Yves here. Michel Hudson, in this short talk with The Saker, debunks many widespread misperceptions about the dollar, the US economy, and the prospects for fundamental change.
I have only a couple of teeny quibbles and a further thought. Hudson discusses private equity buying up single family homes. While that was a very big trend during and after the foreclosure crisis, there’s also been a rise, and not just in big cities, of mom and pop investors buying apartments and homes to rent out on AirBnB. So in recent years, I’m not sure the level of investment buying by private equity is collectively all that much greater than that of well-heeled individuals. We pointed out that private equity had a big problem with single family homes that property management does not scale. In fact, an individual living near their properties (better yet, with a family member in one of the trades or construction) would be able to manage the properties at lower cost than private equity.
The second is I differ a bit on his take that the response of US citizens to falling living standards and rising disfunction will be apathy. That is likely to be the main response, but you will also see more and more incidents of violence. We are already witnessing more shootings of fast food workers and commuters being shoved in front of subway cars. Expect more of that sort of thing…which serves to justify more bunkering of the elites.
Hudson also describes how indebted many individuals are. The Fed’s consumer debt statistics show that mortgage and credit card debt is not excessive. However, what these analyses miss is what would be called greater operating leverage, by virtue of other fixed costs that may not be in the form of debt but like debt, can’t be defaulted on without serious consequences.
In good old corporate land, to do proper apples to apples analysis of debt levels of companies, you need to capitalize operating leases (like the lease costs on sale-leasebacks of corporate real estate) because those fixed charges are effectively debt.
The analogue for households is medical costs. At a minimum, medical insurance costs have gotten to be so high that they should be capitalized so as to present a more accurate picture of household obligations and their true free cash flow.
Originally published at Vineyard of the Saker. Reproduced with permission of Michael Hudson
ntro: I need to begin with a MAJOR caveat and tell you how/why this “interview” happened. I did not plan to interview Michael Hudson. I was listening to a well known Russian economist, Mikhail Khazin, and I was fascinated by what he was saying. I also understood only some of the points he was making. To put it mildly, I am not an economist, and while listening to Khazin did did not take any notes. What I did do is email Michael and ask him a few question by email, just to clarify my own thoughts and marginally better my (rather dismal) “understanding” of economic and their role in the current standoff. With this typical kindness and generosity, Michael gave me some very interesting answers, and he agreed to allow me to turn this into an interview. So, here are the caveats to keep in mind: I might have misunderstood or forgotten what Khazin actually said. So if the question sounds stupid, please blame me, not Khazin! As they say in the USA, this entire topic is way above my pay grade…
Please think of this as an exchange between a young and ignorant student and a college professor and my apologies to the economists out there 🙂
Having said that, here is my exchange with Michael Hudson:
Andrei: Is it true that the USA cannot raise interest rates to lower the inflation rate as this would trigger a cascading series of bankruptcies and cost the Dems the upcoming elections?
Michael Hudson: The Federal Reserve and Treasury painted the U.S. into a corner with its Quantitative Easing to save the banks and brokerage houses after 2008. The policy succeeded in supporting and even raising real estate prices, and providing arbitrage opportunities to borrow at low rates to buy higher-yielding stocks and bonds, vastly increasing the magnitude of financial wealth. This has been especially the case since the pandemic, creating an estimated trillion dollars in “capital gains” (including short term arbitrage) for the wealthiest One Percent.
What seemed to be the financial death trap was the prospect of rising interest rates ending the free lunch of interest-dividend arbitrage, and easy mortgage money. The threat was to reverse the asset-price run-up. We already are seeing that in recent weeks as stocks plunged to reflect the rise in Treasury bond rates.
But by now, 14 years after the Obama bailouts and QE rescue of insolvent banks, a new condition has emerged: a vast sum of private capital seeking to move out of the financial markets. Many of the most astute One Percent is taking their money and running – into private equity and real estate.
The result is that housing prices are soaring as private capital is out-bidding owner-occupant home buyers. While the latter face rising mortgage-interest rates, private capital finds the likelihood for both current rental income and capital gains to be a much better bet than the stock and bond market. The result will not be a decline in real estate prices, but a decline in home-ownership rates as a shift to rental housing occurs. The financial class is becoming the new absentee landlord class.
Lower stock prices will spur a similar private-capital wave o corporate takeovers, posturing as “rescuers” of the economy. The aim will be short-term asset stripping, of course (that is the business plan of private equity), but it will consolidate ownership in the hands of a financial elite. And to the extent that state and local budgets suffer from the downturn, sell-offs of public land and infrastructure also will transfer property and its rent-extracting opportunities into hands – not with borrowed credit but for all-cash, the cash that QE policy and tax favoritism has brought into being in the past 14 years.
So, to the extent that there are bankruptcies, this will have the usual result: consolidation and concentration of wealth ownership. The non-financial economy’s structure is being transformed – under the slogan of individualistic free markets.
Andrei: Is it true that the two digit industrial inflation in the USA cannot be lowered by means or price control, as that would guarantee even more empty shelves and cost the Dems the upcoming elections?
Michael Hudson: The current inflation is not primarily a monetary phenomenon – except for stock, bond and real-estate prices. Raw materials prices, commodity prices and import prices are rising throughout the world. Domestic price controls have no effect on import prices. In theory, they should be able to reduce monopoly prices, but in today’s world the monopolists may simply let shortages develop and wait out the government.
For meat, eggs and other farm produce, the farmers are not receiving higher prices for their crops and produce. The middlemen are gouging out more fees for themselves, thanks to the monopoly position of Cargill et al.
Andrei: Are those who say that the USA cannot export its inflation to other countries by forcing the latter to deflate their currencies and acquire dollars anymore correct?
Michael Hudson: The inflation is global, not stemming from the United States. The U.S. consumer price inflation reflects its dependence on other countries. Import prices are up, not only because of port congestion and supply shortages, but because of global energy prices and the fracturing of world trade into dollar-using and dollar-avoiding economies.
The most problematic U.S. economic problem is debt deflation, not price inflation. Payments to the FIRE sector for debt service, health insurance and housing are taking a rising bite out of family budgets for the 99 Percent as the economy polarizes between an alliance of creditors, landlords and monopolists at the top, and debtors, renters and hapless consumers at the bottom.
I don’t know what Mr. Khazin means by his idea that the United States is exporting its inflation. What do other countries buy from the United States, besides arms and agricultural output, patent-protected drugs and information-technology?
Andrei: Khazin also said that the USA needs to crash the EU in order to force Europe to purchase dollars and US goods and services HOWEVER any semi-real war in Europe will crash the international markets and, therefore, also crash the US economy.
Michael Hudson: This argument does not make sense. Europe does not have enough balance-of-payments surplus to buy dollars to support the U.S. exchange rate – and the U.S. economy does not need dollars from Europe, as it can simply print them (as MMT, Dick Cheney and Donald Trump have shown). And “crashing Europe” would not give it more means to buy U.S. exports. “Old Europe” has let U.S. financial diplomacy turn the euro into a satellite currency imposing austerity on the continent – a kind of financial NATO suicide pact.
Andrei: The Fed overprinted dollars and that there is now no way to get these dollars back out of circulation, thus is there is a high chance of stagflation in the USA by this summer?
Michael Hudson: Most Fed “dollars” are not spent on goods and services, but on FIRE-sector assets. There is indeed stagnation in store for the 99 Percent, from a combination of debt deflation (payments to the rentier class) and a price squeeze for basic needs. This is a structural phenomenon (as discussed above), not one of “the money supply.”
Andrei: Between a rabid inflation and the very high insecurity about the future of the economy, will the US industries will have to lower (or even stop) a lot of its current production, resulting in major shortages?
Michael Hudson: There is not that much industry left in the United States beyond the military-industrial complex. I wonder what the author imagines is still around to be cut back. OK, movies and entertainment with Covid-19 closing restaurants, Broadway and movie houses. Consumers will pay for what they need, and the wealthiest will buy luxuries, but the clothing and fashion markets don’t have much exposure in today’s masked-up world.
Andrei: Eventually, government payments and handouts will either lose their value due to inflation or won’t even be paid, right?
Michael Hudson: There is no problem of the U.S. government not having the money to pay. Inasmuch as most payments are to the wealthiest FIRE sector classes that have become the political Donor Class, there’s no need to worry. The recent wave of savings INTO Treasury bonds show that it is still the safest haven.
Andrei: Since there is nothing the White House or the Fed can do about any of that, do you think that there will be a lot of violence and state repression?
Michael Hudson: Well, there may be violence from the homelessness that looks imminent from the evictions, now that the Covid rent and mortgage moratorium is expiring. This may indeed take the form of racial tensions. But this is nothing like a revolutionary situation. It is highly localized and “free-market.” No political alternative appears on the horizon, as the U.S. is becoming even more of a one-party state (with the role of the Democrats being to block any challenge from “the left” to pro-Wall Street and pro-corporate Republicans. There really is no left-wing party with an independent program. The Democratic Party has co-opted them and buried them in a minority. So instead of violence, we are likely to see apathy – lower voter turnouts, a rising Republican majority in Congress, and enough Democrats to be Republicans pretending to be Democrats (not only Manchin and Sinema but Pelosi, Schumer, etc.) that psychology and anger will simply turn within. Suicide rates will rise.
In short, it looks like what a schlock 1950s science fiction movie would have described as the End Time of Revelation, rent by earth, air, fire and water. The earth is warming, pollution is continuing to cause extreme weather, forest fires are spreading, water levels are going to rise (and subsoil water is polluted by fracking, while the melting of glaciers create drought, ending electric power from dams). Heavier water is leading to earthquakes. We’re all just waiting for San Andreas and its relatives to blow the Seven Trumpets.
Andrei:So where does this leave Congress and the Democrat/Republican standoff?
Michael Hudson: As long as the filibuster is retained, Congress is paralyzed, as each party has the ability to block the other, and voters are almost equally divided as to whether real estate and financial wealth is to be concentrated in the hands of the One Percent by the Republicans (representing corporate America) or the Democrats (representing Wall Street). With so little difference between them in practice, this leaves law-making to the Supreme Court. And it has been put in place by right-wing Republicans, with full acquiescence from the Democrats (Senator Biden led the party’s notorious support for Justice Thomas.)
That’s why Justice Breyer just announced his retirement from the court today, to give President Biden an opportunity to name the next justice. His problem is to find a black women sufficiently right-wing not to threaten his party’s own Donor Class – knowing that in any case, the court is already set on a Republican cultural-political track for the next decade.
Breyer’s hurry reflected his recognition that the Democrats are about to lose heavily in November’s election, so there are only nine months to install a new member of the Court. The Democratic Leadership insists that the party has already moved too far to the left, despite breaking Biden’s promise to raise the minimum wage, cutting back CARES disbursements from Trump’s $2000 to just $1400, dropping the “social infrastructure” elements of his Build Back Better by being saved by Sens. Manchin and Sinema getting him off the hook so as to back his basic campaign promise that “Nothing will change very much.”
With a policy like that, why should Democrats turn out? What’s he done for them lately? Are they going to believe his rhetoric, or what’s actually happening to the economy and to them?
Andrei: thank you so much, dear Michael, for your time and much needed insights!!