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Phony Fiscal Cliff & Neo-Feudalism

January 1, 2013

Michael Hudson is somebody we’re going to see over and over again in the opening posts and essays on this blog. His perspective on the power grab taking place world-wide is about as clear eyed as anyone is likely to see coming from a non-crank; that is, coming from a respectable professor and not the purveyor of some random blog (ahem). It is an awful lot to process, especially if you haven’t been following his line of thinking, so let me provide a little background and then summarize this latest essay – I highly recommend a close reading of the entire thing, but a few highlights will hopefully give you the gist.

Michael Hudson is part of my favorite (dare I say, vaguely radical?) economics department in the country and perhaps in the world. The University of Missouri, Kansas City (UMKC) is home to the people behind the Modern Monetary Theory (MMT) movement in economics. It is only a small exaggeration to say that they are the “last, best hope” for reshaping society along economic lines. We’ll have plenty to say about them in the coming weeks. There are a number of contributors to MMT, and some significant nuances, but the trio of Randy Wray, Bill Black, and Michael Hudson form a kind of core nucleus, with an interesting “division of labor”: Wray is the driving force behind the MMT aspect, Black is focused on crime within high finance, and Hudson is a bit of the economic historian, decoding and reframing the twists and turns of capitalism.

Primarily – and this is a gross oversimplification of Hudson’s work – he is forcing us to radically rethink what it is we mean by a “free market.” Because of the excesses of capitalism over the past few years (decades), I had taken to challenging the existence of anything that could be called a “free market.” Ha Joon Chang had a positive impact on my thinking – explaining that markets only appear to be “free” because we have accepted all the constructs that create them: the laws, currencies, trade agreements, immigration policies, labor rules, etc, etc, and that you simply can’t have the Libertarian fantasy of a market state without government. Governments make markets, or at least shape them whether they do or do not intervene in specific areas. And we can extend this argument into all of the various ways that government needs to constrain and stabilize markets; whether “free market radicals” like it or not, the simple fact is that government has a positive role to play in the market. This had all been pretty standard liberal fare, at least until recently, and is backed by plenty of evidence. The fact is that “markets” are not stable and don’t tend towards a happy equilibrium all by themselves. The fact is that we live in a mixed economy. Any ideological attempt to “free” the markets from all government “interference” is a smokescreen for some kind of a power grab, or an economic misunderstanding. But Hudson does us one better…

Hudson’s main thesis – as far as I can tell so far (still reading his latest book and digging through some old essays) is that “classical” economics sought to “free the markets” from rent extraction. People were, in a very real sense, trying to throw off the old feudal system, and tribute taking landlords who added nothing but a privileged burden to the economy. This would come to include monopoly rent extraction as well – of various sorts. In other words, a “free market” wasn’t one free from government, but free from rent extraction. If you stop and think about that for a second, you will see just how effective our indoctrination has been; what should be obvious is indeed nearly a thought-crime. Hudson provides ample historical evidence to take this claim seriously, but the phase shift this requires in our thinking is somewhat staggering. Our present day economy is heading towards complete rent extracting satiation. The entire process of “financialization” is a process of turning any and all revenue streams into debt, of lowering taxes on land so those tax streams can become bigger mortgage payments, of shifting the tax burden from the sectors of the economy that are parasitic to the sectors of the economy that are productive. We are undergoing a transformation – perhaps in the final stages – to debt peonage and neo-feudalism fueled by a complete takeover by financial institutions and their lackeys in government. A lesser person making these claims might sound crazy, but Hudson pulls it off with significant scholarship.

Hudson begins with a brief synopsis of the situation we find ourselves in, and the “philosophy” behind it:

Wall Street lobbyists blame unemployment and the loss of industrial competitiveness on government spending and budget deficits – especially on social programs – and labor’s demand to share in the economy’s rising productivity. The myth (perhaps we should call it junk economics) is that (1) governments should not run deficits (at least, not by printing their own money), because (2) public money creation and high taxes (at lest on the wealthy) cause prices to rise. The cure for economic malaise (which they themselves have caused), is said to be less public spending, along with more tax cuts for the wealthy, who euphemize themselves as “job creators.” Demanding budget surpluses, bank lobbyists promise that banks can provide the economy with enough purchasing power to grow. Then, when this ends in crisis, they insist that austerity can squeeze out enough income to enable private-sector debts to be paid.

One of the insights crying out for a more radical interpretation of reality was that we broke the “demand engine” of the economy by squeezing labor to the point that it couldn’t purchase enough real goods and services to support a functioning economy. Instead of relying on increased production capabilities for wealth, and sharing enough of the profits to fuel demand, we created fictitious wealth through asset price inflation (a bubble economy) and drove workers into debt to cover the demand gap. What we see now is a ruling elite that is more than happy to use the governments issuing power of a sovereign currency to prop up assets that benefit the plutocrats (think of the various FED programs & Quantitative Easing), but those same ruling elites won’t even discuss using the powers of government to create jobs programs or write off citizen debts. When policy and ideology are this one-sided, there is little choice but to conclude we have been taken over by a foreign power – no tanks were needed, just debt and lobbyists and campaign donations and tax laws and deregulation…

Hudson continues:

The reality is that when banks load the economy down with debt, this leaves less to spend on domestic goods and services while driving up housing prices (and hence the cost of living) with reckless credit creation on looser lending terms. Yet on top of this debt deflation, bank lobbyists urge fiscal deflation: budget surpluses rather than pump-priming deficits. The effect is to further reduce private-sector market demand, shrinking markets and employment. Governments fall deeper into distress, and are told to sell off land and natural resources, public enterprises, and other assets. This creates a lucrative market for bank loans to finance privatization on credit. This explains why financial lobbyists back the new buyers’ right to raise the prices they charge for basic needs, creating a united front to endorse rent extraction. The effect is to enrich the financial sector owned by the 1% in ways that indebt and privatize the economy at large – individuals, business and the government itself.

One of the fundamental (radical) questions that we must answer as a society, long before being sucked into the complexities of economic theory, is “what is money?” I mean really, what is it? How is it created? What can we do with it? What are the constraints on money? A fully functioning understanding of money would radically reframe the debt / deficit / fiscal cliff debates. Things are not what they seem in corporate media land. Hudson doesn’t go after the question directly, but nonetheless illustrates the depth of our hypnosis surrounding the various worldwide “austerity” programs, and how despite raging failures abroad, this same program is coming to America:

This pro-austerity mythology aims to distract the public from asking why peacetime governments can’t simply print the money they need. Given the option of printing money instead of levying taxes, why do politicians only create new spending power for the purpose of waging war and destroying property, not to build or repair bridges, roads and other public infrastructure? Why should the government tax employees for future retirement payouts, but not Wall Street for similar user fees and financial insurance to build up a fund to pay for future bank over-lending crises? For that matter, why doesn’t the U.S. Government print the money to pay for Social Security and medical care, just as it created new debt for the $13 trillion post-2008 bank bailout?

Continuing (forgive the large block quote, but I think this will be enough to tease the entire essay):

The answer to these questions has little to do with markets, or with monetary and tax theory. Bankers claim that if they have to pay more user fees to pre-fund future bad-loan claims and deposit insurance to save the Treasury or taxpayers from being stuck with the bill, they will have to charge customers more – despite their current record profits, which seem to grab everything they can get. But they support a double standard when it comes to taxing labor.

Shifting the tax burden onto labor and industry is achieved most easily by cutting back public spending on the 99%. That is the root of the December 2012 showdown over whether to impose the anti-deficit policies proposed by the Bowles-Simpson commission of budget cutters whom President Obama appointed in 2010. Shedding crocodile tears over the government’s failure to balance the budget, banks insist that today’s 15.3% FICA wage withholding be raised – as if this will not raise the break-even cost of living and drain the consumer economy of purchasing power. Employers and their work force are told to save in advance for Social Security or other public programs. This is a disguised income tax on the bottom 99%, whose proceeds are used to reduce the budget deficit so that taxes can be cut on finance and the 1%. To paraphrase Leona Helmsley’s quip that “Only the little people pay taxes,” the post-2008 motto is that only the 99% have to suffer losses, not the 1% as debt deflation plunges real estate and stock market prices to inaugurate a Negative Equity economy while unemployment rates soar.

There is no more need to save in advance for Social Security than there is to save in advance to pay for war. Selling Treasury bonds to pay for retirees has the identical monetary and fiscal effect of selling newly printed securities. It is a charade – to shift the tax burden onto labor and industry. Governments need to provide the economy with money and credit to expand markets and employment. They do this by running budget deficits, and this can be done by creating their own money. That is what banks oppose, accusing it of leading to hyperinflation rather than help[ing] economies grow.

Their motivation for this wrong accusation is self-serving and their logic is deceptive. Bankers always have fought to block government from creating its own money – at least under normal peacetime conditions. For many centuries, government bonds were the largest and most secure investment for the financial elites that hold most savings. Investment bankers and brokers monopolized public finance, at substantial underwriting commissions. The market for stocks and corporate bonds was rife with fraud, dominated by insiders for the railroads and great trusts being organized by Wall Street, and the canal ventures organized by French and British stockbrokers.

However, there was little alternative to governments creating their own money when the costs of waging an international war far exceeded the volume of national savings or tax revenue available. This obvious need quieted the usual opposition mounted by bankers to limit the public monetary option. It shows that governments can do more under force majeur emergencies than under normal conditions. And the September 2008 financial crisis provided an opportunity for the U.S. and European governments to create new debt for bank bailouts. This turned out to be as expensive as waging a war. It was indeed a financial war. Banks already had captured the regulatory agencies to engage in reckless lending and a wave of fraud and corruption not seen since the 1920s. And now they were holding economies hostage to a break in the chain of payments if they were not bailed out for their speculative gambles, junk mortgages and fraudulent loan packaging.

The unavoidable conclusion, as the essay continues to unfold and provide details and data, is that the financial sector has taken over the economy, the country and the world – to a very large degree already, and is putting the final touches on quite the coup d’état. The fact that this is so difficult for most people to see is testament to the power of mass media, and to the sad state of disengagement from discussions about (let alone actions!) the political-economy that most Americans feel nowadays.

I have a selection of Hudson’s prepared that gets to the longer historical view of this process of financial takeover of the economy; it is the first of 14 medium to long form essays that I’ve pre-selected to explore in the beginning week or two of this blog…but this current piece is quite topical, dealing with the very misleading “fiscal cliff”, and it gets to the core understanding just as well as the (even) longer essay I had planned to start with today…

One of the reasons for writing at all about these topics is that we can not hope to resist effectively that which we don’t understand. It is my sincere hope that the selections I provide offer up an alternative view to the endless corporate mind-washing taking place related to these pressing political and economic “issues” (perhaps “crises” isn’t too strong?)… Michael Hudson is amongst 2-3 dozen significant and credible thinkers I’ve latched onto in my “vaguely radical” attempt to free my mind of obvious nonsense propaganda and start to understand how the economy works and how this goes beyond simple “technocratic” disagreements about effective policy and gets to the heart of a power grab dating back to feudal times. This is the challenge before our generation, and it is not going to yield to disinterested, disengaged, ironic-hipster pseudo-politics… The status-quo is headed in a very bad direction. It is time to up our game, and that begins by grasping the larger financial power-play that is already well-underway.


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