Clio the cat, ? July 1997 - 1 May 2016
MICHAEL HUDSON: Well, you can look at the basic sweep which is an up sweep, an exponential growth. Any debt is a doubling time, and there's something very unique about this kind of slope. The economy doesn't grow like that, the economy grows in business cycles, up and down.
What you don't see here is very much of a downswing, and that is because the growth of debt continues to mount up by compound interest. The creditors, the banks, simply reinvest all of the interest that they get in making new loans, which is exponential, and they can create their own money simply on their own computers.
So, this chart really should be juxtaposed with one of the business cycles, then you'll see that any debt that grows this rapidly exceeds the ability to be paid, and that is the distinguishing feature of debt for the last 5,000 years. The natural tendency of debt is to exceed the ability to be paid.
Now, this chart simply shows debt by the sector that owns it, the household sector, business. What it does not indicate is what this debt is for. What is it collateralized for? Well, almost all of the household debt is for real estate, and the same thing with commercial bank debt. 80% of bank loans for this debt are real estate loans.
And the blue chart of government debt really doesn't matter that much because the government simply creates the debt. And it's debt that doesn't ever expect to be repaid. Households and businesses have to pay the debt. That's what's causing the problem. Nobody ever got into trouble running into debt.
The government doesn't run into trouble running into debt because it can simply print the money to pay. But individuals, families, and corporations have to pay. And when they can't pay, that hurts the banks, and the banks go under.
And the purpose of the Federal Reserve is to make sure that this debt keeps on growing despite the fact that it is stifling the economy and leading to depression.
The role of the central bank is to impose austerity on the whole rest of the economy to make us look like a Third World country in paying the debt, because this is exactly the same kind of sweep that you have for the global south countries owing their foreign debt and for every country in the west.
So the whole West, Europe, the United States, has a chart just exactly like this, and they're all slowing down, and they're all in what's called a debt deflation right now.
MICHAEL HUDSON: Well, there are a number of points also in that chart. After 2000, a lot of that government debt was the war debt, the Iraq War debt. From 1950 through about 1980, almost all the growth in government debt was military spending abroad.
And this debt is not only owed to the United States holders and the Federal Reserve, but the foreign government. So that is not included in the chart, but that's much of the growth.
The interesting thing also is that you see this acceleration of debt after 2008, and yet that was the period of zero interest rate policy.
When the Obama crash occurred, the Federal Reserve said, the one thing we have to make sure is that families bear the brunt of this enormous financial fraud and bad lending and junk mortgages that have taken place. We want to save the banks and we want to sacrifice homeowners for it. We want to make the public pay to the banks to make sure that homeowners lose their home and lose money.
Businesses go bankrupt, but the banks continue to get richer and richer with this debt, and this debt will not get wiped out by bankruptcy. It's going to grow and grow, just like student loan debt has grown. And you see a lot of this business debt going up, and yet this business debt was almost interest free, very low.
What the chart should be correlated with, if we really had a group of charts, was all of this debt was spent not on producing goods and services, not in building factories and means of production, not in employing labor, but in buying stocks and bonds and speculating. It was all used to buy companies, load them down with debt.
And so this corporate debt that's going up is a result of the mergers and acquisitions, the corporate raids, the corporate takeovers, and treating corporations in a way that would make money for their stockholders and their private owners, but not for the economy at large.
So a company would make money, suppose you take over Sears or Toys R Us, the private capital that would take over, they would borrow the money, hardly any interest from a bank, 100%, buy out Sears or another company.
The first thing they'd do is say, okay, now we've taken over the company, could be the Chicago Tribune, let's take the pension funds that's invested in stocks and let's borrow against that. Let's let the pension funds lend the money to the company, and let's borrow more money from the banks to the company. And the money that we borrow, we will then pay out a special dividend to ourselves.
So the money goes from the banks to the owners without having any positive effect at all, but having a very negative effect. It leaves the company so deeply in debt that it goes bankrupt, like Sears or Toys R Us or all of the other companies that have been essentially going bankrupt.
And when they go bankrupt, they're sold to larger and larger companies. And so this debt has the effect of concentrating ownership within the sector.
And the household debt has gone up because as you increase the amount of money that banks will lend against housing, banks have competed. Who can lend the most money against homes for new families wanting to buy a home?
Well, the banks compete to lend so much money that if you're a family buying a home, you have to borrow more money than your rival who's borrowing from their bank, and the banks have just created a new real estate bubble.
And that's what we're in now. The real estate prices have gone up so high, the rental price is so high that one of the byproducts of this is a rise in homelessness.
And with all of this debt, somehow people don't have enough money to buy goods and services, and standards of living have gone down.
We're living in a increasing Third World austerity plan as a result of this upsweep in debt.
MICHAEL HUDSON: You've gone very quickly over that, and I want to show how revolutionary this was. Until from the founding of the Federal Reserve to 2008, there was a basic philosophy of central banks going all the way back to the Bank of England and to the rules that people discussed in the 1880s and 1890s.
The idea of central banks, you used the words “lender of last resort”. That means everybody realized that sometimes when there would be a business downturn or a shift in interest rates, people would have very sound property. The buildings weren't destroyed when they became insolvent. Companies weren't destroyed.
But the problem is there was a temporary downturn in the business cycle. So banks are supposed to only borrow for short term and at a high penalty rate. Every central bank in the world followed the policy. You don't subsidize rates for credit for banks.
Since 2008, the banks have taken control of the U.S. Treasury and taken control of the Federal Reserve to get all the money that they want for nothing. Actually, they're paid to borrow.
After 2008, the Fed said, we've got to make bankers richer. Despite the fact that they're paying themselves more than any other sector, they don't have enough money to keep on lending. We will give them all the money they want. The way we'll do this is the banks will make loans to corporations for takeovers, make loans for commercial real estate. They will transfer these IOUs to the Federal Reserve in deposits.
The Federal Reserve will lend them money in exchange for this. The banks have put all of their bad loans and shaky loans into the Federal Reserve. The Federal Reserve pays them interest on these deposits. The banks make interest not from the corporate borrowers, but the Federal Reserve is creating the interest to pay the banks to make this huge upsweep in loans.
You can look at that as an arm of Chase Manhattan and Citibank. Essentially, they've taken control of the Federal Reserve.
That's really the libertarian ideal of a centrally planned economy planned by the banks. When the libertarians say, let's get the governments out of business, let's get the governments [to not] run a deficit, that means if the government doesn't run a deficit, it'll cut taxes, it'll cut spending. That means that all the credit that people need, the economy needs, will be produced by the banks.
The Fed has said, now we're going to really turn up the screws. We're going to let the banks make 5% of the money. All of a sudden, this growth in the blue, the government debt that you saw, is going to soar. The interest rates are going to be such a large proportion of the government spending that they're already talking about, we're going to have to cut back Social Security and Medicare.
That's what [Nikki] Haley, the Republican nominee, says. The Republicans want to say, if there's a choice between paying Social Security and Medicare or paying interest to the banks and bondholders, the bondholders come first because they're our campaign contributors. You don't get campaign contributors from people who are broke because they don't have the money that the banks have. Of course, we're going to bail out our campaign contributors.
The government itself has been privatized. That's what neoliberalism is. That's what the anti-government libertarianism is. It means liberty for the banks and debt system for the population at large. That's what these charts imply.
MICHAEL HUDSON: When you use the [phrase] "worthless assets", they weren't exactly worthless if you could get 100% from the Federal Reserve. The word that was used by Marx and almost everyone in the 19th century and today was "fictitious capital". In other words, all of these debts and bank assets were counted as an asset.
If a bank makes a loan to a large corporate property owner in an office building, the bank has that as an asset. But as we're seeing today, these asset prices can't be realized. In other words, what if the bank said, okay, now your mortgage is just falling due because it's a balloon mortgage, you have to pay that. Every few years, you have to pay the entire amount or re-borrow it.
Well, all of a sudden, if it's lent $100 million against an office building, and the office building is now worth $40 million, why would a bank lend $100 million to an owner of a $40 million office building? That's the situation we're in today.
Now, look at these two jumps. The first jump that you have after 2008, that's the junk mortgage jump. All of these loans were against fictitious mortgages, mortgages that pretended that there was value there, but there were mortgages mainly to Black and Hispanic borrowers by banks who cheated them, who over-evaluated the prices.
The banks in general discovered a new way of making money after about 2004. They could make money by charging racial minorities much higher rates, almost double the rates that they charged white people. There were whole banks and brokers that specialized in this, and this was basically the junk mortgage group. Countrywide, Financial was the most obvious beneficiary of this.
There were a number of notorious banks that ended up being merged. Bank of America was one of the crooked banks. Citibank was one of the most crooked banks, as has been very well documented.
Randall Wray at the Levy Institute and Kansas City published a big explanation of who were these $29 trillion, $27 trillion of loans for. It ended up many of these loans were rolled over and reloaned, so the net amount was not $27 trillion, but that's how much was given to the banks with this huge jump. Instead of sending the bankers to jail, they made them billionaires. They rewarded them.
That was the Obama policy, and that is what makes them one of the most viciously racist presidents in modern American history. The Democratic Party became committed to returning to its pre-Civil War racist policies.
Well, the next group is you see in 2020-21, this huge jump in bank loans. What were they from? The Federal Reserve began to raise interest rates. When the Federal Reserve raises interest rates from less than 1% to 5%, this means all of a sudden debtors had to pay 10 times as much interest as they did before.
What that did was that reduces the price of an asset. It's an inverse proportion to the interest rate. All of a sudden, the stocks and the bonds held by the banks that went under were fictitious.
In fact, although Silicon Valley Bank and New York Bank went under, all of the banks, especially Citibank and Chase Manhattan, had all of the loans that they had. All of a sudden, they were not worth anywhere near what they carried them on the books. The banks were insolvent.
Now, here was a wonderful opportunity. The Federal Reserve could have taken them over by the government and said, you're insolvent. We're going to wipe out the stockholders and the bondholders because you've made bad loans. Instead, the Federal Reserve said, well, instead of making the banks insolvent, let's make the economy insolvent.
That's the policy we're in today. This increase in Federal Reserve loans has been to support this upsweep of credit that is increasing the burden. All of this upsweep in credit is far in advance of the wages and salaries that people are getting.
Somehow, all this increase in interest charges and amortization charges and penalty fees end up impoverishing the economy by leaving less to spend on food and clothing and other consumer spending. If consumer spending is going up, it's because of the inflation.
MICHAEL HUDSON: Well, I could have a whole hour on that, but I want to follow up with some charts on the racial element of this. We've talked about how the volume of debt is too large to be paid, but I want to say there's another aspect of debt, and if you could show the racial, that's right, that chart is very interesting.
One of the results of debt is to create a bifurcated economy, and that means that we're in a kind of apartheid economy. We're in a financial apartheid economy. 10% of the population owns over 75% of the stocks and bonds in the population, and they're almost entirely a white population.
We've talked about mortgage debt being 80% of the overall debt burden. I want to show what has happened long before the chart begins in 2002.
I want to begin in 1945 at the end of World War II. That's really when the houses had not been built during the Depression because people, there wasn't a market for them. They weren't being built during World War II because all of the raw materials were going to the war effort, and debt for the whole economy was very, very low debt in 1945 because there was nothing to borrow money for. You couldn't borrow money to consume because everything was rationed anyway.
But finally, they began to make loans, and what had spurred the American takeoff and that of other countries. All countries of Europe, America, and elsewhere were rebuilding after the war, and most of this rebuilding was rebuilding for housing. That was when the great housing was taking place. Here in Queens, you had major developers, not only Trump's father, but all the famous experiments and group housing were made.
There was only one thing. White people were able to buy houses for maybe $10,000 was a typical price of a house that now costs a million dollars. The problem is that banks would only, in order to buy a house, you had to take out a mortgage. Nobody has enough money to buy the whole value of a house, and if wages were maybe $3,000 or $4,000 a year back in 1945, you couldn't even buy a $10,000 house. Nobody had that. You had to go to the banks. Banks, until about 2000, 2001, would only make mortgage loans almost entirely to white people, unless you were a very, very wealthy black person or a Hispanic.
What you created was a bifurcated society. The people who bought the houses in 1945—they returned from the war. They took civilian jobs. They bought a house, and many of them died of old age, but they left the houses to the children.
And you had one generation after another generation of white people leaving the house to the children, leaving them enough inheritance to have a house of their own and an education of their own. So what you had was a home-owning, educated white class, but this was not available to non-whites in this country.
So what's the depth of the restriction of credit to the prime human beings, not to the unprimed borrowers? We're talking about a pretty racist policy. It was very responsible for the fact that you've had now 75 years—well, longer than that, 75 years since World War II—you have a disenfranchised, non-white class in the United States of hereditary homeowners who can get into college because their parents and grandparents went to an Ivy League university.
And there's a monopoly of housing and education and wealth at the top of the economic pyramid, and the rest of the economy is essentially disenfranchised as if we're in our own financialized apartheid economy.
MICHAEL HUDSON: That sort of goes back to the value theory that I think requires a separate discussion altogether, because it's so fundamental.
The whole idea of classical economics and the free market was a market to be free from rent, rent being unearned income. Rent is what landlords make in their sleep.
Rent is not created by labor, and most people don't realize what's called the labor theory of value that is based on Ricardo and Marx and the whole 19th century.
The idea was to separate value, which is created by labor, from economic rent, which is created by hereditary, by privilege, by property ownership, by owner, by banking, and by monopolists, and by landlords who make their money, economic rent, by owning a rental property, or by lending money and making interest, or by having a company, a monopoly.
And you just raise prices, and much of the inflation, as Radhika mentioned at the beginning of the talk, they call it profit inflation, meaning a company just decides, let's raise the price of drugs.
For instance, my wife is on an employer, United Healthcare plan. The price that she has to pay, local drugstores went up quintupled on January 1st, because the healthcare insurer said, we can make money by quintupling the price.
Drug companies have been raising the prices all across the board, not by producing more, not because their costs have gone up, which would be, ultimately, the cost would be a cost of production, labor, and materials, but simply because they've become a monopoly.
And the Democratic Party has always been the great protector of monopolies, because they're campaign contributors. And if you look at who heads the health committees and the others in Congress, related committees in Congress, their campaign contributors come from the pharmaceutical and drug industry.
So you have the governments representing their campaign contributors, the military and state department desks at the Senate and House are subsidized and paid for by the military industrial complex, the health departments from the drug companies, and so on and so forth.
So we're that part of the problem of what has made America a failed economy. And it's a failed economy because of the austerity that this debt apartheid has created.
MICHAEL HUDSON: Well, one of the problems of it being undynamic is you're having a decline in office space, in commercial real estate. We've been talking about homeownership rates and how unfair that is, but you remember back in 2008 when there was the property price crash, you had what was called "jingle mail".
You would have buyers, especially in Nevada and Florida, where there was a huge run-up in housing prices, they'd say, okay, I owe $500,000 for this house, but now the house just like it next door is selling for $300,000. I'll just mail back the keys to the bank and say, okay, I'm defaulting, you can have the house, I'm just not going to pay, I'm going to take out a new loan and buy the house next door.
Well, that phenomenon is now happening for businesses. Apparently [only] 40% of the US commercial properties are occupied. In other words, since COVID, and most of all, since the economy began to shrink as a result of this debt deflation, businesses have been going out of business.
Even those who are in business, you have people working from home. Now, if you have the average occupancy rate of buildings being only 40%, how is the owner going to have the money to pay for the bank?
Well, because the banks have lent almost 100% of the value of the building to the homeowner who's willing to pay all of the rents as interest, rent is for paying interest, that's the basic motto.
What they want is the capital gain in the price of the building. They realize they're not going to be a capital gain. This was all fictitious capital, it's going down, we're mailing our keys back to the bank and we're walking away from the building.
This year and next year, there is such an enormous trillions of dollars of commercial real estate falling due, not only here, but in England and other countries, that the banks are all of a sudden going to be left with mortgages that are unpaid.
Against these mortgages, they have liabilities to their depositors, to their bondholders, and most of all, they want to pay millions of dollars to the, I think Jamie Dimon, the head of Chase Manhattan, gets $29 million a year for running a company that's gone bankrupt and is kept alive because he gives some of that $29 million to the politicians who continue to appoint Federal Reserve people who will bail them out. That's what you call a circular flow.
What are you going to do when all of a sudden the banks should be going under? Well, normally, if they've made a bad loan, somebody has to suffer. Who's going to suffer?
As Bill Clinton said when he was told you have to do what Alan Greenspan says and support the banks, Clinton said, oh, it's all about the bondholders.
In 2009, when Obama came in and decided to bail out the banks, Sheila Bair, the head of the Federal Deposit Insurance Corporation, said, wait a minute, we have a crooked, incompetent bank. There's one bank in America that's more crooked than all the others and more incompetent. That's First National City Bank. Let's take it over. Let's make it a public bank. You can't let this bank destroy the whole economy by being so greedy that it makes loans way in excess of the value of property and keeps expecting to be bailed out so it can make more interest and pay its officers more. Let's drive it under.
And Obama and his Treasury secretary, Tim [Geithner], said it's all about the bondholders who own the bank.
So the question is, what will the banks do when all these mortgage loans go under? Well, wipe out the stockholders.
But the bondholders are the wealthiest 1% of the population. They're the ones who own most of the bank bonds.
Who do you think the government is going to support? Is it going to support the economy or the stockholders or the 1%?
That really is the way in which you should think about an economy being an apartheid economy, not simply ethnically and racially, but financially. That's the real apartheid between creditors and debtors that I think all of our shows are examining from different perspectives.
MICHAEL HUDSON: That's a good way to end it. There's so much that it's leading into. And the last thing that the Federal Reserve wants is for—what if banks reported the actual market value of their assets?
When you have a balance sheet, assets and liabilities, they're holding the assets at the price that they made the loan for, say $100 million for a building. But what if they reported their assets as only $40 million for the building? You would have bank assets here and the liabilities here. They'd look just like most people in America.
50% of Americans don't have any assets, but they have a big debt. That's an interesting bar chart to show, assets, liabilities. And you can look at it by income group.
The Federal Reserve does not produce believable statistics on debt as a proportion of income.
If you look at the Federal Reserve statistics of debt to income by percentile, 10%, 20%, nothing has changed in the last 50 years. Nobody's run into debt at all. Because they say, let's assume that debt is constant for the last half century. The statistics are fictitious.
And they're fictitious because that protects the fact that most of this, what passes as bank capital is fictitious. I mean, we're in a fictitious economy.
It's sort of like trying to read about international affairs in the New York Times. That's about as realistic as the Federal Reserve statistics are.
MICHAEL HUDSON: I want to add one point out there. The important thing is that these rich people who are not paying their debts do not have to pay penalty rates. The large businessmen who owe debts don't pay penalty rates.
You know that if you're a family and you're running a credit card debt, if you miss a payment in your electric bill or anywhere, your rate goes up from 19 percent to 30 percent or more.
That's not the case if you're rich people. There's one set of interest rates and penalties for 99 percent of the population, another set for the wealthiest 1 to 10 percent of the population, and you're not in it.
Thanks very much for joining us, and see you in a couple of weeks. Bye bye.
The last working-class hero in England.
Kira the cat, ? ? 2010 - 3 August 2018
Jasper the Ruffian cat ? ? ? - 4 November 2021
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