, gold or whatever ‘thing’ serves as a medium of exchange is only the empirical manifestation of what is essentially a state-administered unit of account. Thus, the function of money as a medium of exchange is incidental to and contingent on its first two functions as a unit of account and a means of payment.
From here, as Ingham aptly put it, ‘Money of account is logically anterior and historically prior to the market’ (2004a: p. 181).
Neo-Chartalism: The Specific Propositions

The recent revival of the Chartalist tradition, also dubbed Neo-Chartalism, Tax-Driven Money, or Modern Money approach is particularly concerned with understanding modern currencies. Thus, contemporary Chartalists advance several specific propositions about money in the modern world:

1. Modern currencies exist within the context of certain state powers. The two essential powers are:

a. the power to levy taxes on its subjects, and

b. the power to declare what it will accept in payment of taxes.

2. Thus, the state delimits money to be that which will be accepted at government pay-offices for extinguishing debt to the state.

3. The purpose of taxation is not to finance government spending but to create demand for the currency – hence the term ‘tax-driven money.’

4. Logically, and in practice, government spending comes prior to taxation, to provide that which is necessary to pay taxes.

5. In the modern world, states usually have monopoly power over the issue of their currency. States with sovereign control over their currencies (i.e. which do not operate under the restrictions of fixed exchange rates, dollarization, monetary unions or currency boards) do not face any operational financial constraints (although they may face political constraints).[2]

6. Nations that issue their own currency have no imperative to borrow or tax to finance spending. While taxes create demand for the currency, borrowing is an ex ante interest rate maintenance operation. This leads to dramatically different policy conclusions.

7. As a monopolist over its currency, the state also has the power to set prices, which include both the interest rate and how the currency exchanges for other goods and services.

.................

Thanks Tet, I was not aware of Chartalism!

[Tet]

http://www.cfeps.org/pubs/wp/wp46.htm


Thanks Tet, I was not aware of Chartalism!

Thanks, fairly recent discovery for myself as well. Henry C K Liu at Asia Times is about the only author you'll find in the Mainstream press that writes on the subject.
http://www.atimes.com/atimes/others/Henry.html

Nice link you found as well, I added it to my favorites.

[Pervilis Spurius]

Re: chartalism in the case of China.

I am under the impression (perhaps someone can disabuse me of this) that the yuan and renmimbi are two distinct currencies. The yuan is used for foreign trade and the renmimbi (literally "Peoples' Money") is used for domestic exchange. If the renmimbi is the exclusive domestic currency then is this the chartalist money system of China?

[grapejelly]

As I understand it, chartalism is like the tally system. Money is tax receipts issued by the government. But this assumes a discipline that is not present, IMHO.

I don't believe any government today possesses the discipline/motivation to moderate their emission of currency except as far as what is consistent with that government's domestic goals and desired exchange rates.

As Hudson points out, countries don't want a strong currency either. They thus continue driving lower cost exports, and make most of their citizens poorer than they would be otherwise.

[Tet]

Re: chartalism in the case of China.

I am under the impression (perhaps someone can disabuse me of this) that the yuan and renmimbi are two distinct currencies. The yuan is used for foreign trade and the renmimbi (literally "Peoples' Money") is used for domestic exchange. If the renmimbi is the exclusive domestic currency then is this the chartalist money system of China?

That's an interesting observation, I'll check into that.

[Tet]

As I understand it, chartalism is like the tally system. Money is tax receipts issued by the government. But this assumes a discipline that is not present, IMHO.

You think a private group that only looks out for their interests and their buddies interests is somehow better?

I don't believe any government today possesses the discipline/motivation to moderate their emission of currency except as far as what is consistent with that government's domestic goals and desired exchange rates.

Why wouldn't a governments goal actually be for the betterment of the people that government serves?

As Hudson points out, countries don't want a strong currency either. They thus continue driving lower cost exports, and make most of their citizens poorer than they would be otherwise.

It is the Imperial Coin, the hegemon itself that exports inflation and lowers the value of other nations currencies. Hudson isn't a very good historian or economist if he is overlooking THE biggest advantage to having the world's reserve currency in the first place. The US has in turn lowered the value of Uncle Buck by over 30% in the last five years and exports certainly haven't increased. Countries certainly are required to collect 300% more d0llars they are required to have in order to purchase the oil they need to have an industrial economy in the last five years. Now who exactly benefits from higher oil prices besides the Federal Reserve itself. Looks like the game is going to be changing pretty quickly come springtime and Russian oil exports kick into high gear.

[grapejelly]

You think a private group that only looks out for their interests and their buddies interests is somehow better?

Much better. Why not a free market for money?

Why wouldn't a governments goal actually be for the betterment of the people that government serves?

It never is. It's for the betterment of the few in control.