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Hier — 27 mars 2024Analyses, perspectives
À partir d’avant-hierAnalyses, perspectives

U.S. Troops Are One Mile From The Chinese Border

By Michael Snyder The U.S. cannot afford a war with China.  The size of our military has been shrinking, and our resources are stretched way...

U.S. Troops Are One Mile From The Chinese Border

Michael Hudson : La fin de la civilisation occidentale

Le plus grand défi auquel les sociétés ont été confrontées a toujours été de savoir comment mener commerce et crédit sans laisser les marchands et les banquiers s’enrichir en exploitant leurs clients et leurs débiteurs. Toute l’Antiquité reconnaissait que la volonté d’acquérir de l’argent créait une dépendance, une forme d’exploitation socialement nuisible. Les valeurs morales de la plupart des sociétés s’opposaient à l’égoïsme, surtout sous la forme de l’avarice et de l’addiction à la richesse, que les Grecs appelaient philarguria – amour de l’argent, manie de l’argent. Les personnes et les familles qui se livraient à une consommation ostentatoire avaient tendance à être ostracisées, car il était reconnu que la richesse était souvent obtenue aux dépens des autres, en particulier des faibles.

L’article Michael Hudson : La fin de la civilisation occidentale est apparu en premier sur Strategika.

U.S. Consumers Have Reached A Breaking Point

By Michael Snyder Over the past several years, the cost of living has been rising significantly faster than paychecks have.  As a result, U.S. consumers...

U.S. Consumers Have Reached A Breaking Point

What is China’s Economic Future?

Par : AHH

Political economists Radhika Desai and Michael Hudson are joined by Beijing-based scholar Mick Dunford to discuss what is actually happening in China’s economy, explaining its technological development and transition toward a new industrial revolution.

Radhika Desai and Michael Hudson at The Geopolitical Economy Hour.

Video:

Podcast:

Transcript:

RADHIKA DESAI: Hello and welcome to the 24th Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I’m Radhika Desai.

MICHAEL HUDSON: I’m Michael Hudson.

RADHIKA DESAI: And working behind the scenes to bring you our show every fortnight are our host, Ben Norton; our videographer, Paul Graham; and our transcriber, Zach Weiser.

And with us today we have, once again, Professor Mick Dunford, professor emeritus of geography at Sussex University and now working at the Chinese Academy of Sciences, keeping a close watch, among other things, on China’s economy. So welcome, Mick.

MICK DUNFORD:  Thank you very much.

RADHIKA DESAI: So, China’s economy is what we’re going to talk about today. Where is it at after decades of breakneck growth, after executing the greatest industrial revolution ever? Where is it headed?

Trying to understand this is not easy. The disinformation that is fake news and even what I often call fake scholarship that distorts the view that any honest person may be trying to take on China’s economy is simply overwhelming. It’s absolutely wall-to-wall propaganda, no matter which Western publication or website you open.

If we are to believe the Western press and the leading scholarly lights of the West, who are the major generators of the Western discourse on China, we are at peak China. That is to say, they claim that China has reached a point, reached the highest point, that is, that it ever can. And from here on, it’s only going to be downhill, more or less rapidly.

They say that China has, in recent years, inflated a huge property bubble to compensate for the West’s inability to keep up imports. And this bubble is about to burst. And when it does, it will subject China to a 1980s and 1990s Japan-style long-term deflation or secular stagnation. They have even invented a word to talk about this: “Japanification”. We are told that the Japanification of China’s economy is impending.

They say that the U.S.’s trade and technology wars are hitting China where it hurts the most, at its export and its reliance on inward foreign investment. They are saying that China has grown only by stealing technology. And now that the U.S. is making it harder for it to do so, its technological development can only stall. They are saying that China followed disastrous COVID-19 policies, leading to mass death, draconian lockdowns, and economic disaster.

They are saying that China over-invests, and its growth will not pick up unless China now permits higher consumption levels. They are saying that China has a serious unemployment crisis, that the CPC, the Communist Party of China, is losing legitimacy, because it is failing to deliver ever-higher living standards. And they are saying that Xi Jinping’s authoritarian leadership is ensuring that the private sector will stall, and with it, so will China’s growth.

All this, they say, before even beginning to talk about China’s foreign policy. And there, of course, lie another long litany of alleged disasters and misdemeanors that China is responsible for, beginning with debt-trap diplomacy and China’s allegedly voracious appetite for the world’s resources.

The only reason why Western experts ever stress the strength of China’s economy is when they want to argue that the West must redouble its efforts to contain China and to stall its rise.

So today, we’re going to take a closer look at China’s economy, and in doing so, we’re going to bust a lot of these myths. We’re going to show you that, sadly, for the purveyors of the fake news and fake scholarship about China, no amount of their huffing and puffing has been able to blow down China’s house, because, like the good, the smart little pig, China is actually building its house with bricks.

So, we have a number of topics to discuss in this show. Here they are:

1.    Characterising China’s Economy: Capitalist? Socialist?

2.    Growth Story

3.    Covid Response

4.    The Alleged Debt and Property Bubble? And Japanification?

5.    Restricted Consumption? Stagnant living standards?

6.    Exports in the China Story

7.    China’s new growth strategy

8.    China’s foreign policy

So, these are the topics that we hope to discuss. We want to begin by talking about how to characterize China’s economy. Is it capitalist? Is it socialist? Then we will do the most important and primary basic thing, we will look at the growth story with some statistics. We will then look at China’s Covid response. We will look at the alleged debt and property bubble and whether China is being Japanified.

Then we will look at the issue of whether China is overinvesting and neglecting consumption and living standards, etc. How reliant is China on exports? What is China’s growth strategy? And what is China’s foreign policy? And are those myths about it true? So, this is what we hope to discuss.

So, Mick, why don’t you start us off with your thoughts on exactly how to characterize China’s economy?

MICK DUNFORD: Ok, the way I would characterize China is as a planned rational state. I mean, right the way through, it has maintained a system of national five-year planning, and it also produces longer-term plans. But it’s a planned rational state that uses market instruments.

China has a very large state sector. And of course, some people have claimed that this state sector is, in a sense, an impediment to growth. And we’ve seen a resurrection of this idea, guo jin min tui (国进民退), which is used to refer to the idea that the state sector is advancing and the private sector is retreating.

It’s a very, very strange concept, in fact, because the third word is min (民), and min refers to people. So, what they are actually, in a sense, saying – these ideas were invented by neoliberal economists in 2002 – the private sector is equated with the people, which I find absolutely astonishing. But, I mean, the country does have a very significant public sector.

What I find striking is that one can actually turn it around and say, what is it that these Western economists seem to think China should do? And they seem to think that China should privatize all assets into the hands of domestic and foreign capitalists. It should remove capital controls. It should open the door to foreign finance capital. It should transfer governance to liberal capitalist political parties that are actually controlled by capital.

I think one of the most fundamental features of the China system is actually that it’s the state that controls capital, rather than capital that controls the state. And it’s, in fact, this aspect of the Chinese model, and in particular, the rule of the Communist Party of China that has basically transformed China from what was, effectively one of the poorest countries in the world into one of its largest industrial powers.

So, in a way, it’s a planned rational state in which the CPC has played an absolutely fundamental role. And without it, I mean, China would never have established the national sovereignty that permitted it to choose a path that suited its conditions and to radically transform the lives and livelihoods of its people.

RADHIKA DESAI: Michael, do you want to [speak]?

MICHAEL HUDSON: The question is, what is the state? There are two aspects of the state with China. One is public infrastructure. And the purpose of China’s public infrastructure is to lower the cost of doing business because infrastructure is a monopoly.

That’s what really upsets the American investors. They wanted to buy the phone system, the transportation system, so that they could benefit from charging monopoly rents, just like under Ronald Reagan and Margaret Thatcher.

The most important sector that China’s treated in the public is money creation and banks. Americans hope that American banks would come over and they would be making all the loans in China and benefiting from China’s growth and turning it into interest. And instead, the government’s doing that. And the government is deciding what to lend to.

And there’s a third aspect of what people think of when they say state. That’s a centralized economy, centralized planning, Soviet style.

China is one of the least centralized economies in the world because the central government has left the localities to go their own way. That’s part of the Hundred Flowers Bloom. Let’s see how each locality is going to maneuver on a pragmatic, ad hoc basis.

Well, the pragmatic ad hoc basis meant how are localities, villages, and small towns going to finance their budgets? Well, they financed it by real estate sales, and that’s going to be what we’re discussing later.

But once you realize that the state sector is so different from what a state sector is in America, centralized planning and the control of Wall Street for financial purposes, finance capitalism, hyper-centralized planning, you realize that China is the antithesis of what the usual view is.

RADHIKA DESAI: Absolutely. And I’d just like to add a few points, which dovetail very nicely with what both of you have said.

The fact of the matter is that this was also true of the Soviet Union and the Eastern European countries when they were still ruled by communist parties. We generally refer to them as socialist or communist, but in reality, they themselves never claimed to be socialist or communist. They only said they were building socialism, especially in a country that was as poor as China was in 1949.

The leadership of the Communist Party of China has always understood that there has to be a long period of transition in which there will be a complex set of compromises that will have to be made in order to steer the economy in the direction of socialism, in order to build socialism.

So, from its beginnings, the revolutionary state in China was a multi-class state and a multi-party state. People don’t realize very often that while the Communist Party of China is the overwhelmingly most powerful party in China, there are other parties that exist as well, which reflect the originally multi-class character of China.

Now, it’s true that since 1978, the government has loosened much of its control over the economy. But the important thing here is that the Communist Party retains control of the Chinese state.

The way I like to put it is, yes, there are lots of capitalists in China. Yes, those capitalists are very powerful. They are at the head of some of the biggest corporations in the world, and they are quite influential within the Communist Party. But what makes China meaningfully socialist or meaningfully treading the path to socialism, let’s put it that way, is the fact that ultimately the reins of power are held in the hands of the Communist Party of China leadership, which owes its legitimacy to the people of China.

So, the reigns of power, the reigns of state power are not held by the capitalists; they are held by the Communist Party leadership.

So, in that sense, I would say that China is meaningfully socialist. Although, as Mick pointed out, there is a fairly large private sector in China, but so too is the state sector very large. And the extent of state ownership means that even though the private sector is very large, the state retains control over the overall pace and pattern of growth and development in the country.

And I just add one final thing here, which is going to become quite important as we discuss the various other points, and that is that the financial sector in China remains very heavily controlled by the state.

China has capital controls, China practices a fair degree of financial repression, and China’s financial system is geared to providing money for long-term investments that improve the productive capacities of the economy and the material welfare of the people. And this is completely different from the kind of financial sector we have today.

So, Mick or Michael, did you want to add anything?

MICK DUNFORD: Just to reiterate, I mean, the point is, the government sets strategic targets that relate to raising the quality of the life of all the Chinese people. And it has strategic autonomy, which gives China the opportunity or the possibility of actually choosing its own development path.

And I think that’s something that very strikingly marks China out from other parts of the Global South that have had much greater difficulty, in a sense, in accelerating their growth, partly because of debt and their subordination to the Washington financial institutions.

So I think that is critically important, the role of sovereignty and autonomy in enabling China to make choices that suited its conditions, and at the same time making choices that are driven by a long-term strategic goal to transform the quality of the lives of all Chinese people.

MICHAEL HUDSON: I want to put in one word about sovereignty. You put your finger on it. That’s really what makes it different.

What makes other countries lose their sovereignty is when they let go, how are they going to finance their investment? If they let foreign banks come in to finance their investment, if they let American and European banks come in, what do they do? They fund a real estate bubble, a different kind of a real estate bubble. They fund takeover loans. They fund privatization.

Banks don’t make loans for new investment. China makes great money to finance new tangible investment. Banks make money so you can buy a public utility or a railroad and then just load it down with debt, and you can borrow and borrow and use the money that you borrow to pay a special dividend if you’re a private capital company. Pretty soon, the country that follows this dependency on foreign credit ends up losing its sovereignty.

The way in which China has protected its sovereignty is to keep money in the public domain and to create money for actual tangible capital investment, not to take your property into a property-owning rentier class, largely foreign-owned.

RADHIKA DESAI: Thank you. Those are very important points. Thank you.

I’d just like to add one final point on the matter of how to characterize the Chinese economy and the Chinese state. At the end of the day, it’s not just important to say that the state controls the economy, but whose state is it?

The way to look at it as well is that in the United States, essentially we have a state that is controlled by the big corporations, which in our time have become exceedingly financialized corporations, so that they are directing the United States economy essentially towards ever more debt and ever less production, whereas that is not the case in China.

And the question of whose state it is makes use of the word autonomy. The autonomy refers to the fact that it is not subservient to any one section of society, but seeks to achieve the welfare of society as a whole and increase its productive capacity.

MICK DUNFORD: If I may just add, I think also it’s important that you pay attention to the policy-making process in China. It’s an example of what one might call substantive democracy. It delivers substantive results for the whole of the Chinese population.

In that sense, it delivers improvements in the quality of the lives of all the people, and therefore, in a sense, it’s a democratic system. But it’s also a country that actually has procedures of policy-making, experimentation, design, and choice and so on that are extremely important and that have fundamental aspects of democracy about them.

When Western countries characterize China as authoritarian, they’re actually fundamentally misrepresenting the character of the Chinese system and the way in which it works, because they, in a sense, merely equate democracy with a system, whereas China, of course, does have multiple political parties, but a system with competitive elections between different political parties. There are other models of democracy, and China is another model of democracy.

RADHIKA DESAI: Mick, you’re absolutely right to talk about the substantive democracy. Indeed, in China, they have recently developed a new term for it. They call it a “whole process democracy”, and it really involves multiple levels of consultation with the people, going down to the most basic village and township levels, and then all the way up the chain.

And I think this process does work, because the other remarkable thing about the CPC leadership is its ability to change direction pragmatically. If something does not work, then it assesses what it has attempted, why it has failed, and then it revises course. So, I think we will see several instances of this as we talk as well.

Michael, you want to add something?

MICHAEL HUDSON: One thing about democracy. The definition of a democracy traditionally is to prevent an oligarchy from developing. There’s only one way to prevent an oligarchy from developing as people get richer and richer, and that’s to have a strong state.

The role of a strong state is to prevent an oligarchy from developing. That’s why the oligarchy in America and Europe are libertarian, meaning get rid of government, because a government is strong enough to prevent us from gouging the economy, to prevent us from taking it over.

So, you need a strong central state in order to have a democracy. Americans call that socialism, and they say that’s the antithesis of democracy, which means a state that is loyal to the United States and follows U.S. policy and lets the U.S. banks financialize the economy. So, just to clarify the definitions here.

RADHIKA DESAI: Very, very true, Michael. But let’s not go, I mean, maybe we should do a separate show on political theory of the state, because that’s equally important.

But for now, let’s look at our next topic. We hope, of course, that everybody understands how we characterize China’s state. But now, let’s look at China’s GDP growth.

So, here you have a chart, and we have several charts on this matter, but we’ll take them one by one and comment on them:

gdp growth china west 1980 2028

So, here we have a chart showing the annual rate of GDP growth from 1980 to 2028. Of course, post-2023 are their projections, which are shown by the dotted lines. And I’ve only taken a few selected countries from the Our World in Data website, and anybody can go there and look at this data, by the way.

So, you can see China and then a handful of the most important Western countries. And you can see that going back to 1980, essentially China’s growth rate, which is here, the top red line here, has absolutely been massively higher on practically any year than the other countries.

In fact, you see I left Russia in here. I should probably have taken it out. It’s a bit of a distraction, because here you see Russia’s growth rate massively bouncing up from the late 90s financial crisis. But let’s leave that aside.

All the other major countries, which you see here, they are all showing considerably lower growth. So, the United States here is this orangish line. And essentially, they’re all showing much lower growth.

And more recently as well, this is the Covid-19 pandemic. And you can see that China, again, like all the other countries, it experienced a fairly sharp decline in the growth rate, but it still remained positive, unlike all the other countries.

And it remains substantially above that of the rest of the economies that constantly are telling China how to improve its economic policy. So, that’s what I want to say about this chart.

But Mick, go ahead.

MICK DUNFORD: Can you show that table that I sent?

RADHIKA DESAI: Yeah, sure. Yes, here we go:

gdp growth china west table

MICK DUNFORD: These are more recent growth rates for China, for the world, and for the G7. And I mean, first of all, they show absolutely clearly that China’s growth rate is still a long way in excess of the average growth rates of all G7 countries, many of which have actually performed abysmally. I mean, Germany is now in recession, it declined 0.3% per year this year. I mean, Italy has had extremely low rates of growth, France, Germany, the United Kingdom, Japan, all had extremely low rates of growth.

China last year achieved a growth rate of 5.2%. It itself expects to grow at 5% next year. The IMF forecast 4.6%. Even that 4.6% target is quite close to the average growth rate that China needs to achieve to meet its 2035 target. It has a 2035 target of doubling its GDP, its 2020 GDP by 2035. I think that that goal is perfectly realizable. And in that sense, I strongly disagree with people who argue that China has in a sense peaked.

But I do find it, really quite astonishing, that Western countries, whose economies have performed extremely poorly, feel in a position to lecture China about how it should address what is said to be an unsatisfactory rate of growth. That’s the first point I want to make.

I just want to say something else, if I may. When we talk about, I mean, China’s growth has slowed. And, there’s no doubt that in terms of people’s everyday lives, there are many difficulties. And I just want to quote something.

At New Year, Xi Jinping gave a speech. I wanted to cite his actual words. He recognised that in these years, China faces what he called the tests of the winds and rains. And then he said, when I see people rising to the occasion, reaching out to each other in adversity, meeting challenges head on and overcoming difficulties, I am deeply moved.

So, the leadership and all Chinese people are well aware that there are many, many difficulties and challenges confronted, because China is actually undergoing a major structural transformation about which we shall speak later. But China is also in the short term undertaking a lot of important actions that are actually designed to cope with some of the real difficulties that people confront.

So, if you listen to Li Qiang’s government work report, he addressed the problem of short-term employment generation. And there are proposals for 12 million new urban jobs to increase employment, especially for college graduates and other young people, because for young people, the unemployment rate, including college students, is in the region of 21 percent. Urban unemployment is 5 percent. So, there are issues to do with the generation of employment.

Government expenditure this year will target a whole series of strategic issues, but also livelihoods. So, affordable housing, youth unemployment, job security, insurance, pensions, preschool education, the living conditions in older communities. So, I’m just saying that, in the current context, difficult economic situation and a particularly turbulent global situation. I mean, China, as every other country in the world, faces challenges, and it is in many ways directly addressing them in very important ways.

RADHIKA DESAI: Great. Thanks, Mick. Michael, do you want to add anything?

MICHAEL HUDSON: No, I think that’s it. The question is, what is the GDP that is growing? There are a number of ways of looking at GDP. And when I went to school 60 years ago, economists usually thought of GDP as something industrial. They’d look at energy production. They’d look at railway cargo transportation.

If you look at the industrial component of what most economists used to look at, electricity is the power for industry, electricity is productivity growth for labor. If you look at these, what is the component of GDP, you realize that these differences in Mick’s charts are even wider than what he showed, because the American GDP, very largely interest, overdraft fees of credit card companies, as we’ve said, is providing a financial service. 7% of American GDP is the increase in homeowners’ view of what their rental value of their property is. That’s 7%.

Now, I doubt that China includes a measure like this in its GDP. But if it did, with all of its rise in real estate prices, its GDP would be even higher in a reality-based basis.

So real GDP, as we think of it, and the public thinks of it, is something useful and productive. Actually, China’s doing a much more efficient job in minimizing the kind of financial and rentier overhead that you have in the United States.

RADHIKA DESAI: Exactly, Michael. What I was going to point out as well is that these figures of U.S. GDP growth and the absolute level of U.S. GDP are heavily financialized.

The financial sector, which actually is not a force for good in general in the U.S. economy, it is out of which the indebtedness comes, out of which the productive weakening comes. The growth of the financial sector is counted as GDP in the United States and massively inflates U.S. GDP, which would not be as high as this.

And this is particularly important given that President Biden, for example, is congratulating himself now for having the strongest economy in the world or the Western world or whatever it is. Well, that’s what the U.S.’s boast is based on.

And China does not do that, nor does it have the kind of financial sector which creates, which destroys the productive economy. Rather, as we were saying, it has the kind of financial sector that supports it.

So, just another general point I want to make. We were talking about this chart:

gdp growth china west table

This shows from 1980 to 2028, and the projections remain, by the way, even from conservative sources, that China’s growth is going to remain higher than the rest of the world, particularly the Western countries, for a long time to come.

And I also decided to show you this chart:

gdp growth china west 2008 2028

This is the chart of growth, which is just a more focused version of the previous one, which shows growth rates from 2008 to 2028.

So 2008 is when we had what Michael and I call the North Atlantic Financial Crisis. And since then, what we’ve seen is, yes, of course, all countries have seen a sort of a reduction in their growth rate, and certainly China has. But even since then, you can see that China’s growth remains high and stable. So, that’s another thing that we wanted to show.

And this is a chart showing the rise of per capita GDP:

gdp per capita growth china west 1970 2021

That is to say, you can have a higher GDP, but if your population is expanding, then to what extent is per capita GDP rising? So, you can see here that, again, even in terms of per capita GDP, and this only again goes to 2021, but in terms of per capita GDP, China has remained head and shoulders above all the major Western countries.

And this bounce here that you see in the case of the US and the UK here, it is only a dead cat bounce from the absolute depths to which their economies had sunk during Covid, and so they came to some sort of normalcy.

Mick, you may want to say something about this chart, because you sent it to me. So, please go ahead:

gdp per capita ppp 2021 china west

MICK DUNFORD: It’s correct, of course, that China’s growth slowed. Now, in 2013, China entered what is called the New Era. At that time, China decided that its growth rate should slow. It chose slower growth. It spoke of 6 or 7 percent per year, and it more or less achieved that, until the Covid pandemic. So, China chose slower growth for very particular reasons, and I think in this discussion, we shall come to some of these reasons later on.

But in a sense, what they want is what they call high-quality growth. And what China is seeking to do is undertake a profound structural transformation of its economy, establishing new growth drivers by directing finance towards high-productivity sectors and directing finance towards the use of digital and green technologies in order to transform its traditional industries. So, in a sense, it’s undergoing a profound process of structural transformation.

And I mean, if you, for example, look at Li Qiang’s speech, the major tasks include invigorating China through science and education, so to strengthen the education, science and technology system, to improve the capabilities of the workforce, or promote innovation, industrial investment and skills, and another, striving to modernize the industrial system and accelerate the development of new productive forces, bearing in mind that we’re on the verge of a new industrial revolution. But these are very important issues, fundamentally important issues.

RADHIKA DESAI: And I would say just, and I know we’ll talk about it at greater length later on, but it is really important to bear in mind that really, when the world stands at the cusp of being able to exploit new technologies like quantum computing or nanotechnology or artificial intelligence or what have you, a relatively centralized decision-making process about how to allocate resources, for what purposes, for what social benefits, etc., is likely to prove far superior, that is to say, China’s method is likely to prove far superior than the Western tactic of leaving private corporate capital in charge of the process.

And just to give you a couple of instances of this, the fact that private corporate capital is in charge of the development of digital technologies is already creating all sorts of social harms in our Western societies, whether it is harms to children’s mental health or even adults’ mental health, to political division that the algorithms sow and so on.

And also, it is leading to a situation where even these mega-corporations, these giant corporations, actually do not have the resources to invest, the scale of resources that will be needed to invest. So, for example, you hear in the Financial Times that Sam Altman is looking for people to invest in his artificial intelligence ventures, which will require trillions of dollars, and he cannot find private investors for it. So, this is really quite interesting.

Okay, so if we’re done with the growth rate story, oh, and I just want to say one other thing about this, which is, this is a GDP per capita in purchasing power parity, and China, in the space of a few decades, essentially, has experienced the biggest spurt in per capita well-being, etc., which includes important achievements like eliminating extreme poverty.

The Communist Party has brought China to essentially per capita GDP in purchasing power terms of next to nothing in 1980 to about $20,000 per annum in 2020. This is really quite an important achievement. And to do this for a country of 5 to 10 million people would be laudable, but to do this for a country of 1.3 billion people is a massive, historic achievement, and I think that’s something to remember.

MICK DUNFORD: I just, if you just go back for one minute, I mean, I absolutely agree with what you’ve just said, Radhika.

I’ll just make a comment about this chart. It’s because we were probably going to speak about Japanification:

gdp per capita ppp 2021 china west

It basically shows that the GDP per capita of Japan, and indeed of Germany, closed in on the United States, and actually Germany overtook it in the 1980s. But after that point in time, I mean, after the revaluation of their two respective currencies, and after the, the bubble, the stock market and property market bubble in Japan, you saw stagnation set in. And there’s a question as to whether that will happen with China.

But I mean, I think that one thing that’s striking in this diagram is that China is still at a much lower level of GDP per capita than Japan, or indeed Germany was at that time. And those economies, because, they were at the technological frontier to some extent, had to innovate, move into new technologies.

China, because there is still a technological gap, has enormous opportunities to accelerate its growth in a way in which, well, Japan failed because it chose not to take up opportunities, and it gave up semiconductors manufacture. But China has enormous opportunities, and that’s one reason why we must anticipate China’s growth as continuing.

RADHIKA DESAI: Absolutely. Thank you, Mick. Okay, so if we’re done with the growth story, let’s go to our next topic, which is what happened in China under Covid-19. Now, of course, there is just so much dispute about and controversy around Covid and Covid strategies, etc. So we don’t want to get into all of them, but I just want to emphasize two things.

We’ve already looked at the growth figures, we looked at the growth figures around Covid:

gdp growth china west 2008 2028

So you can see here that in 2020, all economies had a big dip thanks to Covid in their economies, but China is alone among the major economies to have remained in positive growth territory, and to have, of course, remained much higher than the rest of the other major world economies. So essentially, China, whatever China did, it did not sacrifice growth.

Now, this is very ironical, because in the Western countries, we were told that we need to, in order to continue growing, we need to, so in order to preserve livelihoods, which was the euphemism for preserving the profits of big corporations, in order to preserve livelihoods, we may have to sacrifice some lives. And the Western economies went through an absolutely excruciating process of lockdown here, and opening there, and lockdown again, and opening again, and so on.

But all of this had devastating impacts on Western economies, whereas China prioritized the preservation of life above all. And it imposed a lockdown knowing that, okay, even if we are going to develop vaccines, and remember, China developed its own vaccines, and effectively inoculated over 70 percent of the population by the time they began reopening.

China prioritized the saving of lives, and it was accused of essentially creating world shortages by shutting down its economy, etc. But in reality, China’s strategy, which focused before the availability of vaccines, on essentially physical distancing, isolation, etc., as was necessary, but China managed to do it in a way as to keep up a relatively robust growth rate, and very importantly, lose very few lives.

This is a chart, again from Our World In Data, of cumulative Covid-19 deaths per million of population:

covid 19 deaths per million china us

So here we have all these countries, the United States and United Kingdom are these top two lines, Germany, Canada, Japan, even though we are told that East Asian economies did well because they had experience with SARS, etc., even then, compared to China, which is down here with a cumulative Covid death rate per million of about 149 or something people dying per million, and these numbers are over 3,000, almost 4,000 per million at this point in the United States and the UK, and then you have these other economies.

So China actually managed to avoid the worst of Covid, both in terms of lives and in terms of livelihood, and it did so because it did not compromise the saving of lives.

Does anyone else want to add anything? Mick? You were there.

MICK DUNFORD: Well, I mean, obviously, there were difficulties for some people in some places at some times. I was here right through it. All I can say is the impact personally on me was extremely limited.

It was a very effective system for protecting life. And if you lived in some places, then in fact the impact on your life, apart from having frequent nucleic acid tests and so on and ensuring that your health code was up to date, the impact on one’s life was relatively limited.

But in some places, obviously, in Wuhan at the outset, in Shanghai later on, the impact was very considerable.

But I think it’s an indication of the importance of a kind of collectivism, and the priority given to the protection of human life. And as you said, it is quite striking that actually through it, China’s economy actually kept ticking over.

And of course, China produces so many important intermediate goods that obviously it was also very important in providing things that were needed in many, many other parts of the world.

It also shared its drugs, its vaccines, which is really quite different, in a sense, from the conduct of the United States. And to some extent, the Western pharmaceutical companies.

RADHIKA DESAI: Absolutely. Michael, go ahead.

MICHAEL HUDSON: In the United States, that would be considered a failure of policy. The United States used Covid as an opportunity to kill.

For instance, the governor of New York, Cuomo, took the Covid patients and he moved them into all of the assisted living and old people’s homes. And that had a great increase in productivity. It resulted in enormous death rates for the elderly.

That helped save New York’s pension plan system. It helped save other pension plans. It helped save Social Security because the dead people were no longer what America called “the dead weight”.

The American policy was to indeed infect as many people over the age of 65 as you could. And that helped balance state, local budgets, pension plan budgets.

The increase in the death rate is now the official policy of the Center for Disease Control in the United States. They say do not wear masks. They’ve blocked any kind of mask wearing. They’ve done everything they could to prevent the use of HIPAA filters or airborne disease. The Disease Control Center says that Covid is not an airborne disease. Therefore, do not protect yourself.

Well, the result is many children have been getting Covid and that weakens their resistance system. And they’re getting measles and all sorts of other things. And all of that is greatly increasing GDP in America. The health care costs of America’s destructive policy.

I think Marx made a joke about this in Capital. He said when more people get sick, the doctors and the economic output goes up. Are you really going to consider sickness and destruction and fires rebuilding and cleanup costs? Are you going to count all of this there?

RADHIKA DESAI: But the irony is Michael, even with all of that, America’s GDP plunged so deeply down.

Well, I think we should move on to the next topic, but I will just say one thing. It is generally said that China is in a panic, the Chinese government reversed its draconian Covid policies because there were popular protests, and blah blah and so on. I would not agree with that.

Certainly, there were some popular protests. It also seems as though at least some of them were being pushed by the National Endowment for Democracy with the typical color revolution style. They have one symbol that symbolizes it. So, they decided to put up blank pieces of paper, etc. So, there’s no doubt that there was some of this going on. And as Mick said, undoubtedly, there were local difficulties in many places.

But what becomes very clear is that China decided to lift Covid restrictions towards the end of 2022 only after it has satisfied itself that the risk. And I should also add one thing. It was under pressure to lift these restrictions a great deal because the fact was that the rest of the world was not following China’s footsteps apart from a handful of other countries. And they were socialist countries. They were not following China’s footsteps.

So, it’s very hard to be the only country that’s doing it. But nevertheless, despite all those pressures, China had a very deliberate policy. It lifted Covid restrictions after assuring itself that enough of the population had been vaccinated, as to achieve something close to herd immunity.

And these figures of deaths per million demonstrate that China’s bet proved right, and China continues to monitor the situation. Covid hasn’t gone away.

And so, in all of these ways, I think that it’s important for us to understand that China’s policy has actually been above all about protecting people’s lives.

MICK DUNFORD: Just from my recollection, the demonstrations of which you spoke, where the slogans were written in English, I wonder who they were talking to, were on the 1st of December. China had, on the 11th of November, already announced the steps of, in a sense, removing restrictions. And then they were finalized in early December. So, the change was already underway.

RADHIKA DESAI: Exactly. Great. So, I think we are at almost, I think, 50 minutes or so. So, let’s do the next topic, which is the property bubble. And then we will stop this episode and we will do a part two of this episode, and do the other four topics that remain in part two.

So, Mick, do you want to start us off about the property bubble and the alleged Japanification, impending Japanification of China’s economy?

MICK DUNFORD: Okay. Well, if you want, you can just show the chart:

house property prices china us

Basically, you can see that throughout this period, Chinese house prices have risen quite substantially. You know, in a sense, the story started, with housing reform, after 1988, when China moved from a welfare to a commodity system. And then, in 1998, it actually privatized Danwei housing, and it adopted the view that housing should be provided, as a commodity by developers.

And in 2003, that course of action was confirmed. And from that point in time, one saw very, very substantial growth in the number of developers, many of which, the overwhelming majority of which were private developers. So, in a sense, they moved towards a fundamentally market system.

And they very quickly had to make certain adjustments because they found that while the quality of housing and the amount of housing space per person was going up, these developers were orienting their houses towards more affluent groups. So, there was an under-provision of housing for middle-income groups and for low-income groups.

And so, there were progressively, you saw over the years, increasing attention paid to the provision of low-cost housing and of low-cost rented housing. And in fact, in the current five-year plan, 25% of all housing is meant to be basically low-cost housing.

So, the important point is that this problem emerged in a system that was liberalized, actually, I mean, in line with recommendations that were made in 1993 by the World Bank.

So, in other words, it’s an example of a liberalized, predominantly market-led, private-led system, in which these difficulties and these problems have emerged.

So, that’s the first thing I want to say. And I mean, obviously, to address housing needs, China has had, over the course of time, to considerably move back in the direction of providing low-cost housing in order to meet the housing needs of the Chinese people.

But basically, in August 2020, the government got very, very deeply concerned about, on the one hand, increasing house prices and, on the other hand, the explosion of borrowing and the fact that the liabilities of many of these developers substantially exceeded their assets.

And of course, the other line on that chart is a line indicating house prices in the United States. And of course, it was the crash of prices in the subprime market that, in a sense, precipitated the financial crisis. So, China, in the first place, is absolutely determined that it should not confront that kind of problem that was generated by the liberalized housing system in the United States.

So, I mean, that’s the first thing I basically want to say.

If you want, I can say something about the case of Evergrande. But basically, what China did in 2020 was it introduced what it called Three Red Lines, which were basically designed to reduce financial risks.

But it had a number of consequences because it, to some extent, deflated the housing market. Housing prices started to fall. Some of these developers found themselves in a situation where their liabilities substantially exceeded their assets. There was a decline in housing investment.

But to some extent, I think this is a part of a deliberate goal of basically diverting capital towards, as I said earlier, high productivity activities and away from activities, especially the speculative side of the housing market. So, I’ll just say that for the moment, but I can come back and say something about Evergrande, if you wish, in a few minutes.

RADHIKA DESAI: Okay, great. Michael, do you want to add anything?

MICHAEL HUDSON: Well, what I’d like to know as the background for this is what is the, how much of this housing is owner-occupied and how much is rental housing? That’s one question. The other question is how much is the ratio of housing costs to personal income? In America, it’s over 40% of personal income for housing. What’s the ratio in China?

I’d want to know the debt-equity ratio. How much debt, on the average, for different income groups? Debt relative to the value of housing. In America, for the real estate sector as a whole, debt is, the banker owns more of the house than the nominal house owner, whose equity ratio for the whole economy is under 50%.

These are the depth dimensions that I’d want to ask for these charts, if you know anything about them.

RADHIKA DESAI: Okay, thanks for that. And so, I just want to add one thing, which is that, this graph actually really says it all, and in some ways implicitly answers Michael’s questions:

house property prices china us

Because the blue line, which shows the United States property prices, you can see that they reached a certain peak at 150% of the value of its 2010 values in 2008. Then it went down to below the level of 2010.

But U.S. monetary policy, Federal Reserve policy, its continuing deregulated financial sector, the easy money policy that was applied in a big way with zero interest rate policies, with quantitative easing, etc., etc., has simply led to a new property boom, where the prices of property prices have reached a peak, which is even higher than that of 2007-8, which was such a disaster. And this was all made possible precisely by the, by increasing housing debt, etc.

Whereas in China, a big driver of the housing boom has actually been that people are investing their savings in it. So, by logically, it means that the extent of a debt in the housing market will be comparatively lower. The entities that are indebted are actually the developers.

And that’s a very different kind of problem than, than the, than the owners being indebted. So that’s the main thing I want to say.

And Mick, you wanted to come back about, about Evergrande, so please do. And then remember also that we want to talk about this chart in particular, and deal with the question of Japanification:

china loans real estate industry

So, please go ahead, Mick. Let’s talk about that.

MICK DUNFORD: Okay, well, I mean, as Radhika just said, the problem is, the indebtedness of developers, and the existence of debts that considerably exceed the value of their assets.

And the way in which this situation has come about, and I mean, as I said, the Chinese government, in a sense, wants to address the financial risks associated with that situation, and did so by introducing these so-called Three Red Lines.

It also is interested in reducing house prices, and it’s also interested in redirecting finance towards productivity-increasing activities.

So, Evergrande is an enormous real estate giant. It has debt of 300 billion dollars. It has 20 billion of overseas debt, and its assets, according to its accounts at the end of the last quarter of last year, are 242 billion. And 90 percent of those assets are in mainland China. So, its liability asset ratio was 84.7 percent, and the Three Red Lines set a limit of 70, 70 percent. So, it’s substantially in excess of the red line.

In 2021, it defaulted. And then, in January this year, it was told to liquidate after international creditors and the company failed to agree on a restructuring plan. In September, by the way, last year, its chair, Su Jiayin, was placed under mandatory measures, on suspicion of unspecified crimes. Basically, it was a Hong Kong court that called in the liquidators.

And the reason was that, in a way, outside China, Evergrande looked as a massively profitable distressed debt trade opportunity. There were 19 billion in defaulted offshore bonds with very substantial assets and, initially, a view that the Chinese government might prop up the property market.

So, large numbers of U.S. and European hedge funds basically piled into the debt, and they expected quite large payouts. But it seems as if this negotiation was, to some extent, controlled by a Guangdong risk management committee. And the authorities, basically, were very, very reluctant to allow offshore claimants to secure onshore revenues and onshore assets.

And, in fact, to stop the misuse of funds, I think about 10 Chinese local provinces actually took control of pre-sales revenues. They put it into custodial accounts, and the idea was that this money should basically—the priority is to ensure that the houses of people who’ve paid deposits on houses are actually built, and people who’ve undertaken work in building houses, are basically paid. So, that, then saw the value of these offshore bonds collapse very rapidly, indeed.

And I think that, to some extent, explains the concerns of the international financial market about the difficulties of this particular case. But I think, it’s clear that China intends, basically, to deflate this sector and to put an end to this speculative housing market as much as it possibly can, and to direct capital, towards productivity increasing, essentially, the industrial sector. And we shall talk about this direction of finance later on.

MICHAEL HUDSON: Evergrande debt, and other real estate debt, is to domestic Chinese banks and lenders. Certainly, many Chinese home buyers did not borrow internationally.

So, I want to find out how much the domestic Chinese banking system, or near banking system — not the Bank of China itself, but the near banks intermediaries who lent — to what extent have the banks given guarantees for the loans for Evergrande and others?

I understand that there are some guarantees domestically, and if the banks have to pay them, the banks will go under, just as occurring here in New York City. Do you have any information on that?

MICK DUNFORD: No, I don’t really have any information, except, I mean, some of the literature that I’ve read suggests that these creditors, bondholders and also other creditors, basically shareholders, are going to take a very, very major haircut.

RADHIKA DESAI: Exactly. I think that this is the key, that there will be an imposition of haircuts on the rich and the powerful, not just subjecting ordinary people to repossession of their homes, which they should have access to.

So, as Mick has already said, the Chinese government is doing everything possible to make sure that the ordinary buyers who have bought these houses do not lose out, which is the opposite of what was done in trying to resolve the housing and credit bubble in the United States.

So, I just want to say a couple of things. I mean, the Chinese government is quite aware, as Mick pointed out, the whole thing has begun by, this whole property bubble is in good part a product of the fact that when relations between China and the West were much better, China accepted some World Bank advice, and this is partly a result of that and the kind of deregulation that the World Bank had suggested.

But very clearly, now relations between China and the West are not good. In fact, they’re anything but good. China is unlikely, once bitten, twice shy, to accept such bad advice again, even if they were good. And now that they’re not good, there will be, and China is clearly looking at distinctively pragmatic, socialistic ways out.

And you see in the new address to the NPC by the Premier [Li Qiang], that social housing has become a major priority, not building houses for private ownership, but rather building houses which will be kept in the public sector and rented out at affordable rates. And I think this is really an important thing, really the way to go.

And finally, I would say that, the property bubble in Japan and the property bubble in the United States were bound to have very different consequences, partly because, well, for two reasons, mainly. Number one, the nature of their financial systems were very different.

In the case of Japan, the financial system was being transformed from one that resembles China’s financial system to something that resembles much more the US financial system. And Japan has continued this transformation and has suffered as a result. I would say in short, really, Japan has paid the price of keeping its economy capitalist. So in many ways is the United States.

And the second reason, of course, is that, funnily enough, one of the effects of the Plaza Accord was that, by the time the Plaza Accord came around, Japan was no longer interested in buying US treasuries. And as a result, the United States essentially restricted its access to US markets in a much bigger way. And so, essentially, Japan lost those export markets.

And it did not do what China is able to do. It perhaps could not do what China is able to do, being a capitalist country, which is massively reorient the stimulus for production away from exports and towards the domestic market, including the market for investment.

So I think that we are, maybe this is the cue at which we can talk about Japanification. So maybe you can start us off by commenting on this chart, and then Michael and I can jump in as well:

china loans real estate industry

MICK DUNFORD: Ok, the blue line, of course, is the flow of loans to different sectors. So the blue line is the flow of loans to the real estate sector.

MICHAEL HUDSON: Only the Bank of China or by?

MICK DUNFORD:  All the banks. You can see from 2016, the share going to real estate has diminished very significantly, whereas, where it says industrial MLT, that’s medium and long term loans for industrial investment, you can see a very, very strong, steady increase in the share of loans going to industrial investment. In agriculture, it declines. And then also, that has actually increased since 2016. So this is a directing of investment towards manufacturing and towards the industrial sector of the economy.

So why is that? Well, I think the first thing one can say is that, in the past, basically, the growth drivers of the Chinese economy were, to some extent, export manufactures. But China was predominantly involved in processing activities, employing very unskilled labor and associated with very low levels of labor productivity.

So one of China’s goals is to significantly, basically, strengthen, upgrade the quality of these traditional industries, to make them digital, to make them green, and to radically increase productivity through a large-scale investment wave.

And then, secondly, we’re on the verge of a new industrial revolution, which Radhika has spoken about. So the aim in this case is, basically, to divert investment towards the industries that are associated with the next industrial revolution.

The other main growth drivers in the past, alongside this export sector, were obviously real estate, which, I mean, if you look at GDP by expenditure, was accounting probably with household appliances and furniture and household goods and so on, about 26, 27 percent of the economy.

But it’s a sector that’s associated with relatively low productivity, and of course, it was associated with very substantial speculation and generated very considerable financial instability.

So, as Radhika said, there will be, in dealing with this financial crisis, basically an underwriting of existing, of obligations to existing home buyers, and in the future, an attempt to establish a more sustainable housing market.

The other area of the economy was basically this sort of platform economy. But this platform economy was associated with very, very strong tendencies towards monopoly, and in the, about four or five years ago, a series of measures were adopted, basically, to restrict, some aspects of this platform economy, and other areas, like private tutoring, which was generating large disparities in the educational system, and is associated with the fact, that the cost of raising children in China is extremely high. I mean, it’s the second highest in the world after South Korea, actually.

So, these growth drivers, these old growth drivers, are basically seen as not offering potential to sustain the growth of the Chinese economy into the years ahead, and so there’s this attempt to look for new growth drivers. And basically, for that reason, you’ve seen this redirection of investment.

And I think one can distinguish that, from what happened to Japan, because basically, in Japan, industrial investment did not increase, largely, I think, because the profitability of investment was not sufficiently high. And also Japan, in a sense, adopted a neoliberal program. It didn’t implement industrial policies.

Whereas China is seeking to undertake this transformation, basically, through, it’s a kind of supply-side restructuring, driven by industrial policy, and driven by financial policies, providing strategic funding for industrial transformation.

Then linking that also to the transformation of education, to try to ensure that the output of the education system, in terms of skill profiles, and so on, corresponds much, much more closely with the profile of work and employment, with much more emphasis upon STEM, in the context of this new industrial revolution, radically raising productivity, and by radically raising productivity, you increase income, and ultimately, you’ll increase consumption, and so on.

So I think that the Japanification course is not one that China will follow, that China will actually address this need to innovate and transform its industrial system, in order to, in a sense, address the problems that are associated with the earlier drivers of Chinese development.

MICHAEL HUDSON: We probably need a whole other program to talk about the difference in structure. Real estate is the largest sector of every economy, and China is so different from Japan.

The Ginza district in Japan, right around the palace, that small district, was larger than all of the real estate value in California. So, we’re dealing with a huge debt finance explosion there, and then you have the largest collapse of property prices in Japan, everywhere, anywhere in the world.

In a way, what you’ve described brings us back to what we were talking about at the beginning of the show, about China’s structure. The effect of the real estate slowdown and falling in prices has a disastrous effect on localities, small villages and towns in China, who are dependent on real estate sales as funding their budget.

So, the real estate crash in China, if we’re talking about what policy is China going to take, how is it going to solve the problem of local budgets without solving it by creating a booming real estate market for towns to sell off their property to developers, and developers to make a profit selling off a property to private buyers, mainly.

I assume they’re not just selling it to the government to make a profit. I think there’s a lot of structure that I’d like to know. I don’t know what it is now, but it’s so different from what you have everywhere else.

I think that really is what I hope will be the focus of our show, the geopolitics of different real estate structures and the real estate tax that goes with it.

RADHIKA DESAI: That’s a really interesting question, and much of that we will be discussing in the second part of this show, which we’ll be recording in a week or so, I think.

But let me maybe then just bring this to a conclusion by simply agreeing with what both of you have said, which is that China has a very good chance, in fact, very likely, China is not going to follow the Japanification model because, as Michael is emphasizing, the structure of China’s economy and the imperatives generated by that structure are very different.

To name just one, if something is not profitable in a capitalist economy, it will not get done. Whereas in the case of the Chinese economy, the Chinese government can always say, well, if it’s necessary, we’ll do it even if it isn’t profitable, because it is necessary for the welfare of the people or the productive capacity of the economy, etc. So, profitability just does not play the role of a brake in the same way as it does in capitalist societies.

Secondly, the role of the state, both in terms of initiating new projects and taking responsibility for new projects, and we can already see in the current NPC and the discussions there that the role of the state is already once again expanding again in China, and it can continue to do so. And I think that’s a very good thing.

And remember also that, Mick, you emphasized in the case of when you were discussing one of the graphs, that the per capita GDP of China today is considerably lower than what it was in Japan, even in the late 80s and early 90s.

And that means that, number one, domestic consumption can be a big stimulus for further economic expansion. And secondly, of course, the industrial opportunities, the opportunities for a new industrial revolution are many, and China in particular, because of the important state role in the Chinese economy, the centrality of the state role in the Chinese economy, and the aim of the Chinese economy and the Chinese economy’s managers to develop China’s productive capacity in whatever way that works, not necessarily through private ownership.

These elements are actually going to ensure that China will exploit the opportunities of the new technologies much more effectively and execute a transition to the next industrial revolution much more successfully, and that will be an important road to avoiding what’s called Japanification.

MICK DUNFORD: You know, I think the difference is that Japan, I thought, in the 1980s was at the technological frontier, and China is not. But just, what Michael was referring to is the fact that in China, local government revenue came to depend to a very considerable extent on what is called land revenue.

You know, basically all land is state-owned, is either state-owned or owned by the rural collectives. But what happened was that if land was converted for use for urbanization, was converted for use for urbanization, for housing, then basically the local government could in effect sell leases, 90-year leases, or depending on the activity, different lengths of lease. They could sell these leases to developers. And then that revenue was used by local government to fund infrastructure.

To some extent that model has come up against limits. And I think, the issue Michael raised really concerns how in future will local government be funded, and will there be a reform in the system of taxation?

Will a property tax be introduced in order to generate government revenue rather than relying upon this land tax? Because of course that did encourage local government to allocate that land to people who are going to build housing for upper-income groups, because the implications for land value were under that situation, they would actually be higher rather than providing that land to construct housing for low income groups.

So, this issue of land revenue is one that has to be addressed basically by someone who’s an expert in public finance.

MICHAEL HUDSON: That should be what we talk about in the next show, I think.

RADHIKA DESAI: Great. So I think that we should bring this part of the show, the first part of this show to an end. And let me just do that by going back to our list of topics.

So just to conclude, we managed to cover the first four, although the question of Japanification and the alleged property bubble will resonate into all the rest of the topics, certainly the question of consumption, exports and China’s new growth strategy. So we will return to it.

But in the next [Geopolitical Economy] Hour, we will be talking about these topics, restricted consumption, exports, new growth strategy, and of course, China’s foreign economic policy.

So thanks very much both. Thanks to all the listeners. And we look forward to seeing you in another week or two. Thank you and goodbye.

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The Reality of Bidenomics

Par : AHH

Political economists Radhika Desai and Michael Hudson discuss the rhetoric and reality of Bidenomics, and how good US President Joe Biden really was for the economy.

Radhika Desai and Michael Hudson at The Geopolitical Economy Hour

“what is Bidenomics? It’s a slogan for a war economy, financed by a financial bubble.”

Video:

Podcast:

Transcript:
RADHIKA DESAI: Hello and welcome to the 23rd Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I’m Radhika Desai.

MICHAEL HUDSON: And I’m Michael Hudson.

RADHIKA DESAI: And working behind the scenes to bring you this show every fortnight are our host, Ben Norton; our videographer, Paul Graham; and our transcriber, Zach Weisser.

2024 is being billed as the greatest election year in history. More than 50 countries are going to the polls, that’s 7 out of its 10 most populous countries, with a combined population of 4.2 billion, that is more than half the world’s 8 billion population.

Among these, for good or ill, one might add, the US election will be the most consequential, deciding life and death questions such as how much war the world will witness, how well its economy will do.

This is not because the US is a force for peace and development. On the contrary, it’s been weighing down on the prospects of peace and development for decades. Of course, the formal choices before the US public promise to change little, though a worsening on both fronts is entirely in the cards, no matter which of the two main contenders on the scene at present win the election.

But will they even, will either of them win the election because there are so many uncertainties around this election? Will Biden run? Can Trump run? If not they, then who will represent this increasingly divided country?

And if no one can, is civil war a possibility that has been canvassed in practically every major news outlet on the cards? And what will civil war in the US mean for the rest of the world?

All these questions are part of the story of the 2024 elections. These are the circumstances in which they are being held.

Biden’s approval rating is only 38%. Indeed, it had dipped into negative territory by August of the first year he took office. And since then, they have only gotten worse.

MICHAEL HUDSON: Well, what does the public see that Biden and his supporters are not recognizing? That’s really the question that I think we have to talk about today.

RADHIKA DESAI: Exactly. And what is the public seeing and what is the public experiencing to give him these negative ratings? Biden’s one hope was to unite the country behind him through good economic stewardship.

After all, it was James Carville, Bill Clinton’s campaign manager, the guy who helped reshape democratic politics in the aftermath of the Reagan electoral earthquake, who said, it’s the economy, stupid. You can’t win elections without a good economy.

And you can’t say Biden hasn’t tried. He’s even ponied up a new term: “Bidenomics”. We are told that this is going to solve the US’s deep-seated economic problems.

And certainly his Bidenomics has included considerable sops to the biggest US corporations, the idea being that somehow this is going to induce them to invest, although it is not clear what sort of quid pro quo had actually been set up. And nor is it clear that they’re actually investing even after receiving these sops.

The pro-Biden establishment, of course, has picked up this term and run with it. They’re trying hard to set up an election year narrative that under Biden, the US economy has done very well, Bidenomics is working, and it has moreover achieved that miracle of miracles, a soft landing, by which is meant that it has slain the dragon of inflation without inducing a recession.

However, their job is not easy, and the holes in the story that they’re trying to weave together are widening.

So Michael and I thought it would be a good time to do a 360-degree check on the US economy, and we want to do it by going through a number of major topics.

We’ll talk about employment, we’ll talk about the investment situation, the trade situation, the real story about inflation in the US, because it’s not so clear that the dragon of inflation has been slain, the problem of financial stability, and finally, of course, the issue of the budget. So these are the topics we are going to go through.

But before that, before we go through these topics, we must begin with a contrast. On the one hand, the stock market is soaring.

Let me just show you a few of the stock market indices here.

This is the S&P, so Standard and Poor 500. You can see it is at the highest point it’s ever been in its history.

S&P 500 February 2024

This is the Dow Jones Industrial Average, similarly at a peak.

dow jones february 2024

And the NASDAQ is, if not at a peak, at a peak pretty close to its previous peak.

nasdaq february 2024

So you can see that all the stock markets are doing really, really well. But Michael, does this mean that the US economy is doing well?

MICHAEL HUDSON: Well, it certainly means that there is a tech bubble and a war industry bubble. But let’s look at all the things that are increasing. Since your chart, not only are stocks going up, but when stocks go up, economic polarization increases, because most of the stocks are owned by the top 10% of the population.

So economic polarization is increasing as wealth is concentrated at the top of the economic pyramid. And a lot of voters see this as unfair.

So to say that the stock market and the 1% are doing well is not really a good political selling point, unless you can convince people that, well, you can be a capitalist in miniature.

You can invest your pension funds in the stock market, you can invest your savings, and maybe you can get rich just like the billionaires.

How do you get them to think of themselves not as wage earners, but as stock market investors? If you can convince voters to think that they’re finance capitalists instead of wage earners, you’ve got a good selling point.

But let’s look at other things that are up: Crime is up. Shoplifting, robbery, phone and internet scamming. I’ve already got my morning internet scam call.

Rents are up, utilities are pricing, and food outside the home is pricing. I think we’ll get to these charts later. There we go:

food spending share disposable income US

Basic food, eggs. All of a sudden, people are having to pay more, whether they’re eating at home or whether they’re buying the food at the stores.

Everybody’s noticing the prices are rising and the packages are getting more and more empty. You’ll get a box of cornflakes and a lot of it is air now.

RADHIKA DESAI: It’s called shrinkflation. Prices go up and what they sell you, the quantities go down.

MICHAEL HUDSON: That’s right. Exactly.

Housing is also basically up. When housing prices are up, you also get homelessness up.

Taking the subway in New York, you’ll see a very crowded subway car, and then all of a sudden, you’ll see cars with hardly anyone in it, and that’ll be a homeless person that maybe hasn’t had a chance to take a bath for quite a few days. You’re seeing that already.

RADHIKA DESAI: If I may just interject, this is the percentage of households who spend more than 30% of their income on housing.

households spending 30 percent housing US

Overall, 30% of all US households are spending more of their housing, but among renters, this ratio goes up to 50%, while among owners, it is 21%. You can see that those who are wealthy and relatively better off who own their own homes are penalized less than those who are relatively worse off.

You see here, again, another really shocking statistic. This chart goes back to 1960.

house price median household income ratio US

You can see that the ratio of house prices to the median household income went down after the 60s and remained low right into the 1980s, but from about 2000 onwards, basically coinciding with the easy money policy of the Federal Reserve, house prices as a proportion of median income has risen, and although they again fell after the 2008 housing bubble burst, they began rising again, and today they are even higher than they were in 2008.

MICHAEL HUDSON: The situation is actually much worse than that chart says, because not only have housing prices gone up, but the mortgage rates have gone up. They’ve doubled from about 3% to almost 7%.

Now, if you have a mortgage, you want to buy a house, you don’t want to be a renter, you want to escape from being a renter, you buy a house, and your mortgage has to be 7%.

That means the entire price of the house, the mortgage that you’re paying, doubles in 10 years, and if it’s a 30-year mortgage, it doubles again and it quadruples in 20 years and multiplies eight times by the end of the 30-year mortgage, so that the bank will get eight times as much for the house you buy as the person who sells the house to you.

The mortgage rate and the debt attached to the house is expanding even more rapidly than the housing prices.

That’s what debt deflation is, and that’s part of why the economy is being malstructured.

So what voters are seeing is not simply the economy’s getting worse, but the whole way in which it’s structuring and the direction it’s going in, financialization and the whole neoliberal plan makes them want to throw the rascals out of office.

RADHIKA DESAI: Indeed, the approval ratings figures are showing exactly that.

MICHAEL HUDSON: Yes, what they’re disapproving of is the economy above all, and people say, oh, it’s just because Mr. Biden’s getting senile. Well, it’s not that he’s getting senile, it’s that he’s a nasty, bad person running a nasty, bad economy. That’s really the key.

We haven’t even mentioned the medical costs going up for people who have lost their jobs or they have to stay home because of COVID. There’s a whole COVID effect of the economy. Long COVID is a problem that isn’t being counted. A lot of people are having to take part-time jobs.

So what you’re seeing is a kind of crapification of the economy. You mentioned that about the prices that we’re seeing. A whole new vocabulary is being developed to describe what’s happening in the economy, and shitification, the whole bit.

So let’s look at what hasn’t increased. Maybe there’s a bright spot there: well, lifespans have not increased, and health generally has gone way down.

You have a reversal in the whole post-war rise of lifespans. They’ve gone down. They’ve gone down especially for people who earn less than $50,000 a year. For non-white people, they’re turning down. Wages have been turning down.

The Financial Times last week had a story that wages are growing more slowly for employers working at home because employers want to see them in the office.

And yet what they’ve found in your country now, England, is that workers from home, the productivity is going up even faster than workers who actually have to go to the office and sit on the long transportation train to get in, whether it’s London or New York.

So the Financial Times said this is a success story. Employers gain in both ways. The workers get to stay home, and they’re more productive, but you’re paying them less for the right to stay home.

RADHIKA DESAI: And you’re not paying for all those offices. We’ll come back to that as well. But shall we go into our discussion of the various topics now?

MICHAEL HUDSON: Sure.

RADHIKA DESAI: So the first topic we wanted to discuss was employment. So on the employment front, recently, as many of you will have seen, the Biden administration is making much of a report of the Bureau of Labor Statistics, which reports that 350,000 new jobs were created in the previous month. However, there are huge problems with that.

First of all, let me just show you the story, the official story that the Biden administration would like to emphasize. So this is the official unemployment rate that is shown on the Federal Reserve website:

official unemployment rate US Biden

And you can see this chart also goes back to 1950. And you can see that there have been various peaks in unemployment in the 1980s and again after 2008. And then unemployment went down.

And then, of course, this huge narrow spike is the COVID pandemic, when, of course, it hit nearly 15%, officially, at least. And since then, it has declined.

And so President Biden feels that he can pat himself on the back for bringing down the unemployment rate.

However, there are many, many other elements to this story, which are not being talked about. First of all, as opposed to the Bureau of Labor Statistics, coming up with this number of 353,000 new jobs, a private payroll company, which essentially gathers, you know, basically, it knows who is paying whom, how much in wages, etc., what is the payroll of different companies, reported that only 107,000 private sector jobs were created, which is a very small amount.

And even if to this, you add the public sector jobs that are created, which will have expanded, because of Biden administration initiatives, nevertheless, it, you know, this would mean that if 353,000 new jobs were created, then job creation is being led by the government.

But at the same time, let’s also see something else, full time employment has fallen. That means, and this is, of course, been historically the issue, the United States always claims that it is such a wonderful job-creating economy. But few people point out that the bulk of the jobs that are created are part time jobs, they may even be zero hours contracts, and so on.

So, the actual quality, and of course, the kind of jobs there are, the benefits are low, the wages are low, etc. So, you essentially have an epidemic of McJobs rather than good-paying jobs.

Furthermore, this unemployment rate that I showed you is, unemployment rate is always calculated as the number of people who have failed to find work out of a total number, which includes those who are, those who are either working or actively seeking work. But it does not include those who have stopped actively seeking work.

And that number has actually … been going up for a long time, but it has particularly spiked in recent years.

So, in reality, the actual number of American people who are employed as a proportion of the labor force is going [down] … I want to show you the chart:

labor force participation rate US Biden

The labor force participation rate was fairly low, just below about 60% in the 50s, because of course, at that time, most women did not work. But beginning in the 1960s, as women began entering the labor force, the labor force participation rate began to go up, and it rose steadily through all those decades, up to about 2000, when you see this final little peak here. And since then, it has been in decline.

So, essentially, what workers are saying is that as neoliberalism has matured, as labor legislation, which decreased the onus on employers and essentially allowed employers to offer workers worse and worse jobs for worse and worse conditions and pay and so on, people who could choose to leave the labor force have been leaving the labor force, of course, we’re not even counting those who become disabled, particularly after COVID and so on.

But it has been declining, it declined massively during COVID. Since then, it has recovered, but it still remains short of the point it was at when COVID struck.

So, you can see that this is a relatively favorable story that the administration is trying to, is able to tell entirely because of this matter of labor force participation rates.

And finally, a couple of final points. Wage growth has been down for a year, particularly, as Michael was saying, for work-at-home employees. But the productivity is higher, so employers are gaining.

Workers’ insecurity is very high, and it is high precisely because they don’t have stable, permanent jobs. They have jobs that don’t last very long, that are part-time, that they hold at the whim of the employer. So, the traumatized worker syndrome still remains.

Back in the late 1990s, when Alan Greenspan was asked why, if the economy was running so, you know, the economy was running so hot, essentially, it was running so well, how come there was not more inflation? And he said it’s because of the traumatized worker. Workers are unwilling to demand higher wages, even though, according to him, the labor force, you know, the employment rate was very high.

But the simple reason was the workers were getting bad jobs, that they were getting insecure jobs. So, they were traumatized and insecure. They were unable to complain.

So, and finally, the quitting rate is very high, partly for medical reasons, but also because hospital workers, teachers, etc., do not feel medically protected at their job.

So, and according to the Biden administration, of course, COVID is over. So, these are some of the problems with this idea that somehow the Biden administration has given Americans a low unemployment rate.

MICHAEL HUDSON: Well, you’ve made all the points that I would have made, so I don’t have to make them.

I would like to see a chart for statistics they don’t collect: The employment by U.S. multinational corporations worldwide. Their employment in the U.S. may have gone down, but their employment abroad, especially in Asia, the maquiladoras along the Mexican border, their employment has gone up, but just not employment for their workers in the United States because it’s not really economic to employ American labor, given the rise in housing costs that we’ve just discussed, medical costs, and all the other costs that are going up.

America has priced labor out of the market, except for monopolies, especially artificial intelligence monopolies and military-industrial complexes. These are not competitive, so America doesn’t really have to do anything there.

You pointed to the structural shift in labor. It’s dangerous to go back to the office if they don’t have clean air and if you’re exposed to COVID, and the COVID rates continue to go up, and there’s nothing being done to encourage air purifiers or even the use of masks. You’ve made the points that I would have made.

RADHIKA DESAI: Okay. There’s another couple of points, though, and Michael, I think you wanted to talk about pensions as well, but let me make one point here further, which is that there’s a very odd discrepancy in U.S. growth figures that is increasingly being talked about.

And that is that there are two measures of GDP. One is GDP, gross domestic product, and the other is GNI, gross national income, and very often these two are basically supposed to match. I mean, there were maybe some statistical discrepancies, but the first, GDP, which measures essentially how much value was made out of the production of goods and services, and the GNI, gross national income, which measures how much people earned out of that process, this discrepancy is essentially being put down to the fact that workers are not buying, workers essentially are not, you know, they’re not getting high wages, they’re not buying enough goods, and a lot of their income is actually replaced by debt.

And the second thing is that, in fact, a lot of the things that are actually being produced are not, in fact, being sold. So, both of these things are also problems

Michael, you wanted to talk about pensions on the employment.

MICHAEL HUDSON: Yes, that’s the problem. Not only are the workers’ conditions getting poor, but pensions are no longer defined-benefit pensions, and many of the pension plans in the United States are actually broke.

Again, there was a Financial Times article last week that said that, Brooks Masters wrote, that the typical Generation X household has just $40,000 saved for retirement, and 40 percent of their 401k pension plans are zero. So, this is the result of not having a pay-as-you-go pension policy like Germany has and Europe has. Pensions have been financialized. In other words, instead of just paying out of the current economic surplus that you’re producing, workers and companies have to pay, save up money in advance instead of investing.

The post office, for instance, post office rates, postage prices in America are soaring because the attempt by Congress to privatize the post office means you have to include the pension plans for the next 75 years all in the price of your postage by saving it in advance, not hiring more labor, not improving the mail delivery, but just the turnover to the stock and bond markets to invest so you can pay pensions if there are any postal employees left.

Of course, the whole objective in increasing the public pension plans is to say, oh, I’m sorry, the post office and other public agencies are broke. We’ve got to privatize them. You privatize them, and what happens is what happened in England under Margaret Thatcher. You wipe out all of the pensions because there’s no company to pay them anymore.

Now, Peter Drucker called this pension-fund socialism before, because he said this is wonderful, workers and companies are going to pay for stocks, and that’s going to create financial wealth that’s going to be spent on new factories and new employment, and workers will be capitalists in miniature. Through the pension plans, they’ll be stockholders.

But the effect is simply to divert wage income into the financial markets, into the stock market. The pension system is a bonanza for the stock market and for bondholders because it’s financializing the economy, but it’s an awful noose for the workers who have to pay their own pensions instead of making pensions a public right like it is in socialist economies.

RADHIKA DESAI: Exactly, and if I may add a few points to this, this idea that the Peter Drucker idea that somehow you will get a kind of pension-plan socialism.

There’s a very interesting real-life example of this. In the 1970s in Sweden, thanks to a very high level of coordination between trade unions, governments, and employers, what had happened is that they had managed to create a fairly high-wage economy, a fairly prosperous working class, a very, very generous welfare state providing a whole range of services.

So then the question was, how would workers, whose wages will continue to increase thanks to rising productivity, what would be now done with the rising wages? What would they do? So they decided that they would create a wage earner fund, and the wage earner fund would slowly start buying up the stock of existing corporations for which they work, and slowly they would eventually become the owners of these companies, and that was the general idea. It was called the Rehn-Meidner plan.

And this plan was much discussed. Everybody thought it was great, but what immediately followed, beginning in the 1980s, was a major capitalist counter-offensive, an attack on the unions, which essentially meant that this wage earner fund plan was watered down to an extent that it became meaningless. And of course, today, in many ways, people would say that Sweden has gone from a Valhalla of socialism or social democracy to being a Valhalla of neoliberalism. So I did want to say that.

MICHAEL HUDSON: I want to add a technical twist, and that already occurred in the 1970s in Chile under the University of Chicago guidance. You’ll have the Chilean companies found out how to do pension plans the neoliberal way. You do have the workers buy the stock in the company, but the company owner will also have a whole array of companies. They’ll have a holding company for the industrial company, they’ll have an offshore bank account to hold the stock in the company, and the company will continue to make basically loans to its holding company and be loaded down with more and more debt. It’ll borrow, borrow, and then the holding company, the actual industrial employer, will be left to go bankrupt. It’s a corporate shell, and all the money will have been taken by the holding company.

And so very quickly, Sam Zell, the real estate owner, did this with the Chicago Tribune. The Chicago Tribune had exactly what you’re saying. We’re going to be part owners, we reporters and news people. And so Zell bought the Tribune, then he took all the money in the pension plan, lent it to himself and the holding company, and then said, oh, it’s broke, and wiped out all of the stockholders. I discuss that in my book, Killing the Host. That’s the pension plan finance capitalism.

RADHIKA DESAI: Exactly. And this is exactly the reason why, as this is particularly true in the United States, one reads every few months, one reads that some or the other pension plan has essentially lost its money. And that means the workers who had put in their money, their hard-earned money into these financialized pension plans, essentially are getting nothing in return.

But there’s a couple more points to be made. First of all, when you financialize pension plans, workers are encouraged to think that somehow they are also becoming capitalists, that they have a stake in the stock market, et cetera.

Now, what really happens when our pension money goes into, essentially becomes privatized and is now being managed by some or the other private financial institution, is that our pension money just becomes so much throw weight that they can use in order to move markets in their favor. Remember, when you are speculating, if you are speculating with a few hundred or a few thousand dollars, you are a price taker, a market taker. But when you are speculating with millions of dollars and maybe even billions of dollars worth of money, you are a market maker, you are a price maker, which means that you essentially get to rig the system.

So, our money is used by these fund managers and so on as throw weight in their speculative activities. So, this actually increases speculation, it inflates asset bubbles, and it makes financial crisis, from which we all suffer as working people, more regular, more frequent, and so on.

MICHAEL HUDSON: The situation actually gets worse than fund managers. Because the pension plans are in deficit, the pension managers are desperate. How are they going to get more money? They turn the money over to private capital. And private capital is much worse than the pension fund managers. Private capital makes its money by buying a corporation and driving it bankrupt.

Private capital does to the U.S. economy what it’s done to Sears Roebuck, to Toys R Us. The company will borrow a lot of money from a bank. It’ll pay a special dividend to the private capital owners. The owners will immediately say, we’ve got the increased earnings, we’re going to cut back productivity. When workers leave, we’re not going to replace them. We’re going to work them harder. We’re going to give the traumatized workers syndrome with emphasis. And so, by workers thinking, I’m going to be a capitalist, just like the rich people, and my pension fund is going to make money for me as a capitalist. But making money as a finance capitalist means hurting their identity as a wage earner. What are they going to think of themselves as?

RADHIKA DESAI: Well, exactly. And so, definitely. And the other thing as well is that, of course, the companies that are brought into the control of private capital, these CEOs, etc., they borrow money in order to also, like Michael said, they certainly borrow money in order to pay huge dividends, but they also borrow money in order to engage in share buybacks, which increases the value of the shares. And all of this is being done on the backs of existing employees.

And of course, in doing so, they very often misuse and misapply pension funds so that they can go bust as well.

But my second and third point are equally important, which is that workers who think that they are participating in the stock market and therefore rising stock markets are good for them, etc., should always remember two things.

Number one, when markets go up, they may benefit, but they always benefit much less than the people who are controlling these markets, the big financial institutions and so on. They are very low on the pecking order of benefit from financial speculation.

And number two, when there is a loss, they lose much more than those who are controlling these pension funds, etc., who have their golden parachutes and so on.

So that’s about the employment situation. Now, let us look at the next point, which is what is happening with investment.

So here again, you know, we are being told that parts of the US economy are finally doing much better because investment rates are somehow better and so on. But let’s look at what’s really happening with investment.

So this is a chart showing gross fixed capital formation in the United States from 1970 to onwards:

gross fixed capital formation US 2024

And you can see that on average, if you drew a trend line in this chart, it would basically be pointing downwards. So basically throughout the neoliberal era, investment, which is in many ways the main driver of the economy, consumption is also important, but investment is essentially, you know, the more there is investment, there is the more growth there will be because investment itself creates growth and it increases productivity and growth.

So this has essentially been going down. This peak here is at the end of the 1970s. It’s going down. This is about 1990, going up again just with the tech bubble up here and then with the housing and credit bubble, but then essentially declining after 2008. Since then, it has risen, but as you can see, it remains below, in fact, even many of the low points of the previous 50 years, let alone the high points.

So and in the last couple of years of the Biden administration, these figures are only available to us for now up to 2021. But you can see that under Biden’s first year, it effectively took a downturn.

And let me also add one other thing, which is that investment is a proportion of GDP:

investment proportion GDP US

You know, the United States and the Biden administration make much of competing with China and so on. Let’s take a look at this graph. It only goes to 2015, but I don’t think the story has changed.

And this graph, by the way, is the work of my partner, my husband and intellectual partner, Alan Freeman.

And here you can see he has given investment as a proportion of GDP for China, which is this bold blue line, and for many other countries. But we just want to focus on China and the United States, which is the green line.

And indeed, as you can see, the green line is basically at the bottom of all these comparable countries, including Europe, Japan, other industrialized countries, and so on, and even the global south, which is here in this thin blue line.

So you can see if you’re going to compete with China in terms of growth and productivity and so on, China at its peak is spending 45 percent of its GDP on investment. By contrast, the US is spending less than 20 percent, less than half in investment. So this is the sorry state of investment in the United States.

MICHAEL HUDSON: Oh, it’s much worse than that. It doesn’t say how the composition of this investment has shifted. This re-rising of the US investment is largely military industrial. A lot of it is also real estate. That’s probably the largest element of a lot of this investment. And the real estate investment has been transforming the whole economy.

And that includes buying out existing companies. That’s counted as a new investment. If you buy a building that was at a low price before, buying it at a high price is a new investment. In London, for instance, you just had the sale of the British telephone phone tower last week to a hotel company. So it’s privatized. They’re going to essentially use that as a new investment. But it’s not building a new building. It’s just taking something over.

In the United States, you had the last few months, you had Greyhound bus terminals sold. That was an investment, sort of like Stagecoach in London. The company that bought Greyhound is a real estate company. They said, we’re going to tear down the terminals that are put in the center of the city. The reason they’re in the center of the city is so that they’ll be convenient for people who ride the bus. They can go to the terminal, have a place to sit, buy tickets. We’re going to make them go to the outskirts of the city and wait outside, regardless of the weather, because we don’t care about the users of our service. We want the real estate. So we’re going to essentially dismantle the public service investment and make a gentrified version out of this.

And in New York, you’re having the Wall Street area. All of these commercial office buildings in New York, there’s a 40% vacancy rate on commercial buildings. So companies are coming in to try to invest the company, saying, well, there’s no more industrial economy to put in these buildings. Let’s gentrify it for all the people who are getting rich on the financial sector, making money de-industrializing the economy.

Well, there’s one problem with this that they’re suddenly finding out. You can take an office building, a bank, or a publishing company, or whatever, and divide it into residential units, but where are you going to put the kitchens? These buildings are not geared to have gas and electricity and venting for kitchens. And what about bathrooms? If you look at how your employer is set up at a company, this is not the kind of bathroom that you’re going to want near a bedroom or living room for a residential person. So there’s an idea that somehow you can do to the commercial office buildings in America what President Obama did to Chicago before president when his job was tearing down black neighborhoods and getting rid of the low-income blacks and gentrifying them for his sponsor, the Pittsburghs, to make a real estate fortune there.

So fortunes are being made by real estate investment, not exactly industrial investment. Real estate is, again, part of the FIRE sector, finance, insurance, and real estate. You’re having investment in research and development. That’s called capital investment. You’re getting the picture that the investment that is taking place isn’t the kind of investment that originally helped an industrial economy. It’s a de-industrializing form of investment.

RADHIKA DESAI: And there’s also, I mean, well, gross fixed capital formation will actually measure physical investments, so that there’s definitely some physical investment taking place. But as we see, it’s much lower than China’s, it is not really recovering. And more to the point, if there has been any kind of recovery or whatever little investment is taking place, let’s put it that way, whatever little investment in actual plant and machinery is taking place under the Biden administration is happening in large part because of the sops he’s giving to industry via his Inflation Reduction Act and other such initiatives. So essentially, he is giving certain corporations money to invest in certain sectors. And this is why you are seeing it. So it’s the dynamo or the dynamic, the mojo of American capitalism is definitely not back. It is definitely very weak.

MICHAEL HUDSON: You mentioned the inflation and that act. One of the high points of it was advertised by Taiwan, taking its computer chip company, wanting, getting, I think, over vast billions of dollars to set up a computer chip system in Arizona. The people came up here and they say, oh, it’s not going to work. There are no workers. You know, you said that you were going to provide us with American labor to work in the investment plant, but there aren’t any American workers because they’re not trained as working industrially. You know, who are we supposed to hire as workers for our computer chip plant if you don’t have workers trained to work in computer chip plants or other industries?

RADHIKA DESAI: And, you know, that also reminds me, I mean, we haven’t even talked about this, but the state of public education, that is the education that most ordinary American kids get, has actually been declining to such an extent, as we know, for decades. You know, teachers will complain that they spend all their time trying to keep control of the classrooms. How are they going to teach kids anything? So if your kids are not learning what they need to learn, how are they going to become even semi-skilled workers, let alone skilled workers? So absolutely, I’m not at all surprised.

Some time ago, I remember reading somewhere that the Japanese companies that were being encouraged to invest in car plants in the so-called right-to-work states, these companies were having to produce the literature to minimally give instructions to workers using symbols rather than putting it in writing, because many of these kids were functionally illiterate.

But let’s go on, because we have quite a few things more to talk about, and we don’t want to go too much over an hour.

So very briefly, we said that we would talk about the U.S. trade deficit, and once again, vis-a-vis the trade deficit, the Biden administration is crowing about its great achievement.

trade deficit US Biden

You see here the U.S. trade deficit, which, of course, historically had been very [high]. That is, you know, in this graph, the higher the line is, the better the situation. So when the line dips, the deficit grows.

So you can see beginning around the 1980s and then really taking off in the 1990s, the U.S. trade deficit was quite, you know, dipped quite low. People were really worried about the so-called twin deficits and so on. And then after 2008, precisely because of the massive recession in the United States, the trade situation improved. The trade deficit actually narrowed. And this is also very interesting, you know, historically because of deindustrialization.

The United States has a tendency that when the economy grows, the trade deficit grows. Why? Because American consumers prefer buying foreign goods. So this has been the case for many decades in the United States. So obviously, with incomes shrinking, so did the trade deficit.

But once again, it resumed declining. And as you see here, in the Trump years and also in the Biden years, the trade deficit declined. You know, as you see, it reached a really, really low point already under the Trump administration. And it has recovered, but it still remains at historic high levels.

So in that sense, if there has been any improvement in the trade deficit, again, this is largely because of the sickness of the American economy, the poverty of American consumers, not because of any miracle that the Biden administration has executed or has brought off in the U.S. economy.

MICHAEL HUDSON: I think the Biden administration has vastly helped the trade deficit. You know, what is Bidenomics? It’s a slogan for a war economy, financed by a financial bubble. And the State Department official, Victoria Nuland, just gave another plea for Congress to give a few hundred, a hundred million dollars for the weapons in Ukraine and Israel. And since our show focuses on geopolitics, I want to point out how war spending is contributing to the trade balance and also to American affluence against Europe’s NATO countries that America has just conquered economically.

Nuland picked up President Biden’s point that in reminding politicians that almost all the money for the war in Ukraine is going to be spent here in the United States, employing labor in the local districts of all the congressmen on the military and national security committees. That’s why war stops are going up. And it’s the merchants of death business.

And Biden is pretending to reindustrialize the economy by emphasizing how this military industrial sector is not subject to price competitiveness. You can do it with low productivity, high cost labor, because it’s a proprietary good. It’s an economic monopoly good for the weapons. Biden said, quote, but patriot missiles for air defense batteries made in Arizona, artillery shells manufactured in 12 states across the country, in Pennsylvania, Ohio, Texas, and so much more.

Well, these are the swing states in the election. And you have Biden, Hillary Clinton, Nancy Pelosi, and the other Democrats recognize that the world economy is splitting up between the U.S. and NATO neoliberal countries called “democracies” and the global majority seeking independence. Well, it’s almost as if they’re channeling Rosa Luxemburg. She said the choices between socialism and barbarism. And Biden and Nuland agree, except what socialism is, what’s occurring in the global majority. Barbarism is what’s occurring in the American NATO militarization and the fight in Ukraine and the Near East.

But the fight in Ukraine has helped the U.S. balance of payments, the trade balance, by essentially forcing the NATO countries to impose the sanctions against Russia that we’ve talked about. The anti-Russian sanctions have broken the German industrial economy for good. And that’s why German companies, Mercedes, Porsche, BASF, are moving to the United States, because they can’t get the oil and the gas and the energy that’s needed to make industrial goods.

And what’s happening as a result? America is not buying European investments. America is replacing Russia as a supplier of gas, liquefied natural gas. That’s way up for the exports. Oil, way up. Basically, America is gaining.

And also, this $100 million, all these billions that NATO have given to Ukraine have emptied out their war stocks. And they now say, we have to buy new arms of up to 2% to 3% of our GDP. And who can make it? America can make it, because we don’t have any oil and gas to power the industry to make these stocks. This is going to be a huge, huge increase in the American trade balance while the euro goes down and down and down.

RADHIKA DESAI: If I may add, one of the things that I forgot to mention earlier is that a large part of the improvement in the US trade deficit under Biden in the last couple of years, particularly, has come precisely from the export of liquefied natural gas. So think about it. Instead of having some kind of serious industrial policy, the United States is once again an exporter of primary products like natural gas, an exporter of energy.

Two more quick points. You’re so right to emphasize that, you know, many people think that NATO exists to defend the West against all, you know, originally against communism, and then now against all these vague, you know, dictators and what have you.

In reality, the NATO exists so that the US military-industrial complex will have an export market because of NATO interoperability considerations. Essentially, when a country joins NATO, they become a captive market for the American military-industrial complex.

But there is one final point I’d like to make. You know, many, many decades ago, a couple of decades, maybe two or three decades ago, Madeleine Albright is supposed to have said, what’s the point of having such a vast and sophisticated army if you don’t get to use it? Because she was saying, you know, we should, of course, we should go to war if we want to, etc.

I’d like to paraphrase her on this. What’s the point of having a $1.5 trillion annually military-industrial complex if it actually cannot produce sophisticated weapons today? As far as technological sophistication is concerned, Russia and even China are further ahead of the United States. They can produce things like hypersonic missiles. They can produce electronic technology to fight wars that is far superior to anything the United States has.

So, this is another really interesting point, which is that the United States today can only get customers for its coddled military-industrial complex, which has become incapable of producing anything decent, when it essentially makes people join NATO and essentially convinces the governments of various countries to act against the interests of those countries. Because every country that is being brought into NATO on the premise that its security is going to increase is actually going to have its security decreased.

First, because, of course, NATO is increasing in security around the world. And second, because in reality NATO is not capable of defending these countries. It has deficient armies, it has deficient industrial and military production, and it has deficient weapons technology.

So, for all of these reasons, and the reason why the Russians and the Chinese are able to surpass the United States in terms of military technology is very simple. Yes, they have also in military industries, but their military industries and their armies are actually devoted to the defense of the country, not devoted to their own expansion for their own reasons. So, that’s another thing that I wanted to mention, that this is really in terms of the trade deficit.

But we also have three more interrelated things to discuss, which is what’s really happened on inflation, what’s really happening to the financial sector and financial stability, and what’s really happening to the budget deficit, and how are all these things interacting.

So, let’s take inflation first. What I’d like to say about inflation is the following. Throughout the last many months, the story has been that the Federal Reserve has managed to create a soft landing. We have vanquished inflation while not being in recession.

Now, Michael and I have already told you how the U.S. economy is doing far less well than you might imagine, and that if you look at the GNI statistics, the Gross National Income statistics, the U.S. economy is in recession. It has had several quarters of declining GNI.

On inflation then, the story that we are being told, the official story, is that the Federal Reserve has performed a miracle. It has achieved a soft landing, it has defeated inflation, and the U.S. economy is not in recession. But the reality of it is that if you go by the GNI figures, the Gross National Income figures, the U.S. is in recession in reality.

And the other problem is that, in fact, it’s quite possible that inflation has not been vanquished, because the fact is that while the more volatile prices, but particularly energy prices, have indeed gone down, at least they are down for the moment, core inflation remains stubbornly high, which is why the Federal Reserve, after talking for so many months about reducing interest rates in 2024, is already beginning to postpone the reduction of interest rates.

So, in that sense, inflation has not gone away as a problem, and this creates massive problems for financial stability to which the widening U.S. budget deficit is making its own contributions, and we’ll talk about that in a minute.

Let’s take a look at financial stability then. The fact of the matter is that we already saw at the beginning of this year that we had a series of failures of American banks, the Silicon Valley Bank and a few other banks failed, and they failed chiefly because of the way in which the Federal Reserve is trying to deal with the problem of inflation.

We’ve already discussed in the past that the problem of inflation cannot be really resolved by raising interest rates. Indeed, one economist, Robert Solow, had essentially referred to the raising of interest rates as a means of dealing with inflation as burning a house to roast a pig. I mean, you don’t need to do that. You are basically creating a lot of destruction.

But nevertheless, the U.S. Federal Reserve started raising interest rates, and this began affecting the financial institutions like Silicon Valley Bank and the other banks that went bust that had relied on the continuation of easy monetary policy.

So, in a certain sense, we are facing the prospect of another financial crisis, which in 2008, also the financial crisis occurred because in the mid-2000s, the Federal Reserve started raising interest rates once again because the dollar was falling too low, because commodity prices were rising, and as they brought interest rates up to about 5.25 percent, which is roughly where they are at right now, this was enough to prick the housing and credit bubbles, and you got the 2008 North Atlantic financial crisis as a result.

The new financial crisis has arguably already begun. It already began with the bank failures earlier in 2023, and now we read headlines like this, “Bad property debt exceeds reserves at the largest U.S. banks”. This is a Financial Times story: “Loan provisions have thinned even as regulators highlight risks in commercial real estate markets”.

FT bad property debt reserves US banks

So, they are showing us these major banks, how many lost reserves they have in relation to loans that have already become delinquent, loans on which payments have already been missed. These are the six largest banks, and except for J.P. Morgan Chase, which has a ratio higher than 1 percent, compared to 2022, in 2023, which is this light blue line, practically every bank has less than one dollar of reserve for every dollar of its exposure to bad loans in the commercial real estate market.

And these sorts of problems are, by the way, not just commercial real estate is just one, but there is also private equity. There are many other asset markets in which trouble is brewing.

And this also goes for the market in U.S. Treasurys:

US federal government net interest payments debt GDP

Because as interest rates go up, the U.S. essentially has to pay a higher rate of interest in order to borrow money on the international market.

And what’s more, over the last many years, the treasury market has been sinking, and it has essentially not got enough buyers. As a result, the Federal Reserve has had to step in in order to prop up the treasury market.

But even then, even with all the support the Federal Reserve is going to get, is giving, you can see here this up to 2023 is the real figures. And then from here on, these are estimates. And you can see that interest costs as a percentage of GDP, the interest costs on U.S. debt are going up and they will contribute to a worsening U.S. budget deficit.

So you see here, interest costs have been just a little above 1 percent for a while, and now they will go up to 2 and 3 and 4 percent. And this is going to brew trouble.

And finally, this is an interesting story that appeared:

US military spending 1537 trillion 2022

Even though the United States budget is in such deep doo-doo, basically, you have the United States government spending more and more money on the military-industrial complex.

We are told that it was, the official story is that it’s worth about $750 billion, three-quarters of a trillion dollars. But studies show that the actual size of military spending in the United States is about $1.5 trillion. That is a huge sum. The total amount of U.S. GDP itself is about %20 trillion. So you can imagine, it’s like about 7 odd percent of U.S. GDP.

So this is the state of the U.S. economy. And so we can expect in the near future to hear finally an official admission of the recession the U.S. is in, continuing inflation, and with continuing inflation, the possibility of the Federal Reserve increases interest rates.

So maybe even if it does not increase interest rates, the possibility of another financial crisis. So this is the sort of cauldron of troubles that is already brewing as the U.S. approaches an election year.

MICHAEL HUDSON: Well, there are a couple of things. Let me go over your charts one by one again. You sort of went very quickly.

When you showed the chart about the banks being in negative equity, this is especially the case for small community banks.

FT bad property debt reserves US banks

About 30 or 40 years ago, there began to be small community banks. The smaller banks, if you notice, are the ones that are in the most trouble because they’re the ones that have made loans to local businesses, local landlords.

You already have one of the big New York City community banks going broke in the last week, just like you had the Valley National Bank go broke before. What these charts show is that the U.S. financial system in general is in negative equity.

Now, just think of that. If you have a financial system that’s in negative equity, what do you need a financial system for? The whole idea of finance is people are supposed to be abstinent and save rich people and save their money. You remember Karl Marx’s quip that the Rothschilds must be the most abstinent family in Europe because they have so much money.

Well, the fact is that if banks don’t supply money to the economy, but they’re broke and they get all the money from the government, this is just what China’s doing.

Why don’t we just say, okay, money is a public utility?

RADHIKA DESAI: Nationalize the banks.

MICHAEL HUDSON: If it’s a public utility like China, then it’s not going to make this de-industrial real estate kind of property investment.

Now, let’s look at the chart again for the interest rates going up in the U.S. economy:

US federal government net interest payments debt GDP

This has overjoyed Biden, and especially it makes Obama very, very happy. This is Obama’s dream to privatize Social Security. The government is going to say, we have to balance the budget. The Republicans are going to close down Congress, as they’re threatening to do this Friday, by the way, in order to balance the budget. Because the market, the magic of the marketplace, has raised the interest rates.

Between the higher interest rates and the military charges that you just showed, there really isn’t enough money for social spending anymore. But we can do what Margaret Thatcher did to the English economy. We can privatize Social Security. And now all the money that you had for Social Security is not going to be your money anymore. It’ll be, we put it in the hands of the banks that have already driven themselves and then the financial sector into negative equity.

Now they can take your Social Security and drive it into negative equity. That really is the grand plan, to privatize, to treat Social Security, Medicare, Medicaid like the post office. It’s all going to be privatized. That’s the neoliberal plan. And this is not an accident. This is, it’s a feature, not a bug in the economy. And that’s basically the direction we’re going in.

The privatization of finance, instead of doing the obvious thing, if finance is now broke, why not do it? The government can create the money instead of what it’s doing now.

The banks are giving the bad loans and basically they’re putting their assets with the Federal Reserve and borrowing the money to stay in business. You can be in negative equity forever as long as the Federal Reserve, which basically works for the commercial banks as their customers, is creating enough money to subsidize the negative equity for the banks and the financial sector.

What they’re not doing is subsidizing the negative equity of the wage earners, the negative equity as a result of their housing costs, their medical costs.

RADHIKA DESAI: Two things very quickly. And I think we should probably wind down because we are just about a little over an hour here. But just two quick observations that in the 2008 financial crisis, there were many people who were arguing that, yes, there should be a bailout, but not of the banks that caused the financial crisis in the first place, but of the homeowners who were not necessarily at fault. And of course, the economic benefit of bailing out the homeowners would vastly be greater for the good of the American economy than bailing out the banks.

But of course, a government that is beholden to the big financial institutions was not going to do that. And so it did what it did. It bailed out the big banks and not the poor people who lost their homes, who lost their jobs, etc.

The second thing is that, you know, I completely agree with you, Michael, that this is what neoliberal governments have done for many decades now. They essentially want to privatize everything in sight. And of course, by creating a crisis of social security and so on, that’s what they generally do. They first run down any institution, whether it’s social security or any other publicly owned asset, and then they say it’s time to privatize it because that will improve it.

But, you know, I wonder, I wonder if there are not even enough people who can buy U.S. Treasury securities, if the market for Treasury securities is not great, if the big financial institutions are already sitting on mountains of negative equity, where are they going to get the money to buy? Where is going to be the market to buy these assets that the governments are going to privatize?

Because in the history of privatization, there have been many privatizations that have had to be called off because there are not enough buyers. And we may very well be in that situation.

MICHAEL HUDSON: You pose a question, I get to answer it. The answer is they’ll get it from abroad. This is a geopolitical hour after all. Europe’s loss will be America’s gain.

What affluence is flowing in? You could say that since World War II, Europe and America have gained by keeping the prices of raw materials and the global South countries low and keeping the prices of their industrial goods very high.

What you’re seeing today from Europe is, I think, their way of solving the problem you’ve just posed. The bright spot is getting a flow of American, of European companies into the United States, relocating here because they can’t, the European economy is collapsing. You’re having a flow of labor and skilled labor from other countries into the United States. Affluence is this kind of flowing in.

If you’re not producing an economic surplus at home and you want to somehow sustain American living standards and corporate profits, it has to be done externally. It has to be done via foreign countries. And that’s the geopolitical implications of all this.

If America is turning into a deficit, parasitic economy, some other countries have to pay. And that’s why there’s all of this military spending.

RADHIKA DESAI: I would beg to differ, actually, because here’s the thing. The geopolitical economy of the North Atlantic financial crisis was roughly like this, that in the process of deregulation of European financial institutions that came along with the launching of the euro, a lot of European financial institutions ended up outside of North, the United States and Britain, becoming the main customers of the toxic securities that were being generated in the 2000s as a result of the housing and credit bubbles.

Once that bubble burst, once the crash occurred, essentially European money left and it has generally stayed away. And there, as I said, this money is not even available to buy U.S. treasury securities.

If the Europeans invest in the United States, they will be investing in creating new assets. They’re not necessarily going to buy up what the American government necessarily wants to privatize.

And what’s more, in recent decades, recent years, I should say, China and Japan have also been increasingly reluctant to buy treasury securities. So all in all, all I’m trying to say is that it is not a given that these assets, that the old tradition of essentially privatizing things at bargain basement price, even at bargain basement prices, is necessarily going to work. That’s all. I’m just wanting to raise some questions around it.

But so all in all, Michael, I think what we’ve done is we’ve painted a picture of an extremely precarious situation, an extremely dangerous situation in which people are suffering. They are unhappy. They are going to the polls. They are going, they’re being asked to choose between two candidates, both of whom have failed in signal ways. And there is not any simple way out. And so, as I say, it’s going to be a really, really rocky road to the election.

MICHAEL HUDSON: Yep. If you have a democracy, you cannot let people have a vote for the other candidate. That’s what our democratic hero in Ukraine, Zelensky, says, cancel the elections. That’s what’s happening in Israel. Netanyahu, no way of throwing him out.

And that’s what’s happening here. There can’t be a third party. You have to, as long as the Republicans and the Democrats have the same program, just with a different rhetoric, that’s the new meaning of democracy.

RADHIKA DESAI: Well, I think that you’ve said that, said it, Michael. So I think with that, we’ll say goodbye for now. And we look forward to seeing you in a couple of weeks. Thank you and goodbye.

And please remember to like our show and to share it as to other interested people and to subscribe to the channel. Thank you very much and goodbye.

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Real-Life Economic Solutions

Par : AHH

Political economists Radhika Desai and Michael Hudson discuss realistic alternatives to the neoliberal model of financialization, and tangible policies to build a productive, sustainable economy.

Radhika Desai and Michael Hudson at The Geopolitical Economy Hour

Video:

Podcast:

Transcript:

RADHIKA DESAI: Hello, and welcome to the 22nd Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our times. I’m Radhika Desai.

MICHAEL HUDSON: I’m Michael Hudson.

RADHIKA DESAI: And working behind the scenes to bring you this show every fortnight are our host, Ben Norton, our videographer, Paul Graham, and our transcriber, Zach Weisser. We all urge you to click the Like button, if you like what we are doing, share it on social media, and subscribe to our work by hitting the Subscribe button.

In our last show, which we entitled “The Debt Explosion: How Neoliberalism Fuels Debt Crises“, we promised that our next show would be about what the solution is, what is the solution to the myriad problems that we were describing. And that is indeed what we are going to discuss today.

The solution, we feel, in the United States and in all countries that have gone down the road of neoliberalism and financialization involves a root and branch reform of the financial system. And this would be the foundation for the urgent economic transformation. It will be the single largest component of the economic transformation that so many of us realize we also badly need.

We must reorient the financial system away from the sort of predatory lending and speculation that we described last time, the sort of predatory lending and speculation on which it has come to rest for the past five decades, and increasingly so over the last five decades.

It has to reorient away from that and towards lending for more sustainable production, pure and simple, and the sustainable production of the goods and services which everyone needs. This involves transforming the very basis of our money and credit system.

And given the link between the US financial system and the dollar’s world role, it would also involve ending that role and setting up an international monetary system for the world on the basis of cooperation among the different countries of the world.

Most Americans, I mean this may surprise many Americans, because they are all invited to feel rather proud of their dollar’s world role. However, precisely those who invite American citizens to feel proud of their role are hiding the fact that it is precisely this financial system or it is precisely this world role and the financial system that underpins it that has undermined the US’s productive economy and its capacity to create well-paying, skilled and meaningful jobs for most people in the United States.

Most people in the rest of the world have been asked to regard the dollar’s world role as natural and inevitable. But as Michael and I have shown repeatedly in so many shows, it is anything but natural and inevitable. It is indeed instead unstable, volatile, crisis-prone and profoundly exploitative.

The dollar’s world role has always rested, as we have argued in our shows and our writings, on an attempted and never successful imperialism, and it has to give way to international cooperation for universal development and planetary sustainability, and the international monetary and financial system that promotes production, sustainability, equality and a broad-based prosperity, a broad-based well-being, let’s say, if not prosperity.

The ultimate goal has to be economies in which money plays as small an independent role as possible, where most things are available as entitlements in kind, whether it’s food, clothing, housing, education, transport, culture, goods produced publicly and equitably and provided in adequate quantity and quality with a view to sustainability.

However, to get there from here, from our very highly financialized economies, transformations are necessary in a number of spheres.

So today we want to focus on some of the main elements of this transformation, and one way to summarize what these elements would be is we’ve tried to divide our conversation into the following topics: Who should create money? What should monetary policy aim for? How do we redesign the taxation system? What about land, rent and so on? Should we nationalize the land and eliminate rent? How should the financial system be regulated? What should replace debt? Obviously, income rather than credit. And finally, how should international money be reorganized? So that’s what we want to discuss today.

So Michael, why don’t you start us off by just offering some thoughts on what should money creation look like in the different type of economy we’re talking about now?

MICHAEL HUDSON: Well, the key word that you used was system. And a system has many dimensions of the solutions. And so all the points that you mentioned are various parts of the overall system that we’re trying to put together. There’s not one single reform that can cure the problem.

And the problem basically is that most money is issued by commercial banks, not by the government. And bank credit, as we’ve discussed in the last episode, is largely created for the wrong things. It’s created against housing to inflate housing prices. It’s granted for corporate takeovers.

One thing bank credit is not issued for is to build new factories and to employ labor and to increase economic growth. That’s the job of the government when the government treasury creates money to spend into the economy for functions that are supposed to serve society and serve economic growth.

But when a government lends money, it’s for very different reasons. It’s for the real economy. And when banks lend money, it’s for the financial overhead economy. And that’s why we would like to see all money created basically by the Treasury.

And of course, if the loans are lent out by commercial banks, if they are the agents of the government, they will get credit and the ability to issue credit from the Treasury, but really not from the Federal Reserve.

The Federal Reserve was created to get rid of the Treasury in 1913. The Treasury wasn’t even allowed on the Federal Reserve. Most people don’t realize that before there was a Federal Reserve here, all of the functions that are now done by the Fed were created by the Treasury.

And that’s the same in most countries. Every country that has a central bank is to essentially take power away from the government to spend money into the economy, to insist that the government should run a balance and not create money and force everybody to depend on bank credit for whatever they need.

And the bank credit, as we’ve described before, is not very helpful. And so money is created by running into debt for a commercial bank.

We want money created by the Treasury where it does not involve this kind of debt. There are many ways of doing it.

If the commercial banks acted like savings banks, 100 percent reserve, then they would essentially be reliant on the government to create their credit for the kind of thing that the treasury creates credit for, for growth.

And so if you look at the solution, what is the problem that you’re trying to solve? The problem is to minimize the debt overhead and to maximize economic growth.

RADHIKA DESAI: Absolutely. And just, you know, you’ve said so many interesting things, Michael, and I just, you’re prompting me to say a few things in this response.

So what are the implications of what we’re talking about here is that essentially the government would be, because it is the main issuer of money, it would be capable of lending to itself the money that it needs, whether to build roads or schools or hospitals or what have you. And for that matter, engage in all sorts of sustainability initiatives, whether it is protecting forests or transforming the fossil fuel economy into a different type of economy. All of these investments can be made. So that’s the first thing.

And so the key here in terms of the creation of money is to take away the power that has been given by governments to the private sector to create money as credit and essentially create instead money as cash on the part of the government, minimizing the role of credit and therefore also minimizing the kind of indebtedness that has been so problematic for economies.

This would then also lead to the merging of essentially fiscal policy and monetary policy, because in the sense that, you know, today the two are divided because in order to expand government spending, governments are told that they have to borrow from private creditors. This will no longer be the case.

And finally, thirdly, you know, central banks, you know, a lot of people, I mean, I’m against what the Federal Reserve has been doing for a very long time. But having said that, central banks are necessary because there has to be some institution that mediates the relationship between the national currency and the currency of other countries.

So typically, historically, central banks have had three roles: number one, to maintain the external value of your currency; number two, to set the interest rates; and number three, to regulate the financial sector.

So obviously, the first function is, of course, important. And the way in which it will be different in the scenario that we are talking about, the kind of anti-financialization scenario, is that the maintenance of the external value of the currency would not just be governed by the need to keep the value of the currency high in order to enable rich people to benefit from it. Sometimes devaluation may be necessary because that is what will be necessary to expand employment, etc.

As far as setting interest rate is concerned, the simple fact should be, as the old adage goes, credit should be cheap, but not easy. And I think that’s the way in which this should be run.

And finally, the whole regulation of the financial sector, I mean, this is exactly where the Federal Reserve in particular, and many other central banks that have permitted vast degrees of financialization to occur, have essentially abused their power. Because instead of regulating the financial sector in the interest of a productive economy, they have regulated it in such a way as to permit financialization and predatory lending.

And the whole nature of financial regulation will have to change radically, and go back to something like what it was in the aftermath of the Depression-era banking legislation that was implemented in the United States.

MICHAEL HUDSON: Well, you pointed to another product of the banks, and that’s junk economics, pretending that the bank credit fuels economic growth and that it does so in a way that promotes stability.

But what it really does is financial parasitism, a debt overhead. You mentioned cash, and that you want to replace the bank credit with cash. What you mean, basically, is like the paper money in your pocket.

The government would spend the equivalent of paper money by any kind of government-created credit through the Treasury or through Treasury banks, or even by commercial banks acting like savings banks with the savings coming from the government.

The distinguishing feature of the paper money you have in your pockets that’s different from bank credit is the paper money doesn’t have to be repaid. Nobody is going to somehow repay your currency and say, I’m going to cash it in. You cash in a $10 bill, you get two $5 bills. But bank credit does have to be paid and comes with interest.

The Treasury credit does not have to entail this huge increasing debt overhead that banks create. That’s basically it. It’s this debt overhead that actually, as we will discuss later, deflates the economy instead of inflates it.

Bank credit inflates prices for assets, for houses, for stocks and bonds. But it deflates the economy by making people spend more and more of their income on debt service to buy the higher-priced houses or to buy the higher-priced retirement income that the banks bid up.

RADHIKA DESAI: Michael, I think that you’re absolutely right that this is exactly what’s going on right now. However, in our past programs, one of the things we have emphasized is that, historically, this was not the case even in the United States in the immediate post-War period. It was a very different type of banking system which did lend for productive expansion.

And it’s only really sort of in the ‘60s and particularly from the ‘70s onwards that the kind of deregulation we have witnessed have converted the bank lending into lending essentially for mortgages and the kind of lending you’re talking about.

And of course, the other thing we’ve emphasized is that historically in countries like Germany or Japan or China today, the banking system is very different. And it is geared not towards lending for mortgages, et cetera, alone, but rather lending for productive activities. And so there is a different model. And that’s the model that we need to go for.

I just wanted to add one other point, which is that, of course, when you talk about increasingly taking away the right, [or] the franchise, that has been given to private financial institutions to create credit, create money in the form of credit.

One of the subjects that has become increasingly discussed these days is, of course, that today we can, in fact — the system of government creating money can be made far more efficient thanks to information technology, which is why so many central banks are looking at central bank digital currencies.

Now, the thing to remember about anything you read about central bank digital currencies is that a large part of the discourse is affected by the need to placate the financial sector, which would be wiped out — the private financial sector would be wiped out if you had central bank digital currencies. And I’ll explain why in a minute.

But so it’s either those who are trying to sort of create the world in favor of it, but they are afraid of the power of private finance. They articulate their discourse in a way as to placate private finance. And of course, private financial interests are dead set against the creation of central bank digital currencies.

But on the other hand, precisely because other countries, countries like China and so on, are going to look at it and may well be in the forefront of implementing it. Other central banks have to look at what’s being done and look at its potential. So this is what you have to understand.

Now, the reason why the private financial sector is dead set against creating central bank digital currencies is very simple. Historically, the existence of a private financial sector has been justified by saying that, well, the central bank cannot have, you know, a presence in every locality.

So the idea has been that in order to create a dispersed financial system, you should have private, you should allow private banks to set up shop wherever it is needed. And all you then have to do is regulate it. And we’ve seen what has happened to that regulation, particularly over the past five decades.

But now, essentially, information technology allows every person to have an account directly with the central bank. And therefore, the central bank can essentially regulate, central banks can essentially regulate the money system in a much more tactile way than was ever possible without the intermediation of private interests.

And this would also have a further effect, which is that, you know, today there is a so-called financial exclusion. A number of people who are excluded from having bank accounts, etc., they would be included. And there are a number of people who are excluded from participating in payment systems like credit cards and so on, because they are unable to get them.

But if the government creates a payment system, then everybody could use it without the sort of usurous credit card charges that are essentially charged by central banks.

So, in this way, central bank digital currencies can be part of the solution.

MICHAEL HUDSON: Okay, next topic.

RADHIKA DESAI: Okay, next topic. So, what should monetary policy aim for?

MICHAEL HUDSON: Well, we were going to, the monetary policy has to go hand in hand with tax policy. It always does, because what gives money its value is its ability to be accepted in payment of taxes.

One of the problems is that banks have led the fight for the last 100 years against progressive taxation. And the result has been that banks have united with the landlords and monopolies to create monopolies to finance an absentee ownership class.

And essentially, instead of following the classical economics that we discussed last time, Adam Smith, and John Stuart Mill, and Marx and the others, instead of making economic rent the basic tax base, land rent, monopoly rent, and financial rent, the banks have led the fight to untax real estate and to untax land because they know, they say, there’s all this economic rent, this free lunch, the advantage of price over and above the cost of production, purely empty prices, monopoly prices, when monopolies raise the price of your pharmaceuticals or when stores raise the price of groceries, the banks want all of this monopoly rent for themselves.

And so if the government were to pursue anti-monopoly regulations, or if it was to do the classical policy of taxing the land, then there would be two results: number one, the land tax would not be paid to the banks and not be capitalized into higher housing prices; and number two, the price of housing would be kept down, the price of monopoly goods would be kept down, the price of doing business would be kept down because this excess economic rent, which means empty pricing, which means free lunch, would not be paid to the banks as its major source of income.

And we’ve talked before, last time, about how 80% of bank loans are mortgage loans. So the whole idea of progressive taxation is not simply taxing incomes higher, it’s taxing a particular kind of income higher, bad income, unearned income, economic rent income, not wages, not corporate profits.

The original American income tax in 1913, along with the Federal Reserve, didn’t tax wages, and it didn’t tax normal small businesses. It taxed the wealthy bankers and the wealthy real estate owners and the monopolists. And the last century has been moving away from this because banks became the mother of trusts, as they used to be called. Banks became the main fighters against any kind of economic progress toward the kind of free markets that the classical economists talked about.

So we’re not going to go into value, price, and rent theory here, but if you’re looking at the principles of credit reform and bank reform, you want to ask, how does this affect the relationship between the prices that people have to pay and what it actually costs to build a house? The land is provided freely by nature. The locations are more valuable than others. But banks don’t create this money, but they get all the rent for it, just like before the 20th century, landlords used to get all the rent for it.

You want to fulfill the fight that the classical economics had to free the economies from the legacy of feudalism. Banks want to restore a kind of feudal economy where the richest people live off rent, rentiers. They live off interest, off landlord rent, and monopoly rent. And you want to get rid of that, and that’s what makes socialist economies so much more cost-efficient than finance capitalist economies. There are hardly any industrial economies anymore, except for the socialist economies. And if you want to say, what is a socialist economy? It’s an industrial economy free of the rentier class.

RADHIKA DESAI: Well, exactly, and this reminds me of a point that I made earlier, and this is very, very important. Just as you pointed out, these days, bank credit is designed to inflate the value of already existing assets. And in fact, in doing so, it tends to strangulate the production of new goods and services, which people need. So I call this a form of necromancy, the love of the dead, because the already existing goods whose values are being inflated, whether they are houses or fine wines or pictures or what have you, this is dead labor. And in order to inflate the value of dead labor, you are strangulating the exercise of living labor without which no economy can prosper. So that’s one point.

And before we move away from the issue of monetary policy, I just wanted to also share my screen once again and just remind people of how absolutely awful monetary policy has been for such a long time. So this is just a graph of U.S. interest rates and historically from 1955 onwards. And you see that there have been various periods of very high interest rates. This is us right here with the big increase in interest rates.

And all these increases in interest rates have been designed to strangulate the economy, to induce recessions, so that the value of existing money and of existing assets will be preserved rather than being undermined in any way. And this is precisely what we have to avoid.

And this type of policy is followed because it is believed, as Milton Friedman claimed, that inflation is everywhere and every time is always and everywhere a monetary phenomenon. That is to say, it results from creating too much money. So you have to stop creating money. You have to decrease money supply, increase interest rates and essentially strangulate the economy.

In reality, inflation is a supply problem. And if prices of certain things are going up because there is not enough supply, the best thing a government can do is to organize the supply, either incentivize the private sector to produce it or go into the production of those goods and services on its own. And this is the way to deal with inflation, not by strangulating the economy, as has been done in the past.

And as we are continuing to do so, one of the things you will have noticed is that even today, Jeremy Powell has said that he would like to decrease interest rates, but he’s not sure exactly when. Why? Because the U.S. economy is doing too well. I mean, consider the absolute, how can you say, obscenity of this. But that is what monetary policy is doing right now. And again, in the kind of economy we are talking about, the economy which will solve these problems, we will not have that kind of monetary policy. We will instead recognize that inflation is not always and everywhere a monetary phenomenon, that it is a phenomenon bound up with production and it will be attacked as such.

Michael, do you want to add anything else to the monetary policy matter before we go on to the next question?

MICHAEL HUDSON: Yes. The reality is just the opposite. The deflation is everywhere a monetary problem. The function of Milton Friedman and the Chicago School is to make sure that people are confused and do not understand how the economy works. You want to produce students that end up like Paul Krugman, not people who understand what Radhika and I are taking.

You can say just as well that increased money creates deflation. How does this work? If most bank credit is created to increase the price of housing, to lend against houses and raise the price of housing, that is going to increase the amount of money that people have to pay for housing.

From 1945 to 1980, 25% of American income was what you would pay for a mortgage or for rent. Today it’s up to 43%, guaranteed by the government and even higher for many people. If you have to raise the amount of your income from 25% to 43% to pay the banks for mortgage credit, you’re going to have to cut back your spending on goods and services accordingly.

In the 1930s, this was called debt deflation. Everybody knew what it was. Irving Fisher wrote a great article on debt deflation. My book, Killing the Host, describes debt deflation. The banks try to say, no, no, money inflates the economy and our credit helps employ labor and raise wages, but when we create too much, meaning when wages go up, then we have to step it back down. The worst thing that can happen to an economy for a banker is for wages to go up. The banker wants wages to go down, so the banker wants all the money to be paid as interest in the economy.

Somehow they can turn everything upside down. What you get in the press and the politician speeches is an inside-out economics, not realizing that bank credit deflates the economy, causes unemployment, and that’s how the Federal Reserve manages the banks to make sure that wages don’t grow, that housing prices grow, that rents grow, that money paid to the banks grows, but not money paid to labor or to industry. Because if you had industrialization, if America was still a manufacturing economy, there would be higher employment for labor, and that’s not what the class war is all about in a financialized economy.

RADHIKA DESAI: Exactly. Just one side point, Michael. You and I were discussing this a few days ago. You had written a book called Junk Economics, and you were doing a search on whether you were the first to use the term junk economics, and you found, no, somebody else had used the term before, and guess who that person ended up being? It was me.

The reason I’m bringing this up is because I wrote this book, Geopolitical Economy, in which a large part of my narrative actually rests on reading the economic reports of the president. As the U.S. economic policy became more and more essentially neoliberal, financialized, etc., which could not be justified on any sane basis, the economic discourse emanating from the highest places of the administration could be seen to be visibly deteriorating. It made less and less economic sense. I used the term junk economics when I was giving a presentation based on chapter 9 of that book, which covered the George Bush Jr. period, and I said that by this time the level of irrationality of economic policy had risen to such a great extent that essentially what was essentially a bubble economy was justified as being just perfectly fine on the basis of what I call five tall tales, that the highest, best-paid economists of the country were telling Americans and the rest of the world why they should keep investing. This is essentially when you create a junk economy, then you need junk economics to justify it, and that’s what we’ve had so far.

Having said that, Michael, you already have touched on our third question, which is how do we redesign taxation? I think you have some really important things to say about this, so go ahead.

MICHAEL HUDSON: As I said, should I repeat myself? You want to tax economic rent, not value. Value is created by labor. You don’t want to tax labor, because if you tax labor, the employer has to pay a higher price, and if the price of labor is what determines what goods industrial products are sold for, the more you tax labor and the more you tax industry, then the less competitive you are in the world, and you lose out to countries like Asia or countries that are not post-industrialized, but continue to industrialize. That’s basically it.

Interest is an element of cost. Debt service is an element of cost. If you have to pay higher interest, then, of course, this is the cost of production, and the American economy, by being taken over by the banks, has made itself so high-cost an economy that that is what has de-industrialized the economy. The only way that you can re-industrialize the economy is to prevent all of this unearned income, this free lunch income, the land rent, the interest charges, the monopoly rent. You want to prevent that from being subsidized by the politicians that are put in place by bank contributions so that all of this rent can be paid to the banks.

If there is unearned income, obviously some houses and some locations are going to be better. You want this to be the tax base. If it’s the tax base, it’s not going to be capitalized into higher prices.

RADHIKA DESAI: You mean a land tax?

MICHAEL HUDSON: Yes, a land tax primarily.

Also, you don’t want to charge for student loans. You don’t want students to say, OK, I want to get a job, I’ll go to college, I’ll pay $40,000 a year, and I’ll come out owing so much money that I can’t afford to buy a house and I can’t afford to buy many of the goods and services I produce. They’re not even producing many goods and services because those are basically industrial services and they’ve all been moved offshore.

It’s not that foreign countries have stolen this industry. It’s that America said we don’t want industry that employs labor because you’d have too high employment and you’d have high labor prices and we’re running the economy and we want the money, not labor. We bankers and monopolists and billionaires want all the money for ourselves, not labor. That’s why we’re moving it offshore to keep wages down because we want a low-wage economy. That’s what we call an efficient economy, an economy where people can’t afford higher education, an economy where people can’t afford housing because they’re paying us. They take out student loans that we get the money from. That’s the kind of economy that economists say is efficient. Another word for it is race to the bottom, and that’s the kind of economy we have.

RADHIKA DESAI: Absolutely. And just one final point on redesigning taxation. What Michael is saying essentially is that instead of taxing earned income, particularly labor income, what should be taxed is land, and that should be the main basis on which— and the rationale for this is very simple.

Basically, land becomes more valuable not because of anything you’ve done. Imagine I own a piece of land. I have absolutely no idea. Maybe it’s in a sleepy, faraway place in the country, and it’s really worth very little. And then somebody discovers that there is some new mineral that can be found on my land. Well, with me having done nothing to earn it, suddenly I become the beneficiary of a vast inflation in the price of my land. And ideally, since this discovery itself is a result of broader social processes, society as a whole should benefit from the increase in the value of the land, and that’s why the land tax makes sense.

I mean, you can have other scenarios as well. You can have a scenario in which imagine that I bought a piece of land for next to nothing, and then 10 years down the road, the government decides to put a bus route near it or put a railway line near it. Suddenly the value of my land would go up for my having contributed nothing because of broader social processes. So on the whole, the value of land tends to fluctuate as a result of this. And so neither should people not unduly benefit from such increases in valuations, and nor should they suffer from decreases in valuation. And that’s why a land tax makes sense, because the increases and decreases in the value of land is a result of broader social processes for which the government should take the benefit and also the hit. So I think this is one thing.

And the only other thing I would say about taxation is that, of course, in the first instance, we want progressive taxation. That is to say that the absurd and obscenely high incomes and wealth of the people we have become so rich on the basis of the last 50 years of economic policy should, of course, be taxed.

But in the long run, the aim should be to depress the differentials in wages as well. There’s absolutely no reason why somebody should make hundreds of times more money than somebody else. It simply doesn’t make sense. They’re not a hundred times better. They’re not hundreds of times more intelligent. They’re not working hundreds of times harder, etc., etc.

Michael, please.

MICHAEL HUDSON: Modern monetary theorists, as you know, say that it’s not necessary to tax, that the government can simply create money without taxing. But even if the government could create money, there’s a good reason for taxing. Some taxes are necessary because taxes prevent unearned wealth from being created.

For instance, here in New York, they spent a few billion dollars on extending the subway on the Upper East Side a few miles in a very high-rent, high-housing district where a lot of wealthy people live. When the subway was finally built along 2nd Avenue, housing prices and rents went up all along the line. So all of a sudden, the landlords got a free lunch. Radhika was just talking about landlords getting money for nothing. This is an example. They got a free lunch. The city could have said, OK, by building this subway line, we’ve created a much higher valuation for rents because people now don’t have to walk so far to the subway and they’re willing to pay for that. But instead, the transit authority raised the fares and stopped paying money to maintain the switches throughout the system. The system throughout all the rest of the city decayed. Fares went up, and the city did not recover this money from the absentee landlords who made a killing off the $2 billion that America paid.

You don’t want people to make money that way. You don’t want money to be taken by people who will then bribe the politicians or not bribing, but contribute to their political campaigns and mounting attack ads on their opponents and distort the economy. So the failure to tax economic rent, the failure to tax land rent and bank financial gains is you let a class develop whose economic interests are in fighting against the economy as a whole and turning the economy into getting wealth by unearned income, getting wealth by financial maneuvering and by rent-seeking, as economists say, not by actually producing labor and raising living standards, not by industry and improvements in productivity, but essentially not reinvesting in long-term development, research, and the kind of investment that the countries that are actually growing.

And if you look at what the Asian countries are doing, they’re avoiding this. The Asian countries are doing exactly what Adam Smith, John Stuart Mill, Marx, and the other classical economists defined as a free market. America’s going back towards the kind of 17th, 16th, 13th century. We’re going back to feudalism, not moving out of it.

RADHIKA DESAI: Yeah, I’d only say, by the way, that I personally tend to avoid using the term feudalism for our economic system, because it tends to let capitalism off the hook. I mean, this is what capital, senile capitalism looks like. And so we should, you know, but it’s a terminological problem.

Now, our fourth point was nationalization of land and elimination of rent. And I think we’ve kind of covered that as much as possible. I just wanted to make one small point, which is that, you know, which matters for ordinary people, because a large part of our lives are dominated by things like long commutes. Long commutes happen precisely because of the unfair process of some people benefiting from the increase in the value of land, which again, they have nothing to do with, and essentially pricing people out of living near where they work. And a rational land policy, which would be possible if you had nationalized land, would actually enable people to live near where they work and not suffer from this kind of long commutes and all the distortions of life that that brings, and of course, distortions of productivity that that brings. So it would also be a solution that you’d have a rational location policy, rational location of workplaces, housing, and of course, a rational transportation policy, as a consequence as well.

MICHAEL HUDSON: This is exactly what’s happened in London. Now they can’t afford to live there anymore.

RADHIKA DESAI: Exactly. Okay, so our fifth point was financial regulation to prevent speculation and predatory lending. So do you want to start off with anything there?

MICHAEL HUDSON: Well, basically, speculation is a function of how much credit will the Federal Reserve let banks lend against. Donald Trump could buy huge swaths of real estate for putting down no money at all. And most of the private capital companies are able to say, here’s a profitable company like Sears Roebuck, or Toys R Us, lend me the money to buy it, and I will pay you interest on it, and I’ll buy it, and I will immediately essentially break it up into parts, sell it off, fire the labor force, squeeze labor more, and then leave a bankrupt shell, but you, the banker, and I can get rich off this. That’s basically speculation.

Speculation is making money financially by dismantling an industrial economy. Speculation is taking over a company, borrowing money, using the money to pay out as dividends, using the money for stock buybacks. Speculation is when you buy a company and say, well, look at a company like Boeing. Why is this company spending so much money on engineering aircraft? Let’s not develop a new aircraft. Let’s just take the money that we’re getting already and pay it out as dividends, make stock buybacks, pay it to ourselves, and of course the company is going to go bankrupt and end up crashing in time, but that’s not our problem because we’ll become billionaires by the end of that. We’ll make the banks rich. We’ll get rich. Who needs investments? Let’s just run it all down to the ground.

The whole economy is looking like Boeing right now, and what they’ve done to Boeing, what they’ve done to General Electric has become the model of how to de-industrialize and wreck an economy. They call it speculation, but it’s really debt leveraging. It’s really loading a company down with debt and using its income to pay debt service, not to invest in new capital formation.

RADHIKA DESAI: You know, you say such an important thing about Boeing. Honestly, I remember reading in the Financial Times recently, just as these scandals are coming out about Boeing, that for the last several decades, actually engineers have been refusing to work for Boeing because it’s no longer an engineering firm. It’s a firm that values extraction of value out of whatever carcass is left of that firm and does not emphasize engineering good airplanes as it once used to do. So, this is really quite an interesting point you make.

Several other quick short points. Number one, you know, just a very basic thing, you know, you were talking about how this speculative activity, it happens in a kind of club-like environment. And that reminds me that one of the things I always like to say is that people think that credit relationship is a market relationship. It’s not a market relationship. A credit relationship is effectively a social and political relationship in which you give credit to those who you know. And every model that has been created to try to replace that has essentially either not been practiced by the financial institutions or it has led to huge problems. So, I think that’s the first thing I want to say.

The second thing I want to say is that the best way of preventing speculation was already found and it was found in the United States and it was called the Glass-Steagall Act. And the Glass-Steagall Act said something very simple. We are going to back those parts of the financial system that do not engage in speculation with federal deposit insurance. And if you want to engage in speculation, fine, you can do that. We’ll let you do that, but you do it on your own dime. You do it at your own risk. If you lose money, the Federal Reserve is not going to come and the Federal Deposit Insurance Corporation is not going to come and rescue you. And I think that was fair.

And they didn’t stop speculation, but it sure contains speculation to a very, very small number of people and a very small amount of money, et cetera, et cetera.

But beginning with the repeal of Glass-Steagall, and before it was repealed, it was also softened up quite a bit, beginning with the repeal of Glass-Steagall, the Federal Reserve has created a situation in which the big banks, which sit on your and my money, the billions and billions and trillions of dollars, which are made up of your and my small deposits can be thrown into the market for speculation. And as a result of that, what most people don’t realize is that in 2008, all the small boutique banks that used to be the speculative banks, not protected by the Federal Deposit Insurance, were wiped out by the big commercial banks, which were now backed by the Federal Reserve, even though they were engaged in speculation.

I mean, so we know how to do it. We can do it. And I think that it would be not that difficult to do it.

A final point I want to make, you know, we’ve always emphasized that the problem with the financial system is predatory lending and speculation. And I think that, you know, we have had two very distinct periods in the history of neoliberalism and financialization. In the 1980s and 1990s, interest rates were relatively high. And there, basically, you just made money if you had a lot of money, because essentially, you were being paid lots of money just to sit on it with high interest rates. So in that sense, that was one type of, and of course, those who borrowed money paid through the nose for borrowing that money. So it was an era where predatory lending was much more, I mean, still happens, but it was sort of in the lead.

In the, after 2000, what you got were long periods of very, very easy credit, easy monetary policy. And that is what essentially fueled speculation, because it was easy to borrow money. And you, you know, if the margin was, you know, 0.0001%, on that margin, if you just put in a few thousand dollars, you’re not going to make more than a couple of bucks. But if you could throw in millions and millions and billions of dollars into the trade, then you could make a lot of money. And that’s the two different types of economies we had. And all of this is easy to regulate. It’s just a question of finding the political will to do so.

MICHAEL HUDSON: Well, you use the word market, and that people don’t realize that every economy is some kind of a market. Ancient Babylonia had a market. Briggs and Rome had a market. China has a market. Even Stalinist Russia had a market. The question is, what kind of a market are you going to have? And what’s the relation between prices and the cost of production? And who gets the income? Labor, capital, landlord?

And today, almost all the economists say a market is something where the bank, where the government doesn’t do anything. It’s a free market, meaning the billionaires control the economy. The government will not regulate them. The government will not try to steer credit to be productive. The government will not help the people. It will help the 1% exploit the people. A free market is an economy won by the 1% in an oligarchy where democracy has either no role to play, or if you let the people vote, they don’t understand how the market works and how to create an economic alternative.

So what we’re really talking about in this broadcast is, what kind of a market do you want to have? And where does finance fit into this market? Where does tax policy fit into this market? And how do you then create an alternative?

Well, any economist, Paul Krugman or the New York Times or the entire Council of Economic Advisers will say, with Margaret Thatcher, there is no alternative. But of course there’s an alternative. And that’s what our program is all about. Every few weeks, we’re trying to outline an alternative that it doesn’t have to be this way. Economists say it has to be this way if you want a free market, a free market for the 1% to take whatever they want, to control the banks, to control real estate, to create monopolies, and to extend this all throughout the world so that there’s no country in the world that has a different kind of a market to show that there is an alternative. That’s really the geopolitics of our analysis of how an economy works. And every economy is a market. The question is, do you want an oligarchic market, a democratic market, a productive market, an industrial market, or a financialized market?

RADHIKA DESAI: Exactly, Michael. So well put.

Okay, so our sixth point is expansion of income in place of debt. And my point here is a very simple one. At the moment, we have, over the last five decades and more, we have created a financial system which prioritizes, which strangulates ordinary people’s income and instead invites them to expand credit, to become debtors instead. The kind of economy we are talking about would not do that. It would in fact leave the government free, either to encourage private enterprise or itself engage in the types of investments that will be necessary to increase the incomes of ordinary people. You have what you have by right. The government creates the kind of conditions in which you are able to make a contribution and make a good income, the kind of income you need for a decent standard of living. And the root and branch reform of the existing financial system is the conditio sine qua non of this kind of system. We have to eliminate it if we want to have a kind of economy in which we are capable, every society is capable of producing what it needs, employing its labor to good effect, and so on. So to me, that’s the most important thing to say about this point. Yeah, you agree.

So a final point is the point about international money, moving from the dollar disorder to an international monetary system based on the kind of proposals that Keynes had made. So essentially, maybe just to start us off on the discussion of this, these are the main elements Keynes had proposed to create. Let me just begin with the center and then we’ll move to each one of these things.

But essentially, Keynes proposed to create a new currency. It was not going to be the currency of any country. All countries would continue using their national currencies. But this bancor would be used among central banks to settle imbalances. So if one country imported more from another country over a given year, at the end of that year, if you are clearing the balances, then that country owed a certain amount of bancor to the other country, et cetera, and so on. So bancor was the key thing I want to emphasize here is that bancor was not to be used in ordinary daily transactions. For that, every country would continue using its own currency. Bancor was only international currency to be used by central banks.

MICHAEL HUDSON: Yes. Obviously, something like that should be used today. There are two alternatives. One is the International Monetary Fund special drawing rights. They created an artificial currency, and they did it because the United States said, we’re running a budget deficit because we have 800 military bases all over the world, and we can’t afford them. Give us enough money. But of course, you can’t give us money. In order to give us money to have our military bases to control the world, to make sure there’s no alternative to our kind of free market, you have to give other countries the ability to special drawing rights, too, so that the IMF can lend money to Argentina and the global south so that they can pay for the banks for the balance of payments deficit from following the kind of warped economic growth that the World Bank sponsors, privatization and dependency on American exports.

What we want is indeed an international currency to be used, but it’s not going to be to enable debtor countries to pay the American and European banks. It’s not going to be a currency to finance American military spending. It’s going to be a currency that people will not have to keep their money in dollars anymore.

Imagine you’re Saudi Arabia, and you’d say, we’re getting a lot of pressure from our Palestinian population to support Gaza. But if we support Gaza and don’t support the United States, they’re going to grab all of the money that we keep in the United States. They’re going to do to us what they did to Russia. The United States can grab any country’s foreign reserves if they support a policy that the United States doesn’t support militarily. We need an alternative that is not controlled by the American military and by the American neoconservatives.

Countries do need credit, just like the economy needs credit that we’re urging should be created by the Treasury. What Keynes suggested is the equivalent of an international treasury, but that would lend money for the things that treasuries are supposed to create money for, to promote economic growth, not military spending, not trade dependency, and not a debt-ridden international economy, which is now breaking apart as a result of the last 75 years of IMF and World Bank lending.

RADHIKA DESAI: Great points, Michael. Let me just emphasize one quick thing, though, about SDRs, special drawing rights of the IMF. The problem with SDRs is that while in some respects it looks like a bancor, in a key respect, it is not like bancor, maybe in two key respects. Number one, because it is issued by the IMF, it is still under US control because the US still retains a veto in the IMF. So that’s the first thing.

And the second reason is that, of course, thanks for historical reasons, the IMF and the World Bank are deeply implicated precisely in the US-based financial system, whereas a proper bancor would be extricated from the extremely unproductive, predatory, exploitative, speculative US-type financial system.

You also mentioned, Michael, not creating trade dependency. And another feature of the principles that were embedded in Keynes’s idea of a bancor was the principle of creditor adjustment. Today, we have a situation in which if you are a trade deficit country, you are the one who is forced to adjust. If you owe money, if you’re a debtor country, you are the one that is forced to adjust. But Keynes said that one person’s deficit is another person’s surplus. One country’s deficit is another country’s surplus. And therefore, the two are co-responsible for that situation, and the two must cooperate in order to get out of that situation.

So, for example, take Germany and Greece as a classic example of a persistent surplus country and a persistent deficit country. Germany and Greece have to come up with an agreement to end these persistent imbalances, deficits on the one hand and surpluses on the other, either by Germany investing in Greece, in the Greek economy, in a way as to make it capable of producing more things, which Germans can then buy from them, or by reducing its deficit. Have one way or the other. So, creditor adjustment for both trade flows and capital flows was a very, very important principle.

MICHAEL HUDSON: Well, we’ve just solved the world’s problem.

RADHIKA DESAI: Well, we still have a couple of other points here. So, anyway, let me just discuss the rest of this and then give it over to you, Michael, for whatever else you want to say. So, a third principle was, of course, that there should be capital controls. That is to say, governments and central banks should be able to monitor and control the inflows and outflows of large amounts of money with a view to ensuring that what was happening would not harm the economy.

So, for example, the kind of inflows of hot money that gave rise to the East Asian financial crisis in 1997-98 would not happen, would not be permitted, etc. So, capital controls were a very, very important principle and that would have to be accepted. And all capital flows that are flowing in and out of the country would be based on what is good for that economy.

The price of Bancor, the value of Bancor was to be set on the basis of the 30 most traded commodities. Today, we may expand the list, maybe 50, 60 commodities, but whatever. The idea being that the prices of commodities, that is to say, primary commodities like wheat or copper or gold or what have you, these were the prices that were the most volatile. And if the value of the currency was based on that, oil, of course, was based on that, then this would provide a kind of stable and acceptable value to the commodities.

And finally, the whole system was to be run — Michael mentioned the equivalent of a treasury. That equivalent was to be the International Clearing Union, which would be a multilateral agency agreed by all countries on the basis of, you know, and whose principles would be to prevent persistent surpluses and deficits and where there were surpluses and deficits, essentially to tax them, both surpluses and deficits, in order to provide financing for development. So, these were some of the principles that Keynes brought to Bretton Woods.

This, if they had been implemented, they would have actually led to the creation of a permanently expansionary world economy because it would have allowed every country to govern its economic fate. But of course, precisely because of that, the United States essentially nixed his plans. And every time there’s a big economic crisis in the world, people recall the sensibleness of Keynes’ ideas.

MICHAEL HUDSON: Well, these ideas that we’ve discussed were all discussed 75 years ago. And there were big political arguments about them. I’ve summarized them in Super Imperialism, a chapter on this. And the result of the way that the world economy was malstructured by rejecting Keynes’ idea was the United States did not want to have economic balance. It wanted all the money for itself. The United States said, we’re the world banker. What does a banker do? The banker impoverishes the rest of the economy to get rich. That’s why you’re a banker. And that’s what we’re going to do. We’re going to create an economy, especially to the World Bank, through diplomacy, through military spending, and especially by regime change, so that raw materials prices go down. We’re not only fighting labor, we’re fighting the third world raw materials exporters. We’re fighting the copper producers. We’re fighting the agricultural producers of warm climate tropical crops that we import. We’re fighting everybody who supplies us with what helps our economy so that we can get rich, not them. We can get rich in America and our satellites in Europe by keeping the global South poor, and by keeping Asia poor. There’s not going to be any kind of bancor. There’s not going to be any creditor responsibility for not monopolizing the world gains, because the economic system we want is all about monopolizing the world gains, and that’s what the dollar standard has become.

All of this was foreseen 75 years ago, and because of America’s power after World War II, it was able to establish this regressive, exploitative, unfair economic system that finally today, for the first time, the world is looking back at these principles and saying there is an alternative, while the United States educational system tries to convince economic students that there is no alternative, and the military and the neocons want to say, hey, if you got an alternative, we have some people who can take care of you and have a regime change.

RADHIKA DESAI: Quite so, and you mentioned imbalances, Michael, and one of my favorite points, you reminded me of one of my favorite points about Keynes’s bancor system and the current dollar system. The dollar system relies on imbalances. The greater the imbalance is, the more there will be a demand for dollars, etc., etc. Whereas the genius of Keynes’s — and of course, imbalances create volatility, create crises, and all these things we’ve discussed, all these things in previous shows — the genius of Keynes’s idea was actually that if you reduced imbalances, then the actual amount of bancor that would be needed to make the system work would actually be as little as possible, you know, because ideally, think about it, if you buy $100 worth of goods from me and I buy $100 worth of goods from you, there is nothing, we don’t need money to settle imbalances. The only reason you need bancor is when there are imbalances, and the idea was to reduce imbalances, and the purpose of this was that, again, with credit adjustment, Keynes basically said that, look, if you’re in a stronger position, you should be able to help your partner who is in a weaker position to become productively stronger. That was the whole point, and I would say that it still makes a lot of sense, as you just said, Michael.

So here we are, we’ve dealt with actually all our seven questions, and I hope that we’ve given you something to think about, about the kind of economic system we could have, we could easily have. The most important difficulty is not intellectual, it is political, and as the political legitimacy and power of those who are running the system, particularly in the United States, is visibly declining, cracking, etc., now is the time to strike, now is the time to raise demands for an alternative system, much as, by the way, Jill Stein is doing in her campaign, and I should add that Michael and I are both part of her advisory team, and so please look out for it. We hope to have her on one of our shows very soon, as soon as she is able to find some time, so that we will discuss the kind of economy that the U.S. needs, and I would say if the U.S. turned around, boy, so many other problems would be solved.

So, on that note, unless Michael, you want to add anything, we will end for now, and see you again in a couple of weeks. Meanwhile, please like, please share, please give us our comments, please subscribe, and look forward to seeing you next time. Thank you. Bye-bye.

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