The West Is
Traveling The Road To Economic Ruin
By Paul Craig
Roberts
February
01, 2016 "Information
Clearing House"
- Michael Hudson is the best economist in the
world. Indeed, I could almost say that he is the
only economist in the world. Almost all of the rest
are neoliberals, who are not economists but shills
for financial interests.
If you have
not heard of Michael Hudson it merely shows the
power of the Matrix. Hudson should have won several
Nobel prizes in economics, but he will never get
one.
Hudson did
not intend to be an economist. At the University of
Chicago, which had a leading economics faculty,
Hudson studied music and cultural history. He went
to New York City to work in publishing. He thought
he could set out on his own when he was assigned
rights to the writings and archives of George Lukacs
and Leon Trotsky, but publishing houses were not
interested in the work of two Jewish Marxists who
had a significant impact on the 20th century.
Friendships
connected Hudson to a former economist for General
Electric who taught him the flow of funds through
the economic system and explained how crises develop
when debt outgrows the economy. Hooked, Hudson
enrolled in the economics graduate program at NYU
and took a job in the financial sector calculating
how savings were recycled into new mortgage loans.
Hudson
learned more economics from his work experience than
from his Ph.D. courses. On Wall Street he learned
how bank lending inflates land prices and, thereby,
interest payments to the financial sector. The more
banks lend, the higher real estate prices rise, thus
encouraging more bank lending. As mortgage debt
service rises, more of household income and more of
the rental value of real estate are paid to the
financial sector. When the imbalance becomes too
large, the bubble bursts. Despite its importance,
the analysis of land rent and property valuation was
not part of his Ph.D. studies in economics.
Hudson’s
next job was with Chase Manhattan, where he used the
export earnings of South American countries to
calculate how much debt service the countries could
afford to pay to US banks. Hudson learned that just
as mortgage lenders regard the rental income from
property as a flow of money that can be diverted to
interest payments, international banks regard the
export earnings of foreign countries as revenues
that can be used to pay interest on foreign loans.
Hudson learned that the goal of creditors is to
capture the entire economic surplus of a country
into payments of debt service.
Soon the
American creditors and the IMF were lending indebted
countries money with which to pay interest. This
caused the countries’ foreign debts to rise at
compound interest. Hudson predicted that the
indebted countries would not be able to pay their
debts, an unwelcome prediction that was confirmed
when Mexico announced it could not pay. This crisis
was resolved with “Brady bonds” named after the US
Treasury Secretary, but when the 2008 US mortgage
crisis hit, just as Hudson predicted, nothing was
done for the American homeowners. If you are not a
mega-bank, your problems are not a focus of US
economic policy.
Chase
Manhattan next had Hudson develop an accounting
format to analyze the US oil industry balance of
payments. Here Hudson learned another lesson about
the difference between official statistics and
reality. Using “transfer pricing,” oil companies
managed to avoid paying taxes by creating the
illusion of zero profits. Oil company affiliates in
tax avoidance locations buy oil at low prices from
producers. From these flags of convenience
locations, which have no tax on profits, the oil was
then sold to Western refineries at prices marked up
to eliminate profits. The profits were recorded by
the oil companies’ affiliates in non-tax
jurisdictions. (Tax authorities have cracked down to
some extent on the use of transfer pricing to escape
taxation.)
Hudson’s
next task was to estimate the amount of money from
crime going into Switzerland’s secret banking
system. In this investigation, his last for Chase,
Hudson discovered that under US State Department
direction Chase and other large banks had
established banks in the Caribbean for the purpose
of attracting money into dollar holdings from drug
dealers in order to support the dollar (by raising
the demand for dollars by criminals) in order to
balance or offset Washington’s foreign military
outflows of dollars. If dollars flowed out of the
US, but demand did not rise to absorb the larger
supply of dollars, the dollar’s exchange rate would
fall, thus threatenting the basis of US power. By
providing offshore banks in which criminals could
deposit illicit dollars, the US government supported
the dollar’s exchange value.
Hudson
discovered that the US balance of payments deficit,
a source of pressure on the value of the US dollar,
was entirely military in character. The US Treasury
and State Department supported the Caribbean safe
haven for illegal profits in order to offset the
negative impact on the US balance of payments of US
military operations abroad. In other words, if
criminality can be used in support of the US dollar,
the US government is all for criminality.
When it
came to the economics of the situation, economic
theory had not a clue. Neither trade flows nor
direct investments were important in determining
exchange rates. What was important was “errors and
omissions,” which Hudson discovered was an euphemism
for the hot, liquid money of drug dealers and
government officials embezzling the export earnings
of their countries.
The problem
for Americans is that both political parties regard
the needs of the American people as a liability and
as an obstacle to the profits of the
military/security complex, Wall Street and the
mega-banks, and Washington’s world hegemony. The
government in Washington represents powerful
interest groups, not American citizens. This is why
the 21st century consists of an attack on the
constitutional protections of citizens so that
citizens can be moved out of the way of the needs of
the Empire and its beneficiaries.
Hudson
learned that economic theory is really a device for
ripping off the untermenschen. International trade
theory concludes that countries can service huge
debts simply by lowering domestic wages in order to
pay creditors. This is the policy currently being
applied to Greece today, and it has been the basis
of the IMF’s structural adjustment or austerity
programs imposed on debtor countries, essentially a
form of looting that turns over national resources
to foreign lenders.
Hudson
learned that monetary theory concerns itself only
with wages and consumer prices, not with the
inflation of asset prices such as real estate and
stocks. He saw that economic theory serves as a
cover for the polarization of the world economy
between rich and poor. The promises of globalism are
a myth. Even left-wing and Marxist economists think
of exploitation in terms of wages and are unaware
that the main instrument of exploitation is the
financial system’s extraction of value into interest
payments.
Economic
theory’s neglect of debt as an instrument of
exploitation caused Hudson to look into the history
of how earlier civilizations handled the build up of
debt. His research was so ground-breaking that
Harvard University appointed him Research Fellow in
Babylonian economic history in the Peabody Museum.
Meanwhile
he continued to be sought after by financial firms.
He was hired to calculate the number of years that
Argentina, Brazil, and Mexico would be able to pay
the extremely high interest rates on their bonds. On
the basis of Hudson’s work, the Scudder Fund
achieved the second highest rate of return in the
world in 1990.
Hudson’s
investigations into the problems of our time took
him through the history of economic thought. He
discovered that 18th and 19th century economists
understood the disabling power of debt far better
than today’s neoliberal economists who essentially
neglect it in order to better cater to the interest
of the financial sector.
Hudson
shows that Western economies have been financialized
in a predatory way that sacrifices the public
interest to the interests of the financial sector.
That is why the economy no longer works for ordinary
people. Finance is no longer productive. It has
become a parasite on the economy. Hudson tells this
story in his recent book, Killing the Host
(2015).
Readers
often ask me how they can learn economics. My answer
is to spend many hours with Hudson’s book. First,
read the book through once or twice in order to get
an idea of what is covered. Then study it closely
section by section. When you understand the book,
you will understand economics better than any Nobel
prize-winning economist.
Treat this
column as an introduction to the book. I will be
writing more about it as current events and time
permit. As far as I am concerned, many current
events cannot be understood independently of
Hudson’s explanation of the financialized Western
economy. Indeed, as most Russian and Chinese
economists are themselves trained in neoliberal
economics, these two countries might follow the same
downward path as the West.
If you put
Hudson’s analysis of financialization together with
my analysis of the adverse impact of jobs offshoring,
you will understand that the present economic path
of the Western world is the road to destruction.
Dr.
Paul Craig Roberts was Assistant Secretary
of the Treasury for Economic Policy and associate
editor of the Wall Street Journal. He was columnist
for Business Week, Scripps Howard News Service, and
Creators Syndicate. He has had many university
appointments. His internet columns have attracted a
worldwide following. Roberts' latest books are
The Failure
of Laissez Faire Capitalism and Economic Dissolution
of the West,
How America
Was Lost,
and
The
Neoconservative Threat to World Order.
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