This material is taken from first 15 minutes of Michael Hudson’s Webinar: a 4000-year perspective on economy, money and debt. Shortlink: http://bit.ly/MHudson4000. These are real-world economics lessons, not found in textbooks. A ten-minute video wrap-up is followed by a 1400 word writeup/summary.
Loans to 3rd World Meant for Control
Michael Hudson’s First Wall Street Job was at Chase-Manhattan Bank. He was asked to Evaluate the ability of Latin American Countries to pay back their loans. The goal was to make new multi-billion-dollar loans to countries. After doing the analysis, he came to the conclusion that Latin American Countries have no capacity to repay foreign debts! If you add up all potential export earnings in dollars, and subtract dollar liabilities, you get a negative number. Any loans made to them simply cannot be paid back. When he reported this to senior management of Chase Manhattan, they responded as follows: We will loan them the money to pay back their loans! Our goal is to control the country. If government plays by our rules, they will get the loans required for payment. If not, we will topple the government by denying them credit.
Take any textbook of International Trade theory – you will not find any mention of this motive for lending. The Theory of Balance of Payments between US and 3rd World Country does not depend on exports, export capabilities, import requirements etc. High Levels of Foreign Debt enable control of domestic policies. Unsustainable levels of foreign debt are best for maximum power. Think about the debt-trap that most poor countries find themselves in. And contrast this with the economic theory of balance of payments.
Hudson proved to be right. Massive amounts of lending continued to Latin American countries, eventually leading to a Debt Crisis. In this period, Ronald Reagan de-regulated the US Savings & Loan Industry. Previously, they had been force to make very low risk investments. After de-regulation, S&L’s made huge loans to Mexico and other Latin American countries – rates of interest being offered were very high. In the crisis, US Savings and Loans lost more money than the entire profits of the banking industry since the Great Depression. However, they were bailed out by US Government. Financial Industry makes profits EVEN when they make bad loans. The finance industry has incentives to gamble with the depositors money. If they win, they pocket the gains. If they lose, the depositors lose money. This is called “privatizing gains, while socializing losses”.
War and the US BOP
Following Bretton-Woods Agreement, US agreed to keep USD backed by gold, and other countries agreed to keep USD & Gold as reserves. The Vietnam war led to huge foreign expenditures, and drain of US Gold Stock, as foreign countries cashed USD for gold. The US Wall Street BOP analysts were watching US Gold Reserves decline on a continuous basis. This raised the question “What will happen after USD drops gold backing, which seems inevitable?” Analyzing the deficit, the outflow of dollars which was the cause of the outflow of gold, Michael Hudson arrived at the realization that the US BOP deficit since 1950 onwards was almost exactly equal to the US Military expenditures. According to textbook trade theory, BOP is supposed to be about foreign trade: imports and exports of goods and services. However war expenditures have no relationship to prices wages technology costs of production etc. ALL trade theory models taught in economics textbooks are completely wrong, because they ignore the political economy. The US Secretary of Defense, Robert McNamara learnt about this analysis and telephoned the Bank to get them to fire Michael Hudson immediately. They did not like this finding. He managed to publish his finding within the University research environment.
Thinking about what will happen when USD is unbacked, Hudson came to the conclusion that Central Banks all over the world will want to hold reserves of tradeable currencies. They will find that the best reserves are US Treasury Bills. The US is the only country with a strong currency which is running massive deficits, financed by massive printing of T-bills. The Central Banks all over the world will generate an Infinite Demand for US T-Bills, which will be matched by an infinite supply. This leads to the current situation, where the US can print as many dollars as it like and exchange printing press paper for real goods and services, conduct wars over the globe and solidify its power. Hudson’s analysis proved to be right in wake of the Nixon shock, which delinked dollars from gold. For more details, see Demise of the Dollar?
Financing of Canadian Provincial Development Expenditures:
Hudson gained some fame due to his astute predictions, and was called upon to advise the Canadian government. Prior to the Reagan-Thatcher era, Bank of Canada had an excellent monetary model. But in the era of financial de-regulation, private banks gained substantial power, and persuaded the government to borrow money to finance its expenditures, instead of printing it. In the 60’s and 70’s interest rates were going up – mainly because of excessive use of credit for war finances, creating shortages for private sector credit. The private banks persuaded Canadian Provinces to borrow money on the international market, in German DM and Swiss Francs, to finance development expenditures. The rationale was that the interest rates were slightly lower in Europe. Hudson analyzed this issue as follow. Canadian Provinces issue bonds in Swiss Francs or German DM, offering 4.5%. Take SFr or DDM and turn it over to the Canadian Government. The Government prints Canadian Dollar equivalent and gives to provinces. The Provinces were borrowing so much foreign money that Canadian Dollar depreciated from 90c per USD to 1.06 per USD. Hudson’s Question: Canadian Govt prints money to buy foreign currencies from the provinces. Provinces acquire foreign currencies by selling bonds on the international market. Why shouldn’t the Canadian government print money to directly give it to the provinces? They can charge any interest they want, including zero interest?
There was a high-level meeting to consider Hudson’s suggestion. The Banks said we are “honest” brokers; even though these were the crookedest banks in Canada. They brought in a Catholic Priest who explained that German printing of money before world war 2 bankrupted the country, caused hyperinflation, and led to Hitler and the Holocaust!! They argued that the government should not make any decisions regarding money, because governments are inherently corrupt, and only Swiss and German banks are honest!! The same kind of arguments are being made for and against Modern Monetary Theory (MMT) today. However, MMT has morphed into a variant quite different from the original intent, which was to allow the government to print money to create full employment and finance development expenditures. Today, MMT is being used to support large deficits to enable government financing of the financial parasites, instead of the real sectors of the economy. See “Use and Abuse of MMT” for details.
Wrap-up: These lessons have been extracted from the first fifteen minutes of Michael Hudson’s Webinar: a 4000-year perspective on economy, money and debt. Shortlink for the 2hr YouTube Video: http://bit.ly/MHudson4000 Highly Recommended!! Michael Hudson forecast the Latin American Debt Crisis, and also the consequence of dropping gold-backing for the dollar. He came to the realization that the only solution to the debt crisis was debt-forgiveness. However, nobody understood his ideas in these directions. There was strong Ideological Resistance to the realization that creation of money is a free public good, and interest merely adds to power in the hands of financiers, who use this power for their private interest, and against the public interest. Debt is used to control people, and to empower finance. In his quest to make people understand, Hudson was led to the study of the history of debt, which is the topic of the 2 hour video linked earlier in this paragraph. This history of debt is also covered in David Graeber’s book on Debt: The First Five Thousand Years.
Concluding Remarks: Economic Theory is pure illusion; it is best understood as a projection of the power of top 0.01%. It is meant to deceive policy makers into worrying about the wrong issues, and conceal the REAL issues. If we want to understand why absolutely irrational economic policies, against self-interest of masses of public, are routinely implemented in democracies, we must understand political economy. Without understanding the power of the financial lobby, and their ability to use economic theory to further their interests, we cannot understand the world. To CHANGE policy, we must analyze power structures, gainers and losers, and create coalitions among losers, as well as knowledge, to counter financial power.