Greek debt – remember the goats        
Greece's creditors have essentially let it off the hook by overwhelmingly agreeing to take a 74 percent loss. So what better time to remember one of the first times Athens got in trouble with paying its debts.
          Regling plays down Greek debt expectations        
Loan terms are the most concessionary ‘in world history’
          Thursday 8 March 2012        

Tonight, we look at whether rising mortgage rates are bad or good for the economy.

We ask whether the news that one of Syria's deputy oil ministers has resigned from the government to join the revolt against President al-Assad is an indication that the regime is starting to fall apart, and have an interview with William Daniel the photographer who escaped from the city of Homs with fellow journalist Edith Bouvier.

As the deadline for Greek debt swaps passes, Paul Mason looks at whether a disorderly default is on the cards.

And it is International Women's Day. Focussing on the UK we debate whether the coalition has succeeded in honing its political message to female voters?


          Greek Debt Crisis: Don't Blame Laziness. Greeks Work Longest Hours In Europe, Far More Than French Or Germans        
As the world watches to see who blinks on the Greek debt debacle, it's worth noting one thing that is most definitely not behind the crisis: the working hours of the nation's everyday citizens. As our partner Statista pointed out earlier this year, "data from the Organization for Economic Co-operation [...]
          Central Bankers Think Their Job Is Done Fixing the Global Economy. Why Are They Still Letting Greece Suffer?        

In the two developed-world economies that suffered the most during the 2008 financial crisis and the ensuing recession, the central banks are at last declaring victory. The Federal Reserve has raised interest rates three times in the past seven months and has telegraphed its intention to start shrinking its massive balance sheet this year. Federal Reserve Chair Janet Yellen remarked in June that another financial crisis was unlikely “in our lifetime.” And the European Central Bank, confronting rising interest rates and a continuing economic expansion, is hinting that it may start to taper its asset purchases and will begin to consider raising interest rates, moves that suggest it thinks the eurozone’s economy can now function just fine with less of its help.

After failing miserably to forecast the severity of the global recession of 2009, central bankers are recovering some of their self-esteem. Looking back on the past decade, they succeeded in averting a total crash, setting the stage for a recovery, and sustaining the type of long expansion that generates jobs and, it is still hoped, income growth. While the economies of Europe and the U.S. are not quite firing on all cylinders, there is now a sense that they are chugging along just fine.

And then there’s Greece. While I was in Athens last week, the oppressive heat—107 at midday—felt like a metaphor for the heavy air of resignation and stagnation that blanketed the city. Garbage was piling up in the streets off Syntagma Square thanks to a strike by sanitation workers. We hastened to tour the Acropolis because we wanted to get there ahead of a strike by security guards that would shut down the site in the cool morning hours.

I know it’s the worst kind of reporting to drop in for a couple of days and make grand statements. (In the Financial Times, Simon Kuper’s latest Greece dispatch pulls it off quite nicely.) But there’s also the data, which speaks to a continuing financial and human crisis on a scale unimaginable in developed countries. Ten years after the onset of the crisis, Greece, which has a population of 11 million—roughly equivalent to that of Ohio—is far worse off than any U.S. state or European country was at their depths. The unemployment rate in April was 21.7 percent. The country has seen its population shrink for six straight years. The country’s total output has shrunk about 25 percent from its 2008 peak. GDP per capita is on par with Hungary and Latvia. And this is eight years into an expansion.

Growth cures a host of social, political, and economic ills, while stagnation exacerbates them. The best way to work your way out from under a massive pile of debt is to have a little inflation and some growth. But Greece, with its monetary fate tied to Europe (and hence to Germany), has had virtually no inflation and no growth whatsoever. If your debt is 100 percent of GDP and you hold it steady while the economy shrinks 25 percent, then your debt rises to 133 percent of GDP. That’s effectively what has happened to Greece, whose debt now stands at an astounding 177 percent of GDP.

Of course, Greece got itself into its debt trouble, and its political system has been generally ineffective at restructuring the country’s economy and reigniting growth. But they’ve lacked the most powerful tool a a struggling country has at its disposal—a central bank that will set accommodative policies.

And the technocrats at the European Central Bank haven’t done the country any favors. Greece continues to labor under the absurd austerity terms set by its creditors. Usually, when you foolishly lend money to entities that can’t pay it back, your lenders accept that they won’t get 100 cents on the dollar and write down a portion of the debt as part of a restructuring. The entities that have come to Greece’s rescue—the troika of the European Central Bank, the International Monetary Fund, and the World Bank—have refused to countenance serious write-downs. (Largely for fear of how doing so would affect the health of the German banks that binged on Greek debt.) And so the country is required to run a primary surplus of 3.5 percent of GDP so that it generate sufficient interest payments to service its debt load. That would be like the U.S. running a $570 billion surplus every year.

Rather than pat themselves on the back for engineering growth and banishing financial crises forever, it would be nice if the world’s most powerful central bankers would acknowledge the continuing financial crisis in their midst. And then they could start arguing for a real resolution of the problem. The ECB (and the Fed) have spent enough resources and extended enough aid to the world’s banking system. It’s time to give Greece a break.


          Amid Greek debt talks, Markets across the Globe become Cautious        
As news of a breakthrough in Greece’s debt talks was subdued across the global markets on Friday, most of the markets in Asia had shut down for the Lunar New Year holidays.  In terms of share, France lost 0.6 percent (CAC 40) to about 4,802.48. Similarly, Germany’s DAX dropped at 10,998.21 and that of Britain’s FTSE increased by 0.2 percent at 6,905.28. Meanwhile, the U.S. shares were set to drop down 0.1 percent and 0.2 percent.  Greece was set out for a bailout. It is hesitating at accepting certain budget cuts for the expected demands it is asked to make so far.  However, the opposition remained stiff from the lead lender Germany. Germany insisted that it sees no way the loans could be extended without any budget conditions. Greece is now inclining to an added round of debate on debt crisis. Greece is in its six-month extension phase to its rescue loans. This type of agreement will need more compromises from both the sides said strategists in a note to investors.  Nikkei 225, Japan’s benchmark increased 0.4 percent to almost close at 18,332.30. This created an upbeat mood in the market, marking a closure at almost 15-year high. Japan has been encouraging the grant on the policies such as the cheap yen.  On the other hand, Toyota increased 1.0 percent. Canon by 0.4 percent and Softbank gained 0.3 percent.  Australia’s ASX/S&P sloped down 0.4 percent to 5,881.50. Many other regional markets were shut for the holidays.  The U.S. crude oil also added 27 cents to $51.43 in electronics on the NY Mercantile Exchange. The American currency fell to 118.55 yen from a value of 119.04 yen in the previous session. This happened while the euro declined to $1.1284 from a value of $1.1368.

Original Post Amid Greek debt talks, Markets across the Globe become Cautious source Twease
          Please stop mentioning the war        
In his profiles of bloggers, the late Norman Geras used to ask if people had any prejudices that they were willing to admit.  Having read one or two responses, I used to wonder why he bothered.  "I have to confess I'm prejudiced against the ruling class who like opera and stamp on the faces of the poor on their way in the door blah blah..."  I read one or two of these and thought, "Oh fuck off!  Seriously, if you're not prepared to be honest, would it kill you to just say no - or saving that, not answer the question at all?"

I had always thought of myself as having latent anti-German prejudices, what with having a mother who lived through the war and who frankly doesn't like Germans very much (pity the fool who tries to tell her Dresden was a war crime) - as well as being brought up on a diet of war films and comics that have left me with words like "Achtung" and "Schnell" pretty much exhausting my German lexicon.  But one of the things I've realised in recent weeks is I actually don't, or at least not compared to some of the people paid to comment on the present situation in Greece.  In this I remembered - because I'm old -  the resignation of the Thatcher-era minister Nicholas Ridley for his diatribe on the EEC in the Spectator.  I note this journal is now saying he 'was right all along'.  Well, on the issue of the single currency I think he probably was - as well as on the 'democratic deficit' within the EU.  But the reason he was pressured to resign was not because of his views on the practicalities of EMU but rather for the anti-German (not to mention anti-French) flavour of his views  - and I think that bleeding heart internationalist Margaret Thatcher was right to accept his resignation.  

What concerns me with the present situation is that this kind of attitude seems to have popped up on the left.  The Syrizia coalition's posturing was explicitly anti-German - and to this end adopted a "do mention the war" strategy from day one.  (I'm not going to reference this on the grounds that anyone who doesn't recognise this simply hasn't been paying attention.)  But this has also been the case in Britain.  While there's been a few examples, Paul Mason's is one of the most egregious I have seen:
"Parallels abound with other historic debacles: Munich (1938), where peace was won by sacrificing the Czechs; or Versailles (1919), where the creditors got their money, only to create the conditions for the collapse of German democracy 10 years later, and their own diplomatic unity long before that. But the debacles of yesteryear were different. They were committed by statesmen."
The key distinction here, the only one, is that prior mistakes were made by 'statesmen'?  There is also, I would suggest, the whole nature of the situation.  Here's one excerpt from an account of the annexation of Czechosolovakia:
"Just as the Anchluss had resulted in a large surge of anti-Semitic violence in Vienna, so the incorporation of the Sudetenland saw a number of Jews either murdered or so despairing that they leaped from roofs or turned the gas taps. Hitler personally gave the Sudeten German Friekorps a three-day period of grace to hunt down Jews and political opponents."
Contrast and compare to today where the Germans have loaned Greece rather a lot of money and would like it back.  I had meant to say more about this but I find I can't bear it.  I would agree that Germany hasn't handled the Euro crisis particularly well and are not being entirely realistic about Greek debt but I really think those doing this 'banks are tanks' line should try a little harder to avoid being so crass and gratuitously offensive.  The war has been over for seventy years, after all.


          Syrizia and the SNP        
I didn't really like Ian McEwan's novel Saturday but there was one line that spoke to me, which had to do with the "accidental nature" of the opinions you hold.  We like to think we arrived at them by a rational interrogation of the available evidence but really it often has to do with timing and the (frequently unrepresentative) people you read or talk to.  I'm like that with the Euro.  I graduated three years before the introduction of EMU and from what I had read, I was convinced it wasn't a very good idea.  It was pretty basic textbook optimal currency zone stuff.  Europe, as far as I could tell, fell far short of qualifying as one - but I could have easily drawn a different conclusion if I was reading the same European history a few years later when it looked as if the naysayers were wrong, or if I had been clever enough to convince myself that the differences in the putative Eurozone economies didn't matter as much as I thought they did.

I don't, in other words, have anything particularly original to say about the position Greece finds itself in now.  One is inclined to agree with much of what has been written about the deflationary impact of the IMF intervention within the context of a monetary union, which now virtually everyone agrees Greece should not have joined.  

Syrizia obviously were not responsible for all of this but I'm also with a rather smaller number who think criticism of the way they have handled this situation they did not create has to go some way beyond admitting "they've made a few mistakes".  Dan Davies has a very good summary of this, "When negotiating with Germans, do mention the war, as much as possible" non-strategy here.  

There's one small point to add of a personal nature: I was a little dismayed when people were going on about how cool it was that Varoufakis was a clever leftwing academic because it reminded me of my Dad.  There's lots of things that clever leftwing academics are generally really not very good at but at the top of my list is admitting they might be wrong.  (You may find something Freudian in this if you wish...)

It is in this context of a complete failure to do anything that could be reasonably described as negotiation that Sunday's plebiscite should be understood.  I'm not alone in finding similarities between Scotland's September independence referendum and this, although I think most people would agree the former was rather better conducted.  Among the features they shared were as follows:

1) The insistence that, what to the outside observer would be reasonably described as populist nationalism, it is absolutely not this but rather democracy!  What with democracy being an unarguably Good Thing, if you disagree with us, or have any issues with the populism inherent in plebiscites, then you obviously hate democracy.  So saith those who intone the General Will.  For them, raising issues about whether this 'purest expression of democracy' is the best way to conduct politics in a country is unbearably bourgeois.

2) The insistence that this exercise in democracy creates obligations that stretch outside the borders of the country in which it is held.  In both cases this has to do with the messy business of sharing a currency.  With the SNP and Yes Scotland, the idea that the outcome of the referendum created an obligation for the rUK to enter a currency union - and was not a matter that the English, Welsh or Northern Irish needed to be consulted on.  You can take this 'sovereign will of the people' thing too far.  

It is a similar situation with Syrizia.  I should stress that I hope Greece strikes a deal with the EU and to this end I hope people realise that the last thing they need here is more democracy because there is no way that a proposal for more assistance would pass the sort of 'democratic' test in Eurogroup countries that Greece held on Sunday.

3) The insistence that pointing out that potential pitfalls in a chosen political trajectory is just 'scaremongering'.  I would concede that there was some of this on the No side in Scotland and the Yes side in Greece but I'm afraid merely pointing out that if party x does y, it's reasonable to assume bad stuff might happen, simply can't be dismissed in this blanket fashion.  Hope over fear?  Yeah, that always works, doesn't it?  Like with children and fireplaces, for example.  

For the Nats, it was this idea that refusing a currency union was a 'bluff', as if the Eurozone crisis hadn't happened or something.  Then it was the idea that 'sterlingization' might not be a very good idea and if you suggest otherwise, you're 'talking Scotland down' - as if any 'dollarised' country isn't dependent on its balance of payments to generate currency reserves, or that the fall in the price of oil might have created a bit of a problem here - with or without 'secret oil-fields'.   

For Syrizia it was the idea that 'Oxi' may well mean an exit from the Eurozone.  I do hope and believe that this won't happen but the consensus is that it looks increasingly likely.  There surely isn't now anyone who thinks this is impossible?  Yet at the time of voting apparently only 5% of No voters thought this was a likely outcome.  I hope to God it doesn't happen but those lines about 'scaremongering' are going to look pretty stupid if Greece starts paying wages and pensions in IOUs.

For the future, for Greece we'll have to wait and see but being of a parochial mind recently, one can't help wondering what impact all this will have in Britain and Scotland with the forthcoming referendum on EU membership.  I'm struck by the way that the Greek debt crisis has caused some on the British left to return to the days before (some) Labour and the Tories swapped sides on the issue of EU membership.  The question is, what does a party led by someone who seriously imagines Labour went wrong when they ditched Michael Foot do now, given that they claim to represent 'real' Labour values?  The SNP adopted 'Independence in Europe' as part of Salmond's gradualist strategy but the interesting thing is that not only is Scotland not a country of Euro-philes in the way that the SNP leadership likes to pretend, Yes voters are actually more Euro-sceptic than those of us who voted No. 

The Euro crisis has obviously had an impact on the SNP, which is why what they were effectively arguing for in the referendum was independence within the UK rather than Europe.  Assuming this ill-advised Europe referendum goes ahead as planned, there is no question of the SNP adopting the position of the Bennite left that many of them claim to represent.  They won't do this because they are not a leftwing party at all, Bennite or otherwise.  Making these assumptions, one could make the following predictions about the SNP's position on the EU 'in-out' referendum:

1) They will struggle to have anything relevant to say.  They will conveniently forget that Salmond-era SNP wanted us to ditch the 'millstone' of Sterling for the pound and join EMU but there is no question of campaigning for an exit.  Therefore their position is likely to be the same as that of the Conservative government, which one assumes will be to retain membership of the EU but rule out adopting the Euro.  What's left is complaining about details such as insisting HM Government needs a 'mandate' in all the component part of the UK and complaining about how awful it is that 16 and 17 year olds can't vote or whatever.

2) This won't make a blind difference to the level of SNP support.  It's not just that your average SNP voter is indifferent to the EU, it is that the Nationalist movimento has occupied a space that is completely beyond any arguments about economics, which creates something of a problem for opposition parties.  It doesn't seem to matter that a party doesn't have a coherent plan - what matters is they are seen as making a stand for the national collective, regardless of whether they actually achieve anything.  Both the SNP and Syrizia are considerably more benign than some of those who cheer them on but it is a trend in European politics that is more than a little unsettling.  You could say that I take this position because I am fearful, conservative, on the side of 'neo-liberalism', or lacking faith - but then you'd be making my point for me.
  


          Schengen and the European Migration Crisis         
The Schengen Area. The Agreement signed on 14 June 1985 on a boat on the Moselle near the small town of Schengen (Luxembourg), by five of the ten states that formed the European Community at that time, effectively abolished passport controls and any other border control among the signatories thus treating the area as a single country. The Agreement was supplemented by the Schengen Convention of 1990, establishing a common visa policy. Initially the Schengen Area was separate from EU structures, as at that time the initiative lacked general consensus, but its rules and procedures were incorporated into European Union law by the Amsterdam Treaty of 1997, coming into effect in 1999. The five initial signatories (the three Benelux countries, France and Germany), were gradually followed by another 17, thus encompassing all EU member states except Ireland and the UK that opted out, and four others – Bulgaria, Croatia, Cyprus and Romania – who wish to join and are obliged to join eventually but are not yet deemed to be ready. All four EFTA member states – Iceland, Liechtenstein, Norway and Switzerland – are also associated members of the Schengen Area although they are not members of the EU. In addition, three European microstates – Monaco, San Marino and the Vatican City – are considered de facto participants. Today the Schengen Area has a population of over 400 million people.
Net gains. The creation of the Schengen Area was - in principle – an excellent decision. The effective elimination of internal borders within the Area generated considerable savings in terms of travel time and convenience for passengers, expenditure on custom officials and equipment, higher speed and lower cost of commodity transport. A recent study by Germany's Bertelsmann Foundation estimates the cost of the possible breakdown of the Schengen area at between €470bn and €1.4 trillion over the next decade, (roughly 10% of the 28-members EU bloc GDP) due to an increase in import prices of between 1% and 3%. Germany would lose between €77bn and €235bn and France between €85.5bn and €244bn under the two scenarios. The breakdown of the Schengen Area would also inflict a heavy burden on other countries, with a combined loss for the United States and China over the next decade estimated by the same study at between €91bn and €280bn. The European Commission estimated that the permanent reintroduction of border controls would cost between €5bn and €18bn a year because of lower tourism and transport delays. These estimates perhaps may be slightly exaggerated, but there can be no doubt that in the current, long and severe depression of the European economy, the impact of a Schengen breakdown, even if partial, would worsen significantly the growth prospects of the Union, with global reverberations.

Migrations. In the half-century 1960-2010 the ratio of the population working in countries different from that of their birth over the world population (corrected for the displacements which occurred at the end of World War II in 1945) was relatively stable around 3%, though with a clear tendency to accelerate that was much more marked for South-North migrations (see the figure below, where the value of that ratio in 1960 is taken as equal to 1).  
Source: Docquier, Frédéric and Joel Machado (2015), “Revenu, Population et Flux Migratoires au 21ème siècle: Un défi sociétal pour l’Europe” inStudia Oeconomica Posnaniensia, October 2014.
In subsequent years the acceleration continued. In 2015 migrants entering Europe mostly from the Middle East and Africa turned into a veritable flood – the largest flows to take place since 1945 – that put the Schengen arrangements to a most severe test: EU states received 1.3 million asylum applications, especially from Syria. On 24 August 2015 Angela Merkel announced that all Syrian asylum-seekers were welcome to remain in Germany regardless of which EU country they had first entered. She adopted this “open door” policy unilaterally, without EU agreement, after consultation solely with the Austrian Chancellor Werner Faymann; subsequently there were signs of intended policy reversal but tightening up was only slight (for instance preventing relatives joining migrants for at least a year) thus provoking an intensification of the inflow because of the migrants’ expectation of harder times; a recent poll found that 81% of the German population thought that the government had lost control over migration policy. The Bertelsmann Stiftung estimates that by mid-February 2016 an even larger number of Syrians alone had found their way into Jordan (640,000), Lebanon (over 1 million) and Turkey (2.6 million); Pakistan and Iran have taken several hundred thousand migrants from Afghanistan and Iraq respectively. In 2015 migrants crossing the sea from Turkey to Greece increased 20 times with respect to 2014. Last November the EU granted €3bn to Turkey as an inducement to hold migrants there at least temporarily, but three months later 2,000 migrants still cross daily into Europe: in order to take back non-Syrians the Turks are negotiating for more aid and other benefits such as visa-free travel to Europe, which in turn would generate a significant inflow of Turkish Kurd asylum seekers into Europe. Arrivals in Italy decreased slightly in the same period, from 170,000 to 154,000, which still represent a very large intake. For an up to date survey see Breugel, 12 February, and The Economist, interactive graphics, 6 February.
In May 2015 Branko Milanovic wrote a post in Social Europe, “Five reasons why migration into Europe is a problem with no solution”: 1) deep-seated and permanent factors such as political chaos in the Middle East and extraordinarily huge and increasing income gaps between Europe and Africa, with sub-Saharan population poised to increase almost by six times by 2100; 2) lack of an immigration tradition in Europe; 3) European political blunders due to a combination of incompetence and arrogance, such as overthrowing Gaddafi, the ultimatum to the previous Ukrainian government, and the handling of the Greek crisis; 4) the increasing influence of right-wing, populist anti-immigration parties in several European countries, even when they are not in government; 5) the total lack of strategies, policies and ideas at the European level, while the crisis calls for a multilateral solution involving co-ordination among member-states and with African countries and the European recognition that an influx from Africa is dictated by demographic and economic gaps: “Unfortunately, neither of these two conditions is close to being satisfied. So the problem, among permanent political improvisation, will continue to worsen” – he wrote prophetically. (In a post in the same series last January Branko stressed the economic positives and negatives of migrations; see also his forthcoming book Global Inequality - A New Approach for the Age of Globalization, Belknap Press).
The Schengen Area rules include provisions for temporary border controls to be re-established in case of urgency, for up to 2 and 6 months, and for outright suspension for up to 2 years in the case of threats to public order. Since the 2015 summer temporary measures have been already implemented unilaterally by several countries. Hungary closed its borders with Serbia, Romania and Croatia, allowing its army to use rubber bullets, tear gas and barbed wire against migrants. In November Slovenia started building its own fence along the Croatian border; its Parliament recently approved the deployment of the country’s army to manage the migrants’ flow at its borders. An increasing numbers of migrants have been cutting through these barriers to enter the EU.





Warren Richardson, Hope for a New Life. A man slides a child under barbed wire at the border between Serbia and Hungary at Röszke, Hungary, 28 August 2015. (World Press Photo)
Sergey Ponomarev, Russia, The New York Times, The European migration crisis: Refugees arrive by boat near the village of Skala on the Lesbos Island, Greece, 16 November 2015 (World Press Photo)

The closing of Sche­­ngen internal borders has accelerated since the beginning of 2016. In Denmark the government extended passport checks on the German border for the third time, with Sweden keeping similar checks for travellers arriving from Denmark. France is in the process of closing down the so-called “Jungle” migrant camp at Calais, whose estimated 5,500 residents were waiting to smuggle themselves to the UK on ferries, or through the Chunnel in trucks, trains or even on foot; the closure was violently resisted. Belgium reintroduced border controls on its frontier with France, hiring 290 extra-police officers to try and stop the Calais migrants from moving to its coastline. Austria has built a wall at its frontier with Slovenia; in under two months in 2016 it received 101,000 migrants compared with 4,000 in the same period last year, and has introduced a cap of 80 asylum applications per day.  Borders have been tightened between the Republic of Macedonia and Greece, allowing Syrians and Iraqis through but barring Afghans, who then were banned also by Croatia. Towards the end of February over 22,000 migrants were stranded in Greece and were expected by the Greek Migration Minister and Vice-premier to treble by the end of March; the UN estimates their number to be increasing even faster, at the rate of 3,600 per day. The Greek border with Macedonia has been nearly sealed off, threatening to turn Greece into a giant refugee camp – a “warehouse of souls” (Tsipras). 

The EU is planning to provide Greece with €700mn over 3 years (of which 300mn in 2016 for emergency assistance to migrants); reasonable proposals to trade off migrant assistance for Greek debt cancellation have been rejected as a moral hazard risk. On 24 February in Vienna ten eastern European countries – with the much resented exclusion of Germany, Greece and Italy – agreed on tightening up their own border controls with a view to stop the Western Balkan route into Europe, which of course will shift the flow back to the Mediterranean route into Italy. On 29 February at the Macedonian-Greek border “crowds of migrants were beaten back from storming a fence with a salvo of tear gas” (FT, 1 March). The current migration assault is even more serious than the Euro crisis, as Angela Merkel recently acknowledged.
Last November Jean Asselborn, Luxembourg’s Foreign Minister, declared that Europeans had “only a few months” to save the Schengen system. On 21 February Thomas de Maizière, Germany's Interior Minister, stated that EU member states must agree a common approach to tackle migrations ­“within two weeks”if they wanted to avoid the system’s complete collapse. On 4 March the European Commission unveiled a plan, Back to Schengen, “to lift all remaining border controls by December 2016, so as to return to a normally functioning Schengen Area before the end of the year”. The options considered involve sharing out asylum seekers across the EU on a quota basis regardless of where they first arrived, either as a general procedure or only if a country is overwhelmed by a sudden influx. The IX Report on European Security reveals that a poll conducted in early 2016 among 1000 respondents each in Italy, Spain, France and Germany gives a majority of over 75% in favour of the reintroduction of border controls either unconditionally (56% in Italy) or in special circumstances (Repubblica, 7 March).
The Schengen crisis should not take anybody by surprise. The writing has been on the wall for a long time. The introduction of the Euro as a common currency had equally been an excellent idea, which however failed because it was premature before political, fiscal and banking integration; incomplete due to the ECB lacking powers as Lender of Last Resort to the EU and the member states; and because the Eurozone was subject to increasing divergence in the member states’ fundamentals. The Euro crisis was also made worse by austerity policies perversely enforced by the German-led European authorities. Precisely the same kind of criticisms apply to free internal travel within the Schengen Area: premature, incomplete and made worse by country divergence and recessionary austerity. On the impact of austerity on migrations and convergence see Michelle Baddeley, "Convergence, Divergence and Migration in an Age of Austerity", Seminar paper, Cambridge 2016:

“…(T)
he ability for host societies and economies to adapt will be constrained by limits on government spending. Infrastructure investment is needed in the very short‐term, including emergency infrastructure to support the immediate consequences of migration e.g. within refugee and migrant camps. Infrastructure investment will also be essential in the medium to long term to ensure that growing migrant populations have proper access to social infrastructure including housing, schools, hospitals and other medical services. Without this investment, the prospects for growing inequality, deprivation and socio-political unrest are likely to be severe – exacerbating divergences at many levels: between the global South and North, between Northern and Southern parts of the EU, and within countries depending on how different regions’ populations are affected by migration and/or how much access they have to public finance for infrastructure investment.”

Three considerations are in order:
1.Free internal travel requires strong external controls. Just like a Free Trade Area requires a common external tariff barrier, free internal travel obviously requires a common external border, with a common Coast Guard, border guards and if necessary a common Army, all provided and paid for centrally. The Schengen external borders, on the contrary, are delegated to national, fragmented, uneven and inadequate controls (in spite of the rudimentary Frontex agency and the recent intervention of NATO ships patrolling the Aegean Sea). Moreover existing controls do not include brutal repression, and this humanitarian restraint is more labour-intensive. Shooting trespassers on sight, as East German guards protecting GDR borders used to do with attempted exits, is not yet reached but arrest and imprisonment in Hungary (and the extra-Schengen UK) have been, as well as the use of tear gas and rubber bullets elsewhere.
Schengen external borders are a sieve that allows through indiscriminately legitimate refugees, escaping directly from persecution and war, and economic migrants, i.e. those refugees who had already reached a safe country, or other migrants who are simply seeking to improve their standard of living. The difference between refugees and economic migrants (both classed here as migrants) is elusive, as even refugees will tend to move towards countries with higher employment opportunities and/or income, thus abandoning their “first safe country” status. This difference is fundamental: refugees are protected by UN regulation on reaching their first safe haven, the others are still subject to national endorsement and control. And even if a policy of completely open doors was adopted towards economic migrants, the speed of the migratory inflow would still have to be subject to national control. In fact the capacity to absorb immigrants into any given territory is limited at any time by short term available resources, by the country’s capacity to integrate immigrants and, as well, by their own willingness and preparedness to be integrated.
Whether or not immigration brings net benefits to the host country is a controversial matter. On balance it probably does in the long term, but the case of very fast, concentrated mass migration should be considered in its own terms. The possibility cannot be neglected of a mixed distributional impact on workers and firms through greater competition in labour markets, both in the short and long term; of significant additional investment cost in new infrastructures, and - at least in the short term - welfare costs, making immigration a public investment competing with alternative forms of public expenditure. Immigration brings possible cultural enrichment but also possible cultural impoverishment, as well as potential cultural, political, ethnic and religious conflict – even leaving aside the possibility, not entirely implausible, of migration being a vehicle of health contagion and terrorist infiltration. These drawbacks have to be set against the benefit of rejuvenation of an ageing host population, which is associated with mass immigration.
Whatever the true net costs and benefits of immigration, the increasing electoral success of right-wing, populist, anti-immigration parties in most of the developed world signals unambiguously the widespread perception – right or wrong – that the current level and/or rate of immigration are excessive: from Matteo Salvini’s Lega to Nigel Farage’s UKIP, from Jimmie Åkesson’s Swedish Democrats to Geert Wilders’ Party for Freedom, from the German Alternative für Deutschland to Viktor Orbán’s Fidesz or Jaroslaw Kaczynski’s PiS, Heinz-Christian Strache’s FPO, Milos Freeman’s Civil Rights Party, Marine Le Pen’s Front National, the Finnish and Norwegian anti-immigration parties, as well as shifts in more standard political parties (see the anti-immigration stance of Boris Johnson, mayor of London and David Cameron’s probable successor). In the US the latest polls show that immigration is fourth or lower on public concerns: the anti-immigration vote is overwhelmed by the economy, anti-Elite feelings and security issues, although Donald Trump’s large-scale wall-building and deportation plans may have something to do with his unexpectedly strong bid for the US Presidency.
When existing external borders are not in a position to identify and register all migrants, to distinguish between refugees reaching their first safe haven (which the 1990 Dublin Convention rules, stricter than the UN rules, regard as the first EU country) and all other migrants, it is unavoidable that each Schengen member state will need to reintroduce effective border controls, including visas and passport checks.
The identification of immigrants has been likened to the marking of prisoners in Nazi concentration camps, but the comparison is improper, even if identification required the use of force. Identification is essential to verify both the right to residence and entitlement to benefits.
The almost 4,000 migrants that drowned trying to cross the Mediterranean Sea, the high monetary cost (steeply rising with the spreading of border controls and obstacles) and exposure to violence and other personal risks of migration make the desperate predicament of economic migrants – running away from famine, destitution, drought, environmental and cultural disasters – very close to that of refugees running away from persecution and war. But the difference is still there: refugees have a sacrosanct right to asylum sanctioned by the United Nations, while all others by migrating place themselves at the mercy of their countries of arrival: economic migrants can be refused entry or be repatriated.
Both rejection and forced repatriation are unpleasant and brutal, but an indiscriminate open doors policy would amount to the pretense that the world in which we live, dominated by private property and territory-based democracy, is instead a non-existing utopia of global democracy and universal communism, though limited to the collectivization of social capital. No wonder such a contradictory utopia was never proposed or theorized by anyone. In the world as we know it international solidarity is necessarily a discretionary concession by those who can afford generosity, which can only be exercised collectively if backed by a majority; it is not an automatic right of those who need international solidarity. 
Moreover a policy of indiscriminate open doors to all immigrants, while reducing international inequality across countries will increase internal inequality within countries because of the greater competition in the labour market in the host countries and the impoverishment of the emitting countries, thus leading to a possible and perhaps probable greater global inequality. (The case for repatriation is developed conclusively by Alberto Chilosi, “On the economics and politics of unrestricted immigration”, The Political Quarterly, 73-4, pp. 431–435, October 2002).
All immigrants, whether or not they can be classed as refugees, should be protected from the risks of their journey, in spite of such risks being to some extent the result of their own actions, just as cancer patients are entitled to treatment even if they are smokers (though some may disagree). Preferably the cost of protecting them should be a charge on all Schengen countries, as it is now for the EU Frontex operations, but even if such cost was born by a single country’s taxpayers as in the case of Italy’s Mare Nostrum scheme it would still be desirable.
The trouble is that repatriation is costly, and should be financed by the Schengen countries as it is part of the cost of abolishing internal borders; it requires the agreement of the country of origin or of the first safe country reached, which may be unknown or might no longer exist or might not honour such an agreement (e.g. Pakistan). Moreover it is doubtful whether “pushbacks”, whereby asylum seekers are returned to a country without their application having had a fair hearing, are consistent with both the Geneva Conventions and the EU asylum code. But the fact that repatriation will not always be possible is no reason for not attempting it at least in some cases, if nothing else pour encourager les autres.  Refugees are in a different position because with the settlement of conflict in their own countries they should return home.
On 27 January Sweden – that last year received 163,000 asylum applications, the highest number per capita in Europe – announced a plan to repatriate 80,000 migrants (subsequently reduced to 60,000 then left undetermined) “over  many years”, using aircraft chartered for the purpose, but the plan is still on paper. In the same week 308 economic migrants were sent back by bus from Greece to Turkey; however Turkey will not accept more unless Europe takes more Syrians off their hands – a vicious circle. Rejection looks like a more viable option: in his current visit of the Western Balkans ahead of the EU-Turkey summit Donald Tusk, on 2 March in Zagreb, said that “Member states should refuse entry to third-country nationals who do not meet the necessary conditions or who, although they were able to do so earlier, did not apply for asylum.” (European Council communique’ 3 March). However, the concentration of rejected economic migrants in border camps is bound to create other problems, while the prospect of future rejections can only speed up current migration flows.
2.Free internal travel requires the convergence of living standards within the area (including welfare provisions). Not unnaturally foot-lose migrants who do not have stronger ties (of language, religion, relatives, friends) to a particular country will tend to choose their ultimate destination on the basis of their perception of maximum improvement in their living standard resulting from migration. Employment prospects are likely to be paramount, indeed traditional migration theory (exemplified by the Harris-Todaro model, AER 1970, 60-1) relates the incentive to migrate to wage differences between the home and destination countries weighed by their respective probability of employment (taken as 1 minus the unemployment rate), to which of course one should add the net improvement in welfare benefits. Potential immigrants may well tend to overestimate their perceived income improvement prospects, as they seem to imagine themselves and their children gainfully employed at top salaries; this is one of the factors encouraging migrations beyond reason. When expected income gains diverge across potential destinations, the more attractive countries naturally will tend to be disproportionately vulnerable to migratory inflows. Hence the incentive for destination countries to raise national barriers, and/or discriminate in welfare benefits against immigrants, or dismantle the welfare state tout court for both nationals and immigrants. Even James Meade – a liberal and enlightened economist who proposed a generous generalised basic income – in order to prevent opportunistic immigration recommended that immigrants should be treated by the principle of reciprocity, i.e. enjoy the same benefits, if any, that our nationals might be granted in the migrants’ country of origin. (It has been objected that such a rule might be applied to countries of the same level of development, such as North-North and perhaps South-South, but not to South-North migrations).
The UK is a case in point. Relatively generous benefits granted to immigrants from other EU countries, including social housing, national health entitlements and payments to relatives resident abroad, have led to Cameron attempting to negotiate “emergency brakes” with the EU, subjecting benefits to time restrictions (excluding immigrants for the first four years residence), or to resident family members (possibly restricting family re-joining). Cameron succeeded in negotiating with the EU these kinds of restrictions only for future and not for existing immigrants, which therefore strengthened the conservative government resolve to reduce welfare benefits all round. Meanwhile non-European immigrants to the UK are subjected to a minimum income to be reached within the first 5 years of residence (which has just been raised from £21,000 to £35,000 from next April), under penalty of expulsion after one additional year. New rules will make UK landlords responsible for checking the documents of their tenants, making it harder to find accommodation not only for unauthorized immigrants but also for the 60% UK citizens who do not possess a passport.
3.Any attempt at a fair re-distribution of immigrants among countries requires the re-establishment of national borders. Last July EU Interior Ministers - outvoting Romania, Hungary, the Czech and Slovak republics strongly opposed to the scheme - imposed a plan to relocate 40,000 migrants (24,000 from Italy and 16,000 from Greece) across the EU. In September an additional 120,000 relocations (16,600 from Italy, 54,400 from Greece and 54,000 from Hungary) were added, raising the total to 160,000 in two years, of which 54,000 were postponed to the following year (FT, 25 September 2015). Viktor Orbán, Hungary’s prime minister, announced a referendumon whether the country should be forced to resettle refugees, on the ground that “Introducing resettlement quotas for migrants without the support of the people is an abuse of power”; he is unlikely to lose that referendum. On 28 February Pope Francis advocated “an equitable re-distribution of the burden of migrants” (thus accepting that immigration is a burden).  However, such kind of a re-location is futile, not to say idiotic, for under Schengen completely free and unrestricted internal travel any immigrant re-located to a country other than his/her preferred destination can at any time, and eventually will, just go there. Indeed we could argue that even the relocation of migrants within a given country might have to be subjected, in order to be done efficiently, to the introduction of internal passports and controls of the kind prevailing in the Soviet Union until 1991, in order to stop immigrants from settling in the capital city and in other metropolitan areas that are already overcrowded and congested and to divert them instead to less developed areas with an abundance of cheap underutilised housing and land.
On 29 February Angela Merkel said it loud and clear: “Migrants may not pick and choose where they are to be settled” (Daily Telegraph, 1 March). She referred to their choice of country, but Germany is indeed unusual in imposing constraints on where migrants can live, both in order to prevent the formation of ghettos in big cities and to direct immigrant flows to the underpopulated regions of the former GDR where there is plentiful social housing and a shortage of young workers. Such a policy had been introduced in the 1990s at the time of a large influx of ethnic Germans from the former Soviet Union and Romania. Immigrants have their welfare benefits cut if they move away from their assigned locations. In the UK immigrants who claim social housing and some other benefits are offered it only in the northern rust belt towns.
This kind of restrictions seem necessary to the smoother absorption of immigrants, but paradoxically the European Court of Justice, ruling on a complaint by two Syrians about their German residence requirements, at the end of February 2016 decided that EU rules “preclude” them even if they are aimed at “achieving an appropriate distribution of the burden connected with the benefits”, though it also said that people granted subsidiary protection could be subject to a residence condition “for the purpose of promoting their integration”. Nevertheless German ministers are preparing a law which would expand the existing residence restrictions to refugees whose asylum requests have been approved, in spite of objections from refugee associations (FT, 1 March).
Disintegration?  At present the EU is being subjected to four centrifugal forces (see Munchau, FT 28 February. and Javier Lopez, “Europe in Multiple Organ Failure”): a North-South divide over border controls; another North-South divide about austerity and the Euro; an East-West divide over migrant re-location; and the uncertain implications of Brexit with possible contagion effects on other member states.
It is difficult to disagree with Oxford political scientist Jan Zielonka (Is the EU doomed? Global Futures, Polity Press, London, 2014) when he argues that “Sadly… at present the EU does not facilitate integration, but impedes it”… “The European Union was widely regarded as the most successful modern integration project, but it has turned into an embarrassment”… “No wonder so many citizens lost trust in the EU, and that the process of disintegration is gathering pace.” But Zielonka’s expectation that “A weakening of the EU and its member states will strengthen other political actors such as cities, regions and non-governmental organizations (NGOs)” is utterly unconvincing: the solution or even the alleviation of both the Euro crisis and the migration crisis cannot rely on a network of de-centralised power centres but will require a deep degree of centralised initiative and commitment to greater integration. See “A Plan for Europe’s Refugees”, The Economist 6 February:
“Creating a well-regulated system requires three steps. The first is to curb the “push factors” that encourage people to risk the crossing, by beefing up aid to refugees, particularly to the victims of the civil wars in Syria and Iraq, including the huge number who have fled to neighbouring countries such as Turkey, Jordan and Lebanon. The second is to review asylum claims while refugees are still in centres in the Middle East or in the “hotspots” (mainly in Greece and Italy), where they go when they first arrive in the EU. The third element is to insist that asylum-seekers stay put until their applications are processed, rather than jumping on a train to Germany.” Unfortunately, “All these steps are fraught with difficulty.”
Prospects might become clearer soon, after the next EU-Turkey summit (7-8 March), the German regional elections (13 March) regarded as a test of Merkel’s immigration policies, and the EU Summit on migration (18-19 March).
There seems to be, however, a constitutional conflict between European and international rules about treaties, revealed by the recent agreement reached by the UK and all the other member states about the special terms negotiated by Cameron for the UK. That Agreement is said to have been deposited within the UN and is therefore subject to the jurisdiction of the International Court of Justice, which operates on rules different from those of the European Court of Justice competent to enforce the European Treaties. Downing Street has claimed that the EU-UK agreement is legally binding and enforceable, but it is not clear whether any country who did not like it might seek to challenge it in the International Court of Justice. A constitutional crisis of this kind is the last thing that Europe needs today.

Note: I thank Carmen de la Camara, Marilena Giannetti, Tonino Lettieri, Ruggero Paladini and Fabio Sdogati for useful comments on an earlier draft of this post. However they should not be held responsible for any errors or omissions, nor deemed necessarily to agree with any of the propositions put forward here.

UPDATE
The EU-Turkey summit of 7-8 March led to a draft deal whereby Turkey would take back immigrants coming from Greece unless they successfully applied for asylum there, while the EU would take in one Syrian refugee for every immigrant sent back. In exchange Turkey would receive €6bn aid instead of the €3bn already committed but not yet disbursed, accelerate its progress towards EU accession and obtain visa-free travel to the Schengen Area for its 75mn citizens.


In the three German regional elections of 13 March Ms Merkel’s CDU Party retained the possibility of forming coalition governments but lost ground heavily, while her PSD coalition Party that had backed her immigration policies performed even worse. The xenophobic right-wing AfD gained record support.


On 18 March after ten days negotiations the EU and Turkey reached a compromise deal that commanded unanimous support, effective from 20 March. Greece obtained 4000 new personnel to process asylum applications. There would be no collective pushbacks, but starting on 4 April Turkey (that received 2.7 million migrants to date) would take back applicants who did not qualify for asylum in Greece, while the EU would take from Turkey â€œone for one” as many Syrians up to a ceiling of 72,000. In exchange Turkey would receive €6bn instead of the anticipated €3bn, of which 3bn up front and 3bn at the end of the year; the process of EU accession would be tentatively reopened and EU visa-free travel for Turkish citizens would be granted from next June.

The Greek government’s migration spokesman Giorgos Kyritsis declared that implementation of the deal would require more than 24 hours; Turkey will not take back migrants before 4 April anyway. The 4,000 officials, translators, judges and security guards promised by the EU still have to arrive; eight ships with a capacity of 300-400 passengers each need to be provided by Frontex, together with 30 buses. Thousands of migrants (mostly Syrian, but also Iraqis and Afghans) have continued to arrive in Greece in spite of the agreement. Greece is still relocating migrants from its islands to temporary refugee camps on the mainland. From 4 April a number of failed asylum-seekers (750 in the first week, mostly North Africans, Afghans and Pakistanis) from Greek detention centres will board a vessel chartered by Frontex and be taken to Turkey. In return Germany will take an equivalent number from Turkish refugee camps. These deportations might be illegal and have sparked violent protests but will accelerate in April.

There were still strong objections from humanitarian groups, on the ground that the deal violated international law on the treatment of refugees; Turkey is expected to conform its regulations to international standards, but refused to accept a formal commitment to that effect. European reaction has ranged from welcoming “closed borders” to condemning the “shameful deal”. Wolfgang Munchau, FT 21 March: “The deal with Turkey is as sordid as anything I have seen in modern European politics… The EU not only sold its soul that day, it actually negotiated a pretty lousy deal.”  On 22 March the UN refugee agency announced the suspension of its involvement at all closed centres on the Greek islands, on the ground that so-called “hotspots” for the reception and registration of migrants had turned into “detention facilities” in violation of UN regulations. On 23 March Médecins Sans Frontières and the International Rescue Committee also scaled back their activities in the Greek centres. Following terrorist attacks in Brussels Poland now declared that it can now no longer honour the previous government’s commitment to take a quota of 7,000 refugees out of the 120.000 to be resettled across the EU. In the week following the EU-Turkey deal migration inflows to Greece were reduced drastically, though this might be due to adverse whether conditions in the Aegean.


In the last seven months, Hungary’s courts have held 2,189 trials for border crimes (including on 18 March a blind woman and a man confined to a wheelchair accused of interfering with Hungarian borders last November, FT 22 March) leading to an exceptionally high rate of convictions of 99 per cent. Hungarian judges have chosen expulsions and long entry bans from Schengen countries over prison sentences. On 22 March Frontex was reported saying that it was trying to recruit 150 policemen and 50 officials to be deployed on Greek borders, i.e. it had not succeeded yet.

The Greek-Macedonian border will remain closed, blocking the Balkan route to Northern Europe, leaving tens of thousands migrants stranded in Greece for some time, including Syrians who thought they had been invited by Angela Merkel to come and stay in Germany. It is not clear how the 72,000 asylum seekers would be distributed among member states; once that ceiling is reached the arrangement will be "reviewed", though Central-Eastern EU members are committed to stop at that ceiling. 

The closure of the Balkan route will induce desperate migrants and their smugglers to switch to different and more dangerous routes to Europe, via the Black Sea through Ukraine, via Albania and the Adriatic to Italy, via the South Mediterranean to Italy and Spain (the last two routes having continued to be used especially from Lybia; in the first three months of 2016 immigrants arriving in Italy from the Mediterranean route have doubled). France, Switzerland and Slovenia would then be bound to reintroduce border controls, thus cutting off Italy and possibly Spain from the Schengen area; Austria is already closing the Italian border at Brennero. Liberalisation of travel for Turks would lead to an additional inflow of Turkish Kurds. According to a German think-tank refugee flows this year will amount to an estimated range of 1.8m-6.4m (the higher figure being a worst-case scenario including large numbers from Northern Africa).


Incidentally, on the costs and benefits of mass immigration with special reference to the UK, see R.E. Rowthorn’s excellent Report, 2015.


          Greece: Enough is Enough        


In Alexis Tsipras’ shoes I would apply immediately for Greece to leave the EU, as envisaged by Art. 50 of the TEU (Consolidated Version of the Treaty on European Union, Official Journal of the European Union, C 115/15, 9/5/2008).

Since Greece’s 2010 crisis the Troika (sorry, the “international institutions”) have sunk about €245bn into its rescue, i.e. more than would have been sufficient at that time to pay off the entire Greek debt. It is well known that these funds did not benefit the Greeks but went almost entirely to save French, Swiss and German banks from their exposure to Greek government bonds. And in the FT or 21 April Martin Wolf debunks Greek “mythology” including the myth that “Greece has done nothing”: 

“Greece has undergone a huge adjustment of its fiscal and external positions. Between 2009 and 2014, the primary fiscal balance (before interest) tightened by 12 per cent of gross domestic product, the structural fiscal deficit by 20 per cent of GDP and the current account balance by 12 per cent of GDP.”
“Between the first quarter of 2008 and the last of 2013, real spending in the Greek economy fell by 35 per cent and GDP by 27 per cent, while unemployment peaked at 28 per cent of the labour force. These are huge adjustments. Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources.”

The cost of such adjustments to the Greek people were immense. Unemployment reached 28% (48% for youth unemployment), the dismantling of collective bargaining lowered real hourly wages by 25% by 2014. The minimum wage fell to its level of the 1970s. The minimum pension fell below the poverty threshold. As many as 35.7% of the population and 44.1% of children aged 11 to 15 are now at risk of poverty or social exclusion. And Gechert and Rannenberg (of the German Hans Böckler Foundation) show that without austerity the Greek economy would only have stagnated, avoiding the deep recession, while tax increases without spending cuts would have been much more effective in lowering the Debt/GDP ratio.

Another myth debunked by Martin Wolf is that Greece will pay its debt in full. As a a result of fiscal consolidation and the bailout its debt has gone from about 120% of GDP in 2010 to over 177% today. Thus Greece needs either further debt relief or, in order to continue to service the debt, it needs the €7.2bn bail-out funds due last year that were not disbursed on the ground of alleged delays in Greek implementation of “structural reforms” agreed in the Memorandum of Understanding negotiated by the previous right-wing government with the “institutions”.

After the 25 January elections the new government, democratically elected on a specific anti-austerity campaign, and reported by post-election polls to consistently command the support of 80% of the population, an agreement with the “institutions” was reached in principle on 20 February for the release of the €7.2bn on condition of somewhat different but yet unspecified structural reforms. However there have been continuous wrangles about whether or not the Greek reform proposals were or were not sufficient to warrant the release of the residual bail-out funds.

Up to now Greece has paid punctually interest and debt instalments as they became due, such as $450mn owed the IMF on 9 April and a batch of Treasury Bonds that also fell due. But the IMF is still owed €203mn on 1 May and €770mn on 12 May, plus €1.6bn in June, while some of the debt with the ECB is also due for repayment. The Greek government has scraped the bottom of the barrel by requisitioning the liquid balances of state enterprises and local authorities. It has announced that it is not in a position to make these payments, unless it stops payment of pensions and public sector wages and salaries.  Without access to these €7.2bn Greece is likely to default on its payments to the IMF and the ECB.

On 15 April the FT reported that Greek officials had approached the IMF informally proposing to delay the repayment of loans due in May but were told that no rescheduling was possible; indeed they were persuaded not to make that request officially, presumably to avoid an open refusal.

At the same time Germany’s finance minister Wolfgang Schäuble was reported in an interview to have virtually ruled out that at the Eurogroup meeting in Riga on 24 April a deal might release bailout funds to Athens. "You can't pour hundreds of billions... into a bottomless pit."

However Die Zeit reported that Ms Merkel now might support emergency measures that would give Greece continued access to ECB Emergency Financial Assistance even in case of default. The possibility of a Greek default not being followed by Grexit is being discussed more and more widely (see for instance Wolfgang Munchau and Martin Wolf in the FT).  It might be possible, perhaps, but would still be very messy, and if there is sufficient goodwill to make it possible it would be much more effective to disburse the wretched €7.2bn.

The Financial Times on line of 18 April (Breaking News, 6.57 pm) reports that ECB president Mario Draghi told the IMF spring meeting the euro area was better equipped than it had been in the past (in 2010, 2011 and 2012) to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.

On 21 April BloombergBusiness reported that “The European Central Bank is studying measures to rein in Emergency Liquidity Assistance to Greek banks, as resistance to further aiding the country’s stricken lenders grows in the Governing Council”. The writing is on the wall.

Grexit costs would be very serious not only for Greece but for the entire Eurozone and beyond, but unilateral withdrawal from the whole of the European Union rather than simply the Eurozone would make more sense. An application to withdraw would only take effect two years later, leaving ample time for a possible change of mind and for re-negotiations, but might be an effective and quick way of sobering up Mr Schäuble and the other Troika hawks that have been bullying Greece, pushing it towards default regardless of consequences. Greece might as well take back the initiative, not least to avoid an internal government crisis.

What is particularly deplorable is the IMF duplicity and bad faith: in Greece and everywhere else on a global scale they have been calling relentlessly for fiscal consolidation and structural reforms (a euphemism for enterprise freedom to dismiss employees and for the systematic destruction of the welfare state) but at the same time they have played a leading role in discrediting consolidation and "reforms" as policy instruments to fight a recession.

The IMF World Economic Outlook of October 2012 (Box 3.1 untypically signed by Chief Economist Olivier J. Blanchard and Senior Economist David Leigh, presumably to suggest that their views are personal and not official) raised previous estimates of fiscal multipliers for several reasons. First, the ineffectiveness of countervailing monetary expansion close to the zero floor of the interest rate'; second, lack of opportunities for exchange rate devaluation especially in the Euroarea; third, the existence of  a large gap between potential and actual income (for fiscal multipliers are higher in a downturn than in a boom) and finally, the simultaneous consolidation across many countries.  Such revision of estimated multipliers implied an upwards revision of the costs of consolidation, to the point of theorizing that tax increases and especially expenditure cuts would actually raise, instead of lowering, the ratio between Debt and GDP, thus setting up a vicious circle. This of course is what happened punctually in Greece and in other highly indebted economies – like Italy – as a result of fiscal consolidations.

Further the IMF World Economic Outlook 2015 (Ch. 3, Box 3.5 on The Effects of Structural Reforms on Total Factor Productivity, pp.104-107) issued on 14 April candidly recognizes, on the basis of available econometric evidence, that total factor productivity can be increased by using more skilled labour and ICT, by investing more in research and development and by lowering the level of regulation in product markets. In contrast, the IMF does not find any statistically significant effects on total factor productivity that result from lowering labour market regulation (See also Ronald Janssen Social Europe).
Such schizophrenic duplicity on the part of the IMF has not even incompetence as a conceivable justification. A Greek unilateral withdrawal from the European Union would sober up lots of people in Washington as well as in Brussels, Frankfurt and Berlin. Go for it Alexis and Yanis on behalf of all of us, not just on behalf of Greece. 


UPDATE (13 May)

Last Monday (11 May) Greece paid the $750mn owed to the IMF, one day before the deadline, ending days of uncertainty over funds availability and whether payment might be withheld in order to put pressure on creditors. 

Where did the money come from? The FT reminds us that “The Greek government ordered hundreds of state entities — among them hospitals, universities and local authorities — to deposit their cash reserves with the central bank. But many such entities, including an overwhelming majority of municipalities, have declined to comply”.

An unmissable piece of news, which appears to have gone largely unreported in the financial press: TSIPRAS TO FIRE [FIRED] BANK OF GREECE BOSS FOR UNDERMINING SYRIZA POSITION: “Bank of Greece Governor Yannis Stournaras will be quitting his post today (last Sunday). Alexis Tsipras will ask for his resignation in the light of documentary proof that the former New Democracy Finance Minister personally gave specific briefs to a top journalist about “putting the most negative spin possible on the news” about Greek finances.

Yannis Stournaras was Greek Minister of Finance from 5 July 2012 until he moved to the BoG last year. As a senior consultant to the Bank he was personally involved in the entry of Greece into the euro. As a senior Governor he sits on the Board of the IMF, a position that places him in a serious conflict of interest with the Greek government.  “Meanwhile, the forensic investigation into debt overstatement in 2010 and how much Greek debt can be objectively defined as ‘odious’ continues”. 


           Kakistocracy        

In 1988 my old friend, teacher and mentor Luigi Spaventa was made Treasury Minister in the Italian government.  The Communist Party had been offered a few posts in the government, including Vincenzo Visco at the Ministry of Finance, but had refused; Luigi belonged to the left but was not a party member, and fortunately accepted.  On that occasion, I sent him a postcard with the following verses:

Visco al Fisco! Noo? Peccato,
Il Partito s’e’ imbranato.
Per fortuna c’e’ Spaventa
Che al Tesoro s’arroventa,
E la fine e’ ormai per via
della Cachistocrazia.

[Visco at Finances! No? Pity./The Party has goofed./But fortunately Spaventa/At the Treasury is getting fired-up,/And at last we are on the way/To end our kakistocracy.]

Naively I thought I had coined the word, from the Greek kakistos, superlative of kakos(bad), government by the worst citizens, but on googling the word there are almost half a million entries: kakistocracy was first used in 1829 by the English satirical writer Thomas Love Peacock. The American poet James Russell Lowell wrote in a letter in 1876: "Is ours a government of the people, by the people, for the people, or a kakistocracy rather, for the benefit of knaves at the cost of fools?"

Luigi, a wonderful teacher and a great economist, died prematurely in 2010.  Had he lived longer he might have been appointed premier in 2012 instead of Mario Monti (for he was President Napolitano’s economic adviser), or to even higher office later: Italian recent history would have taken a turn for the better.  In any case I was patently wrong: not only does kakistocracy â€“ the mafia in collusion with the political Casta- still rule Italy, now it has spread to the entire world.  Whenever the best men come to power in a country, the global kakistocracy tries to squash them.  This is the case right now in Greece.

All that Alexis Tsipras is asking of the European and global rulers is six months of breathing space to prepare an alternative plan for debt management and economic recovery.  After all, the elections of 25 January had been called only on 14 December and he could not conceivably have been expected to have a plan ready when his outstanding surprise victory was proclaimed.

His first moves were directed at reassuring the global community: Greece would honour its debts in full, without insisting on a debt haircut; the country would remain in the Eurozone, as preferred by a large majority of its citizens; it would fight tax evasion and raise the living standards of those who had suffered most from the austerity imposed by the Troika (the ”Memorandum” issued by the EC, ECB and IMF): the unemployed, especially those unfairly dismissed, the poor, old age pensioners and the other economically weak groups.  ”If the country’s sacrifices were conducive to recovery and growth I would be the first to advocate them” – he said to Parliament last week (I am quoting from memory) – ”if the bitter pill was necessary to recover health I would readily swallow it”.  But the austerity imposed by the European and globalist kakistocracy demonstrably leads only to cumulative impoverishment and ruin, as it has already done.  Thus Tsipras rejected at once the continuation of the programme agreed with the Troika by his predecessor, renouncing the €7.2bn aid that Greece otherwise expected to receive at the end of February, asking only for the €1.9 bn repayment of ECB profits made on its Greek bonds, with a view to using the next six months to negotiate a new agreement and in the meantime to meet all outstanding obligations by issuing around €10bn short-term Treasury bonds. 

So far the Kakistos and Tsipras are set on a collision course. The Greek Finance Minister Yanis Varoufakis and German Finance Minister Wolfgang Schäuble would not even “agree to disagree”.  On 11 February in Brussels at a meeting of Eurozone Finance Ministers talks collapsed after six hours.  There is no way the debt owed to the ECB or the IMF can be cut, under penalty of losing access to assistance from these institutions – though Greece might be allowed to repay ECB credits by borrowing on very long terms from EFSF, the Eurozone bail-out fund.  Moreover Tsipras has promised that private investors will not be hit.  The only room for debt renegotiation is with European governments, to whom Greece owes directly or indirectly about €195bn, around 62 per cent of its total debt (of which almost 148bn or 45 per cent to the bail-out fund EFSF). True, Greece has already benefited from a debt cut in 2010 and 2012, and from the lengthening of maturities right up to 2057; and from a reduction of interest on its debt down to 2.6% of GDP, equivalent to that paid by Italy or France (and only 1.5% on its debt with the EFSF, which could not possibly be cut further).

But according to the Troika Memorandum Greece is committed to running a primary surplus (before paying interest) of 4.5% of GDP a year, which is an exceedingly heavy burden on an impoverished country.  Such a surplus requirement could very well be cut at least temporarily, by an interest moratorium until growth is resumed, back to earlier income levels, to the 1%-1.5% primary surplus that Syriza’s current plans would require. This is the purpose of the proposal put forward by Yanis Varoufakis, of swapping debt owed to European governments with new bonds indexed to the Greek growth rate.  

The ECB was certainly within its rights to cancel the waiver allowing Greek banks the use of Greek government bonds as collateral, thus denying Greece access to liquidity at 0.05% interest, once Tsipras had indicated his unwillingness to continue on the agreed course at the end of February.  But it was certainly not ”legitimate and opportune” as declared by Matteo Renzi, who presented Tsipras with an elegant tie instead of solidarity (”So that he could go and hang himself with it”, commented Giorgia Meloni, leader of the right-wing party Fratelli d’Italia).  As long as Greece has access to Emergency Liquidity Assistence (even at the higher cost of 1.55%) Greek banks can cope even with the slow run on deposits that has already begun (€15 bn in the two months preceding the elections); but such access has to be confirmed every fortnight and its possible suspension is a Damocles’ sword. Greece really needs the Tsipras really needs the €10bn Treasury bonds that Tsipras wishes to issue.

The trouble is that Greece is already right up against the €15bn limit to short term indebtment that has already been imposed by the Troika, and the additional €10bn bonds have to be, but have not been, authorised.  Yet this is the only and therefore the best way out of the Greek-Troika confrontation.  Wolfgang Schäuble declared that ”Europe is not in the business of granting bridging loans”, but the €10bn would be no skin off his nose, they would be raised – at a price, that current delays make rise all the time – in the international market.  By giving up its entitlement to €7.2bn under the Memorandum surely Greece can have its €15bn borrowing ceiling lifted at the same time?  The Troika cannot have it both ways, tying Greece to its borrowing limit when it is renouncing some of the benefits of its current deal with the Troika.

Germans display the memory typical of elephants when they evoke the ghost of their 1922-23 hyper-inflation to justify their opposition even to ECB quantitative easing.  But they have a shorter memory than goldfish when it comes to the 1953 cancellation of German debt of over 200% of its GDP at the time, much in excess of the current Greek debt burden of under 180%.  According to the economic historian Albrecht Ritschl (LSE), Germany was ”the “biggest debt transgressor of the twentieth century”;Robert Skidelsky recently reminded us that“Germany experienced eight debt defaults and/or restructurings from 1800 to 2008. There were also the two defaults through inflation in 1920 and 1923. And yet today Germany is Europe’s economic hegemon, laying down the law to miscreants like Greece.”

Tsipras’ mention of war reparations was not commented on by Merkel but both vice-Chancellor Sigmar Gabriel and Wolfgang Schäuble immediately said that the issue was definitively closed years ago, and its re-opening was out of the question.  Tsipras mentioning the War was treated as an inappropriate gesture in bad taste.  Shades of Basil Fawlty of Fawlty Towers, shouting at the Hotel’s Spanish waiter Manuel: ”Don’t mention the War!” when German guests arrived.  But why ever not?  If memories of 1922-23 hyper-inflation are not buried, a fortiori neither should more recent and tragic ones.  Such a combination of a good memory for distant events with forgetfulness of recent ones is typical of dementia.

A secret Greek Finance Ministry report is said to provide detailed evidence of ”atrocities and forced loans during Nazi occupation of Greece in World War II”.  Apparently ”in 1960 Germany paid DM 115 million in reparation payments to victims of the Nazi terror regime in Greece in accord with a bilateral reparation agreement”. But 1) the Netherlands suffered much less and received a much larger compensation; 2) “the 1953 London Agreement on German External Debts, between the Federal Republic of Germany and creditor nations, stipulated that payment obligations from World War II were to be deferred until ‘after the signing of a peace treaty’", and 3) apart from the cost of war suffering, casualties and loss of material assets, there was a loan the GreekCentral Bank was forced to give the Nazi regime in 1942, 476 million reichsmarks which the occupiers not only acknowledged but had actually started repaying shortly before the end of the war.  Even at a modest interest rate of 3% a year (though German loans after the War generally had a 6% interest rate) after 70 years that loan would have built up to a handsome three digit billion sum in today's euros.  Professor Hagen Fleischer, a historian from Athens University, explains that "Before 1990, Germany tended to point out [that] it was too soon, because Germany was divided and it was the entire country that had gone to war, not just one half. So the issue was supposed to be canned until Germany was again reunified".  After reunification, however, "Germany's response was suddenly, 'So much time has passed - now it's too late’".  Clearly the Greek Ministry of Finance should publish its secret report in full on the Internet at once, together with all the body of evidence of post-2009 Greek negotiations with the Kakistos of the Troika that led to the ”Memorandum”.

There is a perfectly feasible solution to the otherwise potentially catastrophic losses involved in the confrontation between Greece and the Troika: lifting the €15bn ceiling on short-term debt in exchange for Greece renouncing the aid otherwise payable under the Memorandum.  Paradoxically, Angela Merkel is standing firm and and wisely stopping Europe from joining the USA and its jejeune warmongering President Barak Obama in arming Ukraine and fighting Vladimir Putin.  Let’s hope that she might come to her senses also in her dangerous confrontation with Greece. 


UPDATE
On Thursday 13 February it was announced that fiscal revenue for the month of January was €1bn lower than forecasts (a shortfall of 23%). The ECB extended another EUR5bn in emergency loans to banks in Greece after fears that a spate of bank withdrawals could dry up funding. In fact according to JP Morgan withdrawals from bank deposits since the beginning of 2015 amounted to €21bn.  But ELA is subject to fortnightly verification and is not a permanent solution.  On Friday 14 it was announced that in the fourth quarter of 2014 the Greek economy had contracted slightly, reversing the trend after nine months growth.

The Greek government claims that it does not need any fresh cash: “We do not want new loans, we need time, not money to implement reforms” – the Greek premier said in an interview to the German weekly Stern.  But a spokesman for the Commission commented: “We fear that the available liquidity is shrinking faster than anticipated”.

Monday 16 February was supposed to be the day of reckoning. But the Brussels meeting of Eurozone Ministers of Finance with Tsipras and Varoufakis ended with a bitter row, with general recriminations and yet another postponement of the final decision until no later than Wednesday next.  The Union offered Greece only the extension of the pre-existing agreement, at the same conditions; the Greeks rejected the proposal as “absurd and unacceptable”

Time is running short, for some countries, like Germany, the Netherlands, Finland and Estonia, need parliamentary approval not only for a new Memorandum but also for an extension of the last one.

One might think that the difference between the positions of the two antagonists is minimal and purely formal. After all, what big difference there might possibly be between the extension of a pre-existing agreement subject to consensual renegotiation within six months, and a slightly different stipulation also subject to consensual renegotiation within the same term?

The difference however is immense.  The extension of the current agreement would involve the acceptance not only of the general principle of austerity but also of new privatizations of public assets at derisory prices, and the reversal of policy measures already taken by the Tsipras government, such as the reinstatement of public employees especially if unfairly dismissed, the adoption of a higher minimum wage and higher pensions.  It would be a capitulation on the part of the Greek government, involving the rejection of the main principles of their electoral campaign and popular mandate.  And for the kakistos European leaders it is a serious question of asserting who is really Master in Europe.

We could say that the Troika, like Shylock The Merchant of Venice, is demanding of Greece its pound of flesh in payment of its debt, whereas Greece is willing to pay a pound of its flesh only on condition that it does not include any of its blood.  This Shakespearean drama is being replicated next Wednesday, with an open ending. 


BREAKING NEWS
Greeks and eurozone agree bailout extension


“Greece and its eurozone bailout lenders agreed an 11th-hour deal to extend the country’s €172bn rescue programme for four months, avoiding bankruptcy for Athens but setting up another potential stand-off in June when a €3.5bn debt payment comes due”. Financial Times, 20 February 2015, 8.18pm

Hip Hip Hip! Hooray!





          Moderate optimism        

The month of January 2015 gave us several, interlocked reasons for moderate optimism about the prospects for economic recovery in the Eurozone and in Italy.

First, the further fall in oil prices, strengthening the trend already present from last summer. From mid-June 2014 to the end of January 2015 the price of crude oil fell by as much as 60 percent, reducing the energy costs of Eurozone producers in spite of the parallel but much lower depreciation of the euro against the dollar (on which more below). Quantitative estimates of the effect of this cost reduction on the rate of GDP growth are uncertain and vary around 0.5% -0.8%, but undoubtedly the positive effect is present and is not negligible.

The second reason for moderate optimism is the ECB decision on 22 January to implement Quantitative Easing, albeit with the disapproval of the Bundesbank president Jens Weidmann and a minority of other representatives of the Nordic  member states of the Eurorozone: € 60 billion per month for 19 months, from March 2015 to September 2016, and if necessary even further, until the Eurozone inflation target "below but close to 2 percent" is reached.  This amount however includes other interventions already decided previously, so that the additional amount really is not €1,140bn but only about €900bn, and the surprise effect (important for example in the Swiss frank large appreciation of 15 January) had been diluted by months, indeed years, of announcements, discussions and debates. However the size of the intervention was still greater than earlier expectations, of the order of €500bn, and therefore there still was some element of surprise. The provision that National Central Banks should take on 80% of the risk of default on 80% of their country’s bonds purchased by the ECB is an important limitation of the Monetary Union but an acceptable price for this massive intervention.

Third, the depreciation of the euro down to a rate of $ 1.11, then stabilized at $1.13 (below the rate of $ 1.17 at which the euro was first introduced and a far cry from its peak of $1.47), for several reasons: ECB Quantitative Easing; the expectation of the Fed raising interest rates, repeatedly announced and now postponed probably to next June; expectations - rightly or wrongly - of the worsening of the Greek crisis and even a possible exit of Greece from the Eurozone (Grexit).  Such devaluation should have a significant impact on the competitiveness of all member countries and therefore their exports and growth, improving the relative position of those who like Italy have seen labour productivity stagnate or even decline over the last decade. Predicting the quantitative impact of euro devaluation on the rate of GDP growth is difficult and risky, but this effect could have an order of magnitude of 0.8-1%.

Fourth, the resounding victory of Alexis Tsipras and his party Syriza in the Greek elections of 25 January, which has called into question the austerity policy adopted by European institutions under the hegemonic influence of Germany as the only strategy response to the Great Recession of 2007, along with so-called "structural reforms".  These last are a euphemism for the dismantling of the welfare state, privatization of under-valued public assets and the cancellation of decades of achievements of the labour movement.

The first moves of the new Greek government were reassuring: Greece has no intention to leave the euro (a choice supported by 60% of the Greek population), nor to press for further cancellation of public debt, nor to request additional aid.  At the end of February Greece expected to receive €2 bn aid from the European Union and €5 bn from the IMF, conditionally on reform implementation.  Now the Greek government requests only €1.9bn from the ECB as reimbursement of the additional interest earned by the Bank on the Greek bonds in its portfolio. As Finance Minister Yannis Varoufakis rightly said, "A Monetary Union responding to a serious financial crisis by granting more loans to deficit countries on condition that they shrink their national income is not sustainable”.  Varoufakis proposes a " menu of swaps " of Greek bonds with new bonds of two types: one indexed to nominal economic growth, whose service therefore would be conditional on the resumption of growth, and the other a "perpetual bond" that would replace the Greek government bonds in the hands of the European Central Bank. The Greek budget would remain in primary surplus, but only on a more modest scale of 1-1.5%, thanks to the decision to pursue big tax evaders.  In this way Greece could effectively honour existing commitments, while creating a fiscal space sufficient to finance the reconstruction of the welfare state, to increase the minimum wage and pensions, as well as to grant the benefits in kind or subsidies (for example in electricity and transport) promised and partly already introduced by the new government.  Otherwise, Varoufakis says, "Greece will become deformed rather than reformed." Varoufakis' plan was received favorably at its presentation to the City of London, and provides an excellent and credible basis for discussions and negotiations with the European institutions.

Why, then, the "moderate" nature of optimism rooted in so many positive developments?

First, the fall in the oil price is the result of lower demand in the recession, the Saudi decision not to cut production to match lower demand, and the significant growth of the US production obtained from bituminous shale.  But the price reduction undermines its causes: not only does it stop investment in the development of alternative energy sources, but at the current price of around $ 50 per barrel it makes most of the production to be sold at a loss and therefore not sustainable. On 30 January the announcement of the closure of one hundred high-cost wells in the United States raised the price of oil by more than $ 8 in a single day although production had continued to rise. And if the low oil price were maintained there would be - and are already experiencing them - negative effects on the demand for imports by oil-producers and therefore on income and employment in the non-oil-exporting countries.

Second, in the opinion of many observers and businessmen, monetary easing by the ECB was "too little too late", in comparison with the $ 4.5 trillion mobilized by the Fed already commenced in 2008, and further, in view of the greater use by US companies of credit and securities to finance investments, compared to the larger component of profit reinvestment by companies in Europe and especially in Italy.  But there is no doubt that monetary easing - in addition to its impact already mentioned on euro devaluation - will facilitate the recapitalization of banks that have an excess of government bonds in their portfolios.

Third, the devaluation of the euro could unleash a war between currency areas with rounds of competitive devaluations, and the associated de-stabilization of financial markets.

Finally, European and German economic authorities have immediately taken rigid and hostile positions adverse to any form of restructuring of Greek debt.

Matteo Renzi has been likened to Alexis Tsipras but unfortunately we are not so lucky, all they have in common is their young age; Italy also has €40bn credits towards Greece, and our excellent Pier Carlo Padoan has neither the imagination nor the tenacity of Yanis Varoufakis.  If anything Alexis Tsipras has something more in common with our new President Sergio Mattarella: immediately after their election both went to visit a monument to the victims of Nazi atrocities, a gesture that cannot have been greeted with enthusiasm by Angela Merkel.  The French are watching from the sidelines; in order to widen the breach in European austerity opened by Syriza we will have to wait for a parallel Podemos victory in the next elections in Spain.

The danger is that the game of chicken played by Germans and Greeks might lead to a lethal crash, perhaps in the form of an "accidental Grexit" (an expression coined by Wolfgang Munchau): the expiry of any deadline before a new agreement is reached, the loss of Greek access not only to Quantitative Easing but also to emergency liquidity provided by the ECB, capital flight and a panic run on the banks by the public seeking to withdraw cash from their accounts.  At that point, a severe liquidity crisis could force Greece to issue some form of national currency, perhaps initially notes issued by the Treasury circulating in parallel with euro cash now in short supply: from there to a formal exit is only a small step. Cyprus came within a breath of this predicament.

Marcello De Cecco noted that while a Greek exit from the Eurozone could very well happen in the way I described, it would be the result of a deliberate policy of not wanting to help Greece, instead of a series of casual fatalities, when there is will there is always a way, and if deadlines are not met this means that Greek exit is not so much feared but wanted.

In any case, a possible Greek exit from the Eurozone – whether accidental or deliberate - cannot be ruled out completely, and would be catastrophic for the entire Eurozone, with contagion spreading first to Portugal, then to the other southern countries including Spain and Italy, eventually turning against Germany itself and the other Nordic countries. That is enough to temper anybody’s optimism.

POSTCRIPT

On 4 February the ECB Governing Board decided that Greek government debt will no longer be accepted as collateral starting next week.  This appears to be like undue ECB interference in Greek negotiations with the EU, but 1) it is well within the Bank’s discretionary powers; 2) it is likely to be part of the price paid by Mario Draghi for the large size of his Quantitative Easing and 3) it is also a way of raising the stakes which might, in the end, favour Greece by raising the cost of a Greek exit for Germany and the hawks as well as for Greece.  After all, Yanis Varoufakis is an accomplished game theorist and should know what he is doing (see Varoufakis Y., Rational Conflict. Oxford, Blackwell, 1991; Varoufakis Y. and S. Hargreaves-Heap, Game Theory: A critical text. London and New York, Routledge, 2004).  At least, this is what we might still hope.

For assessments supporting this last point see the excellent post by Frances Coppola, What on Earth is the ECB up to? and the other posts listed at the end of it.

          FINISHING THE POST-CRISIS JOB / PROJECT SYNDICATE        

Finishing the Post-Crisis Job

Jim O'Neill
. A clerk counting stacks of Chinese yuan and US dollars


LONDON – August 9, 2017, is the tenth anniversary of the decision by the French bank BNP Paribas to freeze some $2.2 billion worth of money-market funds. Those of us who were active in financial markets at the time remember that event as the beginning of the worst global financial crisis since the Great Depression.
 
Many economists and financial observers argue that we are still living with the consequences of that crisis, and with the forces that incited it. This is partly true. Many developed economies still have in place unconventional monetary policies such as quantitative easing, and both productivity and real (inflation-adjusted) wage growth appear to be mostly stagnant.
 
But it is important to put these developments in perspective. Many people, including the Queen of England in November 2008, still ask: “Why did no one see it coming?” In fact, many financial observers did warn that housing prices in the United States were rising untenably, especially given the lack of domestic personal savings among US consumers.
 
As Chief Economist of Goldman Sachs at the time, I had written three different papers over a number of years showing that the US current-account deficit was unsustainable. Unfortunately, these findings largely fell on deaf ears, and the firm’s foreign-exchange salespeople probably got bored passing on yet more of the same pieces to their clients.
 
At one point in 2007, the US current-account deficit was reported to be 6-7% of GDP (it has since been revised down to around 5% for the full year). This high figure reflected the fact that the US trade balance had been steadily deteriorating since the 1990s. In the absence of any obvious negative consequences, however, complacency had set in, and the US continued to spend more than it saved.
 
Meanwhile, China had spent the 1990s exporting low-value-added products to the rest of the world, not least to US consumers. In 2007, its current-account surplus was around 10% of GDP – the mirror image of the US. Whereas the latter was saving too little, China was saving too much.
 
For some observers, this huge international imbalance was the source of the crisis. In the years leading up to the crash, they argued that the global financial system was simply doing its job, by finding increasingly clever ways to recycle the surpluses. Of course, we now know that it performed that job rather poorly.
 
Much has changed in the intervening decade. In 2017, China will run a current-account surplus of 1.5-2% of GDP, and the US will most likely run a deficit of around 2% – but possibly as high as 3% – of GDP. This is a vast improvement for the world’s two largest economies.
 
Still, other countries have built up ever-larger current-account imbalances over the past decade. Chief among them is Germany, whose external surplus now exceeds 8% of GDP.
 
Germany’s current account suggests that there are deep imbalances that could lead to a new crisis if policymaking is not well coordinated. The last thing that Europe needs is another sudden reversal, as we saw at the height of the Greek debt crisis.
 
The United Kingdom, for its part, will have a current-account deficit above 3% of GDP this year, which is nearly three times what it was ten years ago. But that is not to say that the UK’s trade balance has significantly deteriorated. Rather, it reflects the fact that the UK is a major financial center, and that investment returns have shifted more in the UK than elsewhere.
 
All told, the global economy today is much healthier than it was ten years ago. Many are disappointed that real global GDP growth since the crisis has undershot performance in the previous decade. But since 2009 – the worst year of the recession – the global economy has grown at an average rate of 3.3%, just as it did in the 1980s and 1990s.
 
Of course, this is largely owing to China, the only BRIC country (Brazil, Russia, India, and China) that has met my growth expectations for the decade (although India is not too far behind). The size of China’s economy has more than trebled in nominal terms since 2007, with GDP rising from $3.5 trillion to around $12 trillion. As a result, the aggregate size of the BRIC economies is now around $18 trillion, which is larger than the European Union and almost as big as the US.
 
There will inevitably be another financial bubble, so it is worth asking where it might occur. In my view, it is unlikely to emerge directly from the banking sector, which is now heavily regulated. The bigger concern is that many leading companies across different industries have continued to focus excessively on quarterly profits, because that determines how executives are remunerated.
 
Policymakers should take a hard look at the role of share buybacks in this process. To her credit, in the Conservative Party’s 2017 election manifesto, British Prime Minister Theresa May announced that her government would do this. One hopes that May’s government follows through. Doing so could strike a symbolic blow against the underlying malaise of post-crisis economic life. The West needs real investments and higher productivity and wage growth – not more economically unjustifiable profits.
 
 

          Trust in the collective wisdom of citizens - the Greek experience        
Greece has been the poster child for European economic crisis, but former Prime Minister George Papandreou wonders if it's just a preview of what's to come. “Our democracies," he says, "are trapped by systems that are too big to fail, or more accurately, too big to control” -- while "politicians like me have lost the trust of their peoples." How to solve it? Have citizens re-engage more directly in a new democratic bargain.
George Papandreou draws on lessons learned from the Greek debt crisis as he helps guide the EU through difficult waters




 http://www.ted.com/talks/george_papandreou_imagine_a_european_democracy_without_borders.html




          Financial Advisor Dennis Tubbergen Talks About Greek Debt        

Tubbergen's radio shows are also available as podcasts on his website.

Grand Rapids, MI -- (SBWIRE) -- 10/21/2013 -- Have trouble keeping up with what is going on with the U.S. economy and stock markets?

Dennis Tubbergen, a financial advisor, author, radio show host and CEO of PLP Advisors, LLC can help out. With his blog at http://www.dennistubbergen.com, Tubbergen is dedicated to sharing his viewpoints and opinions. On October 9, 2013 his blog was titled Soros: Greek Debt Can't be Paid.

Tubbergen began the blog by saying, "Hedge fund icon George Soros recently stated that the Greek debt can't possibly be paid and unless some of the debt is forgiven, Greece may see political extremism."

Below Tubbergen quotes from an article in the German publication Deutsche Welle that ran July 10, 2013.

U.S. large-scale investor George Soros (pictured) told Germany's "Spiegel online" business editors that another international debt haircut for crisis-stricken Greece was inevitable.

"Everyone knows the country will never be able to pay back its debt," Soros insisted. He said his talks with business partners had convinced him that private investors would be willing to return to Greece once the repayment of public debt was off the table. This, he argued, would allow the country to recover fast.

But it's been the outgoing German government in particular which has refused to even talk about another write-down on Greek debt. Berlin has only signaled it would be willing to agree to lower interest rates and perhaps grant a longer period for debt repayment.

George Soros admitted it would be a hard battle to get the public creditors to forego what they were supposed to get from Athens, as it would breach many political taboos again and would be tough to communicate to taxpayers.

But he said Germany should recall its own history after World War II, when it profited several times from debt cancellations .

To read what Tubbergen has to say about this and a unique surgery center in Oklahoma City that charges 20% of other similar facilities, go to http://www.dennistubbergen.com and select his October 9, 2013 entry.

Tubbergen's syndicated radio show can be heard on metro Michigan stations WTKG 1230 AM and WOOD Newsradio1300 AM and 106.9 FM.

About Dennis Tubbergen
Dennis Tubbergen has been in the financial industry for over 25 years and has his corporate offices in Grand Rapids, Michigan. Tubbergen is CEO of PLP Advisors, LLC and has an online blog that can be read at http://www.dennistubbergen.com. To view Tubbergen's latest Moving Markets? newsletter, go to http://www.moving-markets.com.

The opinions expressed herein are those of the writer and not necessarily those of USA Wealth Management, LLC. This update may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Therefore, no forecast should be construed as a guarantee. Prior to making any investment decision, individuals should consult a professional to determine the risks, costs, benefits and fees associated with a particular investment. Information obtained from third party resources is believed to be reliable but the accuracy cannot be guaranteed.

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          The Age of Migration - debt, migration and flawed architecture         
With Eurozone Finance Ministers discussing suggestions ranging from a temporary Greek exit from the Euro, to a request for the Greeks to come up with 'more' (more austerity, more evidence that proposed measures actually will be carried out?), there's a long day of negotiations ahead in Brussels. But that Greek debt crisis has now opened up a debate on the notion of debt restructuring within the single currency area.

There is growing pressure for Greece's creditors to allow more formal restructuring of Greek debt, which would inevitably lead to acceptance that debt restructuring, re-profiling or relief may need to be seen across the Euro Area at times. Many people who have been looking at the mountains of debt accumulated by Eurozone governments in recent years have long believed repayment of that debt is unlikely, so what's the big deal? Even a casual glance at the history of sovereign debt shows that defaults happen more often than many people realise, often occur in clusters, and the risk of them is underpriced. Furthermore, default is, by and large, forgiven faster for sovereigns than for others, understandably.  A defaulting individual or company can be cast away, never to be seen again. Literally, in the case of debtors the English sent to the other side of the world in the 19th century. But a country won't go away. Russia defaulted and then sat there on the same bit of land as before until we all decided to do business with it again.

History, furthermore, tells us that punishing a country's people too harshly and demanding they repay the debts accumulated by their parents, leaders or even themselves, is counter-productive. At worst, it builds enmity. At best, it means an economically weakened trading partner.

So if we accept that default is occasionally necessary, why be bothered about doing it in Europe? The answer, I think, is that the idea that sovereign default is impossible in the Euro Area is a big part of the architecture of the system, put there to cope with one of its very biggest structural flaws - the fact that while national central banks do not have the ability to run independent monetary policies, national governments have a lot of autonomy over fiscal policy. This is a huge flaw, 'managed' with the rules on deficits and debt. Weaken those and the flaw is exposed, and will either bring the system crashing down or be resolved itself through adoption of a new fiscal structure.

Here's a description of the conditions for a strong monetary union, which I took from the late Victor Argy:  "A strong monetary union is assumed to have a common currency and a common central bank. Capital markets are unified and independent monetary policy becomes impossible. Some independent fiscal policy continues to be feasible. And he goes on to list the conditions which make the costs of joining a union smaller, or the benefits larger. They are 1) that differences in growth rates and labour productivity are not large; 2) that intra-union trade is large; 3) that there is no long-run trade-off between inflation and unemployment; 4) the differences in propensities to inflate are relatively small; 5) differences in degree of domestic instability are relatively small; and 6) there is a significant degree of labour mobility." Grapes of Wrath. A better read on currency unions than anything I've written can be found here, in a discussion by Milton Friedman of the Euro in 1997. Some of the weakness he outlines have been tackled since then, but not all. 

'Some independent fiscal policy continues to be feasible'.  That is absolutely not what European fiscal policy looks like. Consider this. US State and Local debt totals 1/6th of Federal debt and less than 20% GDP.  So when California over-borrows, despite being the biggest state, it still doesn't cause a huge national crisis. Imagine California having a debt level of 120% GDP, and then asking smaller states to forgive a share of that debt based on their own share of US GDP. It doesn't happen because the US allows 'some independent fiscal policy'.

This problem of local control over debt and Federal control over monetary policy is a really, really issue. When I write that sovereign debt default is relatively common, I should differentiate between default on domestic debt, and default on foreign debt. There's a brief discussion of the top in this week's Economist here, Buttonwood. Domestic debt default is often counter-productive because of the damage it does to the domestic banking system, so default usually happens via the means of inflation.  Historically this was done through the effortless means of debasing the currency, more recently it's been done with the help of a monetary policies than boost inflate and weaken the currency. And most recently of all, global disinflationary forces have made it hard to do at all. Defaulting on foreign currency debt is more straightforward, and therefore more common. But in Europe, the domestic routes to de facto default through devaluation and inflation, simply don't exist. All debt is foreign because no single country controls the Euro printing press. And worse still, since more and more of any single country's debt is now held by that country's banks, this is now de facto foreign debt but defaulting will still cause havoc in the domestic banking system.

I still don't know how this weekend will play out, let alone how long the Greek debt can can be kicked down the road before we're back talking about debt. But I do know that Greece isn't the only European country whose debt won't ever actually be repaid in full and I know that changing the rules to accept that reality will either bring about the collapse of the Euro system or lead to a change in the way that European fiscal policy is operated.

Finally, a quick word about Puerto Rico. A very different debt crisis but one which really is a sign of the times. Puerto Rico's $72bn of debt is close to 3/4 of GDP and either huge compared to any US State (which Puerto Rico isn't) or manageable if it were an independent country with (which it isn't either).

What really makes Puerto Rico's debt unsustainable, and is both a cause and result of GDP shrinking in 7 of the last 8 years,  is the fact that its population is falling. Faced with a weak economy and poor prospects, people, especially young workers, are leaving the country. Check out this link  from the Pew research centre if you want some scary charts of where this is heading. When I first wrote about the Grapes of Wrath, I thought that labour mobility in the US in the 1930s (which resulted in huge numbers of displaced Oklahoma farmers heading down Route 66 in search of jobs in California) was both a sign of a monetary union working properly and yet, evidence that even in the US there was huge social strife caused by migration. I wasn't really wondering what would have happened to Oklahoma's ability to repay debts if it had been an independent country. Nor was I thinking forwards to a world where would have the degree of mobility in people, job and technology that we have now. In a technologically joined-up world, skills will spread globally and people will move to where those jobs are, as well as moving away from places with political or economic problems. This may 'the Age of Migration'. The politics of migration/immigration are increasingly important and for the countries they leave, while the economics of debt with shrinking populations will be equally important.





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PROGRAM NOTES 10feb17

This weeks show features stories from RADIO DEUTSCHE-WELLE, SPUTNIK RADIO, RADIO HAVANA CUBA, and NHK WORLD RADIO JAPAN.

From GERMANY   President Trump wants to repeal the Dodd-Frank Wall Street Reform bill, which is very distressing to the European community. There are numerous parallels between Donald Trump and French far-right presidential candidate Marine Le Pen- she is echoing Trump's strategy of promising to bring back jobs and the steel industry.

From RUSSIA   George Galloway interviewed well-known British radio commentator James Whale. They discussed Donald Trump, not about his policies, but about his personality and phenomenon. They talk about the end of the professional politician, the similarities to the Brexit vote, and the danger of the rise of a dictator. They say that the Constitution and political systems are broken, and that the right-wing is rising out of that ruin. They agree that populism and nationalism are serious threats to democracy.

From CUBA   Following the settlement with FARC rebels, the government of Colombia and the ELN rebel army are moving forward on peace talks. Germany is going to deport newly arrived refugees to Greece. More than 180,000 migrants arrived by boat to Italy in 2016, an 18% increase from 2015. Then a Viewpoint on former Brazilian President Lula da Silva, who is under pressure to abandon his plan to run again for president next year. The Iranian President Rouhani has called on members of the non-aligned movement for action against unilateralism and extremism in the world.

From JAPAN  The Japanese Transport Minister responded to Donald Trump's remarks that Japanese trade policies are unfair. Defense authorities are proceeding with offshore work on a US military base in Okinawa despite protests including a flotilla of canoes. A new survey of damage and radioactivity in the Fukushima reactors has been suspended because of failure with robotic cameras. Japanese nuclear regulators reported that 10 of the non-operational nuclear power plants have not completed work to prevent massive inflows of rainwater.

"Critical thinking is compatible with patriotism. Amnesia is not a requirement for patriotism. We must not confuse dissent with disloyalty. When the loyal opposition dies, I think, the soul of America dies with it."
--Edward R Murrow

PROGRAM NOTES 03feb17

This weeks show features stories from SPUTNIK RADIO, RADIO HAVANA CUBA, and NHK WORLD RADIO JAPAN.

From RUSSIA  On Sophie Shevardnadze's show, Sophie and Co, her guest was Ralph Nader, American activist and 6 time candidate for US president. Sophie asks him why there were such large protests even before Trump had done anything in office. Ralph thinks that Trump will do most of the things he promised during his campaign, but does not think that the protests will evolve into an all out rebellion. They discuss Trump's war with the media, and Ralph's earlier prediction that there will be a fast move to impeachment. He criticizes the 2-party system and the Electoral College.

From CUBA  Mexico has demanded that Israeli President Netanyahu apologize for praising Trump's wall plans. Lawmakers in Minnesota are pushing an anti-protest bill allowing cities to sue protestors for policing demonstrations. Then a Viewpoint on the daily protests in Argentina against President Macri and his neo-liberal policies- the country has experienced 50% inflation and widespread firings in the public sector.

From JAPAN  President Trump lashed out at Japan and China, saying that they devalue their currencies- the Japanese Prime Minister Abe rejected the criticism saying that the policy is aimed at achieving a 2% inflation target. The operators of the devastated Fukushima nuclear power plant believes it may have located molten fuel inside one of the reactors, six years after the accident. Honda and General Motors will jointly produce fuel cell systems for the next generation of eco-friendly vehicles. The Israeli government approved plans for another 3000 homes for Jewish settlers in the occupied West Bank. 1.7 million British citizens signed a petition opposing a state visit by President Trump, which Parliament will debate on February 20. UN Secretary-General Guterres has called on the international community to unite in supporting refugees. World leaders have reacted to the entry restrictions on refugees and others imposed by President Trump.

"The only difference between the Republican and Democratic parties is the velocities with which their knees hit the floor when corporations knock on their door. That's the only difference."
--Ralph Nader

PROGRAM NOTES 27jan17

This weeks show features stories from NHK WORLD RADIO JAPAN, RADIO DEUTSCHE-WELLE, RADIO HAVANA CUBA, and SPANISH NATIONAL RADIO.

From JAPAN  An Insight on the inauguration speech of Donald Trump, with emphasis on his terminology and why the speech led to protests around the world. The new UN Secretary-General Guterres called on governments and corporations to invest in sustainable forms of development. The Israeli government has approved a plan to build 2500 settlement homes in the occupied West Bank, and 560 housing units in east Jerusalem despite international condemnation of building in occupied territories.

From GERMANY  Donald Trump's chief of staff contradicted the media on the size of the crowd at the inauguration leading one of his counselors to defend the different reports as "alternative facts." Trump's first day in office was met by a wave of protests in the US and around the world. Trump signed an executive order to build the so-called wall along the Mexican border saying that US taxpayers will be reimbursed by Mexico- comments on the reaction in Mexico by the director of the Americas program of the Center for International Policy in Mexico City.

From CUBA  In Mexico widespread protests continue against the government decision to raise fuel prices by more than 20%. In Colombia FARC has announced that their new political party will be running in May. Trump has reinstated the global gag rule that bans US funding for any international health care organization that performs abortions or even provides information about abortions.

From SPAIN  Alison Hughes produced a program on whistleblowers in the US. Before leaving office Obama commuted the sentence of Chelsea Manning who had turned over a huge amount of secret military and diplomatic documents to Wikileaks. Edward Snowden was not on Obama's list of pardons despite the White House receiving over a million petitions for his pardon, including one from Daniel Ellsberg. Comparisons to the outcome of the Pentagon Papers are numerous, here are some statements Ellsberg has made about Manning and Snowden.

"We were young, we were foolish, we were arrogant, but we were right." --Daniel Ellsberg

PROGRAM NOTES 20jan17

This weeks show features stories from SPANISH NATIONAL RADIO, SPUTNIK RADIO, RADIO HAVANA CUBA, and NHK WORLD RADIO JAPAN.

From SPAIN  Alison Hughes compiled Spanish press reviews and editorials on President-elect Trump's first press conference. 4000 US soldiers , tanks, and other military equipment have deployed to Poland, the largest military expansion along Russian borders since the end of the Cold War- the US defense budget for eastern Europe has quadrupled this year under the Obama administration. President-elect Trump said he would propose to end sanctions against Russia in return for a nuclear arms reduction deal with Moscow.

From RUSSIA  A series of press reviews. First, British politician Jeremy Corbyn is accused of being a Russian collaborator for questioning the NATO buildup on the Russian border. There was a rumor in the Sunday Times that Putin and Trump will meet in Iceland shortly after the inauguration which was denied. British selected PM Theresa May announced a schedule for implementing Brexit, but it is dependent on Northern Ireland having an assembly in place- and a leader of the Real IRA was executed on the street in Cork last month.

From CUBA  This month the US government fined a US non-profit organization, the Alliance For Responsible Policy, for arranged trips to Cuba for US citizens in 2010 and 2011. A Viewpoint on Obama's pardon of Puerto Rican independence activist Oscar Lopez Rivera- an interesting history. Numerous Americans have been calling on Obama to pardon Native American leader Leonard Peltier. Obama did commute the sentence of Chelsea Manning, the longest imprisoned whistleblower in American history.

From JAPAN  Russian President Putin said he has no reason to criticize or defend Donald Trump because he has never even met him and has no idea what policies he will implement. Japanese companies are having to rethink their business strategies with Europe in light of Brexit. Japanese electronics firm Toshiba is in a financial crisis because of huge losses in its nuclear power business in the US. International delegates studying the Israel/ Palestine conflict say a solution recognizing two states is the only way to achieve peace. French President Hollande says his country will continue military activity in the African continent, leaving 4000 troops in Mali.

"Think of the things killing us as a nation: narcotic drugs, brainless competition, dishonesty, greed, recreational sex, the pornography of violence, gambling, alcohol, and- the worst pornography of all- lives devoted to buying things, accumulation as a philosophy. All of these are addictions of dependent personalities. That is what our brand of schooling must inevitably produce. A large fraction of our total economy has grown up around providing service and counseling to inadequate people, and inadequate people are the main product of government compulsion schools." --John Taylor Gatto

PROGRAM NOTES 13jan17

This weeks show features stories from NHK WORLD RADIO JAPAN, SPUTNIK RADIO, RADIO HAVANA CUBA, and SPANISH NATIONAL RADIO.

From JAPAN  Japanese executives are worried about their businesses in Mexico if President-elect Trump conducts a review of NAFTA. Two aging nuclear reactors in New York are to be shut down by 2021. Taiwan passed a law to shut down all nuclear power generation by 2025 in favor of renewable sources. A US Navy destroyer fired warning shots at Iranian military boats in the entrance to the Persian Gulf.

From RUSSIA  George Galloway interviewed Ken Livingstone, former mayor of London. They discussed the political climate in the US and UK, why election polls are increasingly inaccurate, and the return of Tony Blair to the political scene. They describe Jeremy Corbyn, the presumed Labor candidate for Prime Minister, as the UK's Bernie Sanders. They also speculate on the future of enacting Brexit and the timing of a new PM election.

From CUBA  In Mexico thousands of people continue to take to the streets to protest the government's decision to raise fuel prices by 20%. Then a Viewpoint on the opposition party in the Venezuelan Parliament which is working to remove the elected President Maduro, which many are describing as an attempted coup. Syrian President Assad says his armed forces will fight until all of Syria is free from extremists groups, and that he would step down if a public referendum directed him to. The Pentagon has admitted that Special Forces made a raid in eastern Syria last weekend.

From SPAIN  Alison Hughes reports on plans for peace talks on the war on Syria between Syria, Russia, Iran, and Turkey. She aired President Assad's remarks on the bombing of Aleppo. Iran met with major powers to discuss the 2015 nuclear deal which Trump said he will dismantle. Israeli forces demolished homes and the only school in a village in the occupied West Bank. Alison then aired the New Years statement by the new UN Secretary-General Antonio Guterres on his hopes for peace.

"Here is a conclusion I've come to after many years: among all the errors we may have committed, the greatest of them all was that we believed that someone really knew something about socialism, or that someone actually knew how to build socialism."
--Fidel Castro

PROGRAM NOTES 06jan17

This weeks show features stories from SPANISH NATIONAL RADIO, RADIO HAVANA CUBA, NHK WORLD RADIO JAPAN, and SPUTNIK RADIO.

From SPAIN  Islamic State or Daesh claimed responsibility for the mass shooting on New Years in Istanbul- Turkey's President Erdogan lists many terrorists and says that Western goverments support them, which the US denies. There are protests in Mexico over steep increase in gasoline prices. Then a press review including the controversial Israeli settlement expansions on Palestinian territory which were condemned recently at the UN.

From CUBA  Cuban radio spent the beginning of this week reviewing the top international stories of 2016, here are three of them- the Parliamentary coup against Brazilian President Dilma Rousseff, outside support for attempts to overthrow President Maduro of Venezuela, and reports that 2016 was the hottest year on record while President-elect Trump intends to cut funding for climate change programs. Antonio Guterres, the new Secretary General of the UN, warned that the global body faces very challenging times.

From JAPAN  A US consulting firm says the biggest risk facing the world this year is the US led by Donald Trump. A Japanese academic has questioned the wisdom of attempting to decontaminating the Fukushima region, where $25 billion have already been spent, given that the majority of former residents do not want to return to the area. Car makers are ramping up development of all-electric vehicles.

From RUSSIA  George Galloway interviewed Kim Sharif a British lawyer of Yemeni origin. The British government just admitted selling banned cluster bombs to Saudi Arabia which are being deployed in their war on Yemen. They discuss the history and current situation in Yemen which Kim describes as genocide on the part of the Saudis. She also points out how Yemen has become a dumping and breeding ground for ISIL or Daesh fighters, with the support of Britain and other western powers.

"We are not what we know but what we are willing to learn." --Mary Catherine Bateson

PROGRAM NOTES 30dec16

This weeks show features stories from NHK WORLD RADIO JAPAN, RADIO HAVANA CUBA, and SPANISH NATIONAL RADIO.

From JAPAN   Japanese Prime Minister Abe visited Pearl harbor with US President Obama on the 75th anniversary year of the infamous attack- here is an Insight discussing the reconciliation between the nations, which included Obama's visit to Hiroshima in May- there is much speculation as to how the relationship will change under President Trump. China joined in the conversation saying that Japan should reflect deeper on its past history of invasion of many places in Asia including China. Despite strong local opposition, work has restarted to relocate a US military base in Okinawa. Japanese electronic firm Toshiba has posted a huge loss from its nuclear power operations in the US under its subsidiary company Westinghouse, partly from losses incurred at the nuclear reactors being built in Georgia and South Carolina. A private fund in Japan is providing financial assistance to young people diagnosed with thyroid cancer after the 2011 Fukushima nuclear disaster. Japanese government consultants are suggesting that high-level nuclear waste should be stored 5000 meters below the earth surface rather than the 300 meter burial as currently planned.

From CUBA  This week RHC aired specials on their top stories of 2016. First a report on President Obama's historic visit to Cuba in March, the first US president to set foot in Cuba since 1928. In October at the UN members passed a resolution urging the US to end the crippling economic blockade against Cuba, though the sanctions remain in force today. At the age of 90, the revolutionary leader Fidel Castro died in November.

From SPAIN  Alison Hughes reports that much discussion over immigrants is taking place in Europe following a Tunisian man who drove a truck into Christmas shoppers in Germany. Alison then reads from articles written by Patrick Cockburn and Robert Fisk on how the wars in Syria and Iraq continue to fuel these attacks, like the ones in Belgium and Paris. Fisk says that ISIL uses the attacks as a strategy to provoke attacks on muslims and encourage the far-right sentiments in Europe. Then reports on the wars in Syria, including the discovery of mass graves in rebel held areas of Aleppo, the rebels claim that they have not been defeated, and the transition of so-called moderate rebels into the ranks of Daesh.

"You are about to be told one more time that you are America's most valuable natural resource. Have you seen what they do to valuable natural resources?! Have you seen a strip mine? Have you seen a clear cut in the forest? Have you seen a polluted river? Don't ever let them call you a valuable natural resource! They're going to strip mine your soul. They're going to clear cut your best thoughts for the sake of profit unless you learn to resist, because the profit system follows the path of least resistance and following the path of least resistance is what makes the river crooked!" --Utah Phillips, to youth

PROGRAM NOTES 23dec16

This weeks show features stories from RADIO HAVANA CUBA, SPUTNIK RADIO, NHK WORLD RADIO JAPAN, and SPANISH NATIONAL RADIO.

From CUBA  At the WTO Cuba argued that the US economic blockade remains practically unchanged and is the main obstacle to the economic development of the country. Ousted Brazilian President Dilma Rousseff called acting President Temer illegitimate and that the takeover was a coup. The EU and the Arab League have denounced Israel's illegal settlement activities, demanding the land grab in Palestine cease.

From RUSSIA  Afshin Rattansi interviewed members of black American musical band called The Last Poets. They talk about whether Obama changed the situation for black Americans, what a Trump presidency might mean, and the idea of pardoning Mumia abu-Jamal.

From JAPAN  The Russian ambassador to Turkey was assassinated by an off-duty Turkish policeman, in response to Russian military actions in Aleppo. Following a deadly truck attack in Berlin, many European nations have stepped up security forces to stop terror attacks. The Foreign Ministers of Russia, Iran, and Turkey have met to strategize an end to the war in Syria- the US was not invited to the talks.

From SPAIN  Alison Hughes reports on the evacuations in Aleppo which were occasionally besieged by sabotage. The UN voted to send monitors to observe the evacuation. The Syrian ambassador to the UN spoke about government support for the evacuees, criticizing the so-called rebels groups and their foreign supporters, and media distortions. Patrick Cockburn wrote a piece for the British newspaper the Independent, entitled "There Is More Propaganda Than News Coming Out Of Aleppo This Week."

"Users of cliches frequently have more sinister intentions beyond laziness and conventional thinking. Relabelling events often entails subtle changes of meaning. War produces many euphemisms, downplaying or giving verbal respectability to savagery and slaughter."
--Patrick Cockburn

PROGRAM NOTES 16dec16

This weeks show features stories from NHK WORLD RADIO JAPAN, SPANISH NATIONAL RADIO, RADIO HAVANA CUBA, and SPUTNIK RADIO.

From JAPAN  The UN Conference on Nuclear Disarmament opened this week in Nagasaki with participants discussing their efforts to eliminate all nuclear weapons. Antonio Guterres, former Prime Minister of Portugal, was sworn in as the new Secretary-General of the UN, replacing Ban ki-Moon. Japan has postponed a summit with China and South Korea after the South Korean parliament voted to impeach the president. Israel received the first of 50 F-35 stealth fighter jets.

From SPAIN  Alison Hughes covered the evacuation and fighting in rebel held parts of eastern Aleppo. Canadian journalist Eva Bartlett spoke at the UN about the ceasefire attempts, the actual will of the Syrian people, and accused the mainstream media of lying about what is happening in Aleppo. She questions the credibility of the White Helmet organization and the British Syrian Observatory for Human Rights. She says that the agenda of the western media is regime change, despite Syrians overwhelming support for Assad

From CUBA  The EU and Cuba signed a deal to normalize political and economic relations. The Brazilian Senate passed the controversial amendment to freeze public spending to the inflation rate for the next 20 years. The Obama administration released a CIA report on Operation Condor, the 1970s covert efforts to control Latin American governments.

From RUSSIA  George Galloway interviewed Nomi Prins author of "All The Presidents Bankers." She says that the global financial crisis has not ended but merely been covered up. She says that the reason for skyrocketing debt and zero interest rates is to support a flawed and criminal financial system. The banks have gotten bigger and paid $160 billion in fines for criminal actions without anyone facing trial.

"We must reconstitute the natural world as the true terrain of politics. We must draw our standards from our natural world, heedless of ridicule, and reaffirm its denied validity. We must honor with the humility of the wise the bounds of that natural world and the mystery which lies beyond them, admitting that there is something in the order of being which evidently exceeds all our competence." --Vaclav Havel

PROGRAM NOTES 09dec16

This weeks show features stories from SPANISH NATIONAL RADIO, NHK WORLD RADIO JAPAN, SPUTNIK RADIO, and RADIO HAVANA CUBA.

From SPAIN  Alison Hughes reports on two significant elections in Europe this past week. The first was in Italy, where Prime Minister Matteo Renzi saw a referendum that would change the constitution rejected by voters- following that he resigned as he had promised. In Austria Green candidate Alexander Van der Bellen won the presidency, giving some relief to those worried about a complete far-right takeover of European leadership. Eurozone finance ministers are discussing Greek debt and plans to add even more austerity measures, including privatizing ports and historic sites. France has elections coming up in May, President Hollande has announced he will not seek re-election, and several right wing candidates are cuing for the leadership.

From JAPAN  Japanese and US defense chiefs have reaffirmed a desire to stay aligned despite Trump's campaign threats of changing the military relationship between the two countries. Trump reported that Japanese telecom giant SoftBank group will invest $50 billion and create 50,000 jobs in the US over the next 4 years. The foreign ministers of NATO and the EU agreed to boost defense cooperation over concerns over Trump's stance opposing their military buildups.

From RUSSIA  Afshin Rattansi's guest on Going Underground was filmmaker John Pilger whose latest release is "The Coming War On China." They discuss the 400 US military bases surrounding China as a provocative blockade building steadily for the past 6 years. In the process both China and the US have changed their nuclear weapons policies from low-alert to high-alert. Western media has avoided reporting on the largest accumulation of US air and naval forces since the second world war. Pilger describes the threats from US military bases in the Marshall Islands and Okinawa.

From CUBA  Arrests have been made in Venezuela for those accused of hacking and shutting down the banking system last week. The UN Environment program posthumously awarded assassinated Honduran activist Berta Caceres its Champion Of The Earth award. There were large protests in Brazil against plans to shut down corruption investigations. The UN General Assembly again passed a resolution calling on Israel to withdraw from Syria's Golan Heights, seized in 1967.

"We journalists have to be brave enough to defy those who seek our collusion in selling their latest bloody adventure in someone else's country. That means always challenging the official story, however patriotic that story may appear, however seductive and insidious it is. For propaganda relies on us in the media to aim its deceptions not at a far away country but at you at home. In this age of endless imperial war, the lives of countless men, women and children depend on the truth or their blood is on us. Those whose job it is to keep the record straight ought to be the voice of people, not power."
--John Pilger

 

PROGRAM NOTES 02dec16

This weeks show features stories from NHK WORLD RADIO JAPAN, RADIO HAVANA CUBA, SPUTNIK RADIO, and SPANISH NATIONAL RADIO.

From JAPAN  South Korean opposition parties are pushing to impeach President Park Geun-hye despite her offer to resign before her term expires. The Japanese government plans to scrap the controversial fast-breeder nuclear reactor. Swiss voters rejected a referendum to speed up the elimination of nuclear power plants. The US military has announced that their attack on Syrian forces that ended a truce between Russian and so-called rebel forces was an unintentional human error, but will not apologize for the action.

From CUBA  The death of Fidel Castro was a primary topic in most international news sources this week. Numerous world leaders spoke at the tributes to him at ceremonies in Havana, here are summaries of what President Rafael Correa of Ecuador and Greek Prime Minister Alexis Tsipras said. Then a Viewpoint on the key role Fidel played in exposing the crippling effect that foreign debt has had on third-world countries, leading to impoverishment and resource exploitation.

From RUSSIA  Afshin Rattansi interviewed Rob Miller, director of the Cuba Solidarity Campaign. He says that the demonization of Castro was led by the US media and US government propaganda. Billions of dollars of fines have been levied against nations and corporations for trading with Cuba, and this blockade has continued under President Obama. Miller points out that American media accused Castro of torturing Cubans while the US tortures prisoners in Guantanamo Bay prison, which Cuba considers an illegal occupation of land. He says that other Latin American nations are also targets of US media disinformation.

From SPAIN  President-elect Trump called Castro "a brutal dictator." Then Spanish press reviews covering the death of Fidel Castro, the Catalan budget which includes funding for a referendum to separate from Spain, and changes in the educational reform and opposition to the recent citizen security law, popularly known as "the gag law."

"As I have said before, the ever more sophisticated weapons piling up in the arsenals of the wealthiest and the mightiest can kill the illiterate, the ill, the poor and the hungry but they cannot kill ignorance, illnesses, poverty or hunger." --Fidel Castro, 2002

PROGRAM NOTES 25nov16

This weeks show features stories from RADIO HAVANA CUBA, SPANISH NATIONAL RADIO, NHK WORLD RADIO JAPAN, and SPUTNIK RADIO.

From CUBA  The governments of Mexico, Honduras, Guatemala, and El Salvador have joined forces to protect their citizens who may face deportation from the US after Trump is inaugurated. Despite a state of emergency, protests took place in Paris opposing the election of Trump and the fear of rising fascist candidates in upcoming elections in Europe. In Brazil trade unions have called for protests and a general strike in opposition to the neo-liberal agenda of President Temer. The Colombian President Santos has condemned escalating violence against human rights defenders.

From SPAIN  Alison Hughes reports on Parliament repealing controversial Spanish educational reforms that included standardized tests. Spanish arms exports have increased 400% since 2006 with much of it going to Saudi Arabia. In Turkey the government has fired another 15,000 civil servants and media outlets.

From JAPAN  Japanese Prime Minister Abe says the TPP free trade pact will be meaningless without the US involvement. At the devastated nuclear power plant in Fukushima the removal of spent nuclear fuel scheduled for 2018 has been delayed again. A cooling system at the Fukushima nuke failed temporarily following a powerful earthquake offshore. There is a move to impeach President Park Geun-hye in South Korea.

From RUSSIA  On Going Underground, Afshin Rattansi got a press review from Ben Chacko, editor of the UK's Morning Star. The Sunday Time reported that Tony Blair may return to frontline politics, The Guardian accused Venezuelan President Maduro of being a dictator, and Global Research on the calls for a clamp down on so-called "fake news."

"The state can't give you freedom, and the state can't take it away. You're born with it, like your eyes, like your ears. Freedom is something you assume, then you wait for someone to try to take it away. The degree to which you resist is the degree to which you are free." --Utah Phillips

PROGRAM NOTES 18nov16

This weeks show features stories from NHK WORLD RADIO JAPAN, RADIO HAVANA CUBA, SPANISH NATIONAL RADIO, and SPUTNIK RADIO.

From JAPAN  The Japanese Prime Minister Abe sent a special advisor to speak with a Republican senator about Japanese government worries over President-elect Trump's policies. Major emitters of greenhouse gases have called on Trump to honor the Paris agreement on climate change. The hole in the ozone layer over Antarctica remains at the same level as the average for the past decade.

From CUBA  As President Obama tours Europe for the last time, massive protests and riots broke out in Greece. Obama asked Congress for increased war funding for fighting ISIL and Afghanistan, just days after the UN announced it is investigating US airstrikes that killed 32 mostly civilians in Afghanistan. The International Criminal Court announced that the US military and CIA may be guilty of carrying out war crimes in Afghanistan. The US has criticized a new measure by the Israeli regime to legalize illegal settlements built on Palestinian land.

From SPAIN  Alison Hughes reports on the new Colombian peace deal, Julian Assange, Chelsea Manning, and the UN conference on Climate Change being held in Morocco. In Colombia, after the peace accord referendum failed, the opposing sides met and created a new proposal to end the 55 year long war. Julian Assange faced questioning by Swedish prosecutors at the Ecuadorian embassy in London. Chelsea Manning has asked President Obama to commute her remaining sentence to the time she has already served. The UN Climate Change talks in Morocco are focusing on implementing agreements reached in Paris in light of ever increasing global temperatures.

From RUSSIA  On Going Underground, Afshin Rattansi interviewed Dr.Jill Stein, the Green presidential candidate. She disputes blame for the Trump victory, and points out why she thinks Clinton was the wrong candidate for the Democrats. She speaks about the effect Trump's climate change denial might have on the environment, but points out that he did not start bad climate policies, they have been underway for decades. She mentions recent local environmental victories and calls for a unified struggle against assaults on the climate. She says it is important to remember the Richard Nixon administration and how that drove the people to create the Clean Air Act, the Clean Water Act, and womens rights, and led to the end of the Vietnam War despite the spurious leaders in Washington.

"You know, it's a funny thing, every one of the bastards that are out for legalizing marijuana are Jewish. What the Christ is the matter with the Jews, Bob? What is the matter with them? I suppose it is because most of them are psychiatrists."
--Richard Nixon, 1971

PROGRAM NOTES 11nov16

This weeks show features stories from NHK WORLD RADIO JAPAN, RADIO HAVANA CUBA, SPUTNIK RADIO, and SPANISH NATIONAL RADIO.

From JAPAN  At the Climate Change Conference in Morocco, the UN weather agency said that 2015 was the hottest year on record, emphasizing the need to immediately implement the Paris Accords. Before the election Donald Trump made threats about US military support of Japan, now the State Department is trying to dispel fears of major policy changes. People in Japan are worried about the nuclear weapon policy Trump described in his campaign. Japan, like the rest of the international press, reported on the large number of anti-Trump protests taking place in the US.

From CUBA  A review of international responses to the election of Donald Trump.

From RUSSIA  Afshin Rattansi spoke with legendary filmmaker and documentarian John Pilger on the outcome of the US elections. Pilger says the result did not surprise him. He said the liberal class wanted to maintain a corrupt war-mongering status quo, and the majority of voters sought change. He compares the shock surprise to the Brexit vote and talks about who funded each candidate. He says journalism has become an echo chamber for the establishment, and denies that Russia and Assange helped Trump to victory. He talks about the neo-conservative influence on Hillary, and the silence of the media on the expanding US involvement in wars around the world.

From SPAIN  Alison Hughes covered some Spanish press and the Podemos political party responses to the unexpected Trump victory. Then she reports on Daniel Ortega's election victory in Nicaragua.

"Vietnam was as much a laboratory experiment as a war."
--John Pilger

PROGRAM NOTES 04nov16

This weeks show features stories from SPANISH NATIONAL RADIO, RADIO HAVANA CUBA, NHK WORLD RADIO JAPAN, and SPUTNIK RADIO.

From SPAIN  Alison Hughes reports on the protests in Madrid following the congressional vote allowing Mariano Rajoy to continue as Prime Minister of Spain. NATO defense ministers put into effect the biggest military buildup on Russia's borders since the Cold War. An article was published questioning whether Russia's foreign bases really a threat. At the UN demands were made that all fighting stop in Syria.

From CUBA  Two reports on the political turmoil in Venezuela, where right-wing opposition forces who want to impeach President Maduro called off a protest march and trial. Former Uruguayan President Mujica questioned the neo-liberal policies of the new Argentinian President Marci and the global growth of right-wing politicians. The recently installed government in Brazil says that the expansion of government funded social services caused the country's economic problems- and that the 20 year freeze on public spending will fix the situation.

From JAPAN  Japan will sign a deal on nuclear power technology with India, the first such deal with a country that has not signed the Nuclear Non-Proliferation Treaty. The Chinese President met the Taiwan opposition leader in Beijing where they agreed on the "one China" policy- this is in contrast to the current pro-independence President of Taiwan. The Chinese Premier met with Japanese business leaders and discussed restoring bilateral ties. Japan is protesting some new Chinese gas field development in the South China Sea.

From RUSSIA  Sophie Shevarnadze interviewed Dr David Shambaugh director of the China Policy Program at George Washington University. They discussed the legacy of Obama's policies with China and Asia, and the tensions over who has rights in the South China Sea. They also covered the changing relationship between the US and the Philippines, and the Rand Corporation which released a study called "War With China: Plans for a military conflict with China."

"Any dictator would admire the uniformity and obedience of the U.S. media." --Noam Chomsky

PROGRAM NOTES 28oct16

This weeks show features stories from NHK WORLD RADIO JAPAN, SPUTNIK RADIO, RADIO HAVANA CUBA, and SPANISH NATIONAL RADIO.

From JAPAN  50 non-nuclear countries at the UN General Assembly submitted a resolution calling for a treaty to ban all nuclear weapons- the US urged all NATO members to oppose the resolution, which as of press time had not come up for a vote. Philippine President Duterte spent several days in Japan after his visit to China. Japanese Prime Minister Abe made agreements with Duterte on economic and security matters, notably the conflicts in the South China Sea. Duterte wants all US troops out of the Philippines within 2 years, and warned Japan of an impending confrontation between the US and China in the South China Sea. NATO members are discussing a perceived threat of Russian military buildup adjacent to countries where NATO is increasing its military presence. Reporters Without Borders say that media freedom in Okinawa is under threat, with police removing those reporting on protests at US military bases in the prefecture- they also found US military surveillance of Japanese citizens, NGOs, and journalists. Officials have directed the burning of low-level radioactive waste starting in January to see if it is safe.

From RUSSIA  Afshin Rattansi talks about the pesticide risks to bees in Europe, the UK has banned some but not all pesticides thought to contribute to colony collapse- the German company Bayer produces most of these chemicals and is buying up Monsanto which is developing genetically-modified bees.

From CUBA  For the first time the US abstained from voting on a UN resolution calling for the lifting of the economic blockade on Cuba- the blockade has seen a few adjustments but overall remains in complete effect. Venezuelan President Maduro has accused the opposition of attempting a parliamentary coup not unlike what has happened in Brazil. Opposition to the Presidential takeover in Brazil has led to the occupation of 1000 schools in the country.

From SPAIN  The Socialists abstained from voting in Parliament, thereby allowing Mariano Rajoy to continue as Prime Minister and avoiding a third round of elections. Catalonia will hold a binding referendum on independence in 2017, while the federal government annulled the regional ban on bull fighting. In light of calls for a no-fly zone in Syria, Alison recalls the no-fly zone in Libya which led to the death of Gaddafi and, five years later, a failed state. The World Meteorological Organization reported dire levels of gases and carbon in the atmosphere, but pushed alternative energy now as a means of stopping an even more alarming future.

"Propaganda is to a democracy what the bludgeon is to a totalitarian state." --Noam Chomsky

PROGRAM NOTES 21oct16

This weeks show features stories from RADIO DEUTSCHE-WELLE, SPANISH NATIONAL RADIO, RADIO HAVANA CUBA, and SPUTNIK RADIO.

From GERMANY  German President Merkel revealed plans to more than double military spending in the coming year. Russian President Putin denied that Moscow was using cyber attacks to interfere with US presidential elections. Russia and Syria began a ceasefire in eastern Aleppo to help civilians flee the opposition held area. Leaders of Ukraine and Russia agreed to draw up a new roadmap to implement the current ceasefire in eastern Ukraine. The Iraqi government announced the start of an offensive to retake the city of Mosul. The EU has postponed a final decision on a free trade deal with Canada.

From SPAIN  In this week's Panorama Alison Hughes reports on the still undecided leader of the government in Spain, and that Artur Mas, former president of the Catalan, faces a trial for staging a symbolic independence vote in November 2014. She then reports on the siege of Mosul by Iraqi, Kurdish and Turkish soldiers with US advisers- some reports say that thousands of Daesh fighters were allowed to leave Mosul and travel to Syria in the lead up to the battle.

From CUBA  On Monday there were large demonstrations across Cuba to protest the continuation of most of the US economic blockade. In Honduras a former Deputy Minister has been arrested in connection with the murder of environmentalist Berta Caceres. Protests continue in Brazil against the neo-liberal policies being imposed by the post-coup President Temer including a 20 year freeze on public spending. A UN agency has adopted a resolution reaffirming the right of Palestinians to the al-Aqsa mosque in east Jerusalem. The New York Times reported that the Obama administration has intensified a clandestine war in Somalia with hundreds of US special operations forces and drone strikes.

From RUSSIA  On his show Going Underground, Afshin Rattansi interviewed US filmmaker Oliver Stone. Oliver's latest film, Snowden, could not find a distributor in the UK. He discusses press freedom in the UK, Pentagon and CIA influence in American media, US support of terrorists, and the current anti-Russian attitude in American politics and media.

"My father was a Republican and he hated Roosevelt. And that's sort of been the battle of my life, I think. You have to understand I grew up a Republican conservative. I hated Castro. And I put my money where my mouth was because I went to war, but I understood pretty quickly that this was another place, another culture and we would never fit in there." --Oliver Stone

PROGRAM NOTES 14oct16

This weeks show features stories from NHK WORLD RADIO JAPAN, SPANISH NATIONAL RADIO, RADIO HAVANA CUBA, and SPUTNIK RADIO.

From JAPAN  The US and South Korea began another round of military drills along the Korean peninsula. North Korea considered the drills a direct provocation. A Chinese fishing boat sank a South Korean coast guard boat in a dispute over territorial waters. Russia and Turkey made a deal to complete a gas pipeline between the countries for distribution to Europe, and accelerated plans to jointly build a nuclear power plant in southern Turkey- they also agreed to get humanitarian aid to the Syrian city of Aleppo.

From SPAIN  In this week's Panorama, Alison Hughes reported on the two rival resolutions on Syria at the UN Security Council, both were defeated. A leaked UN report revealed that the US and EU sanctions against Syria are causing the greatest suffering among ordinary Syrians and preventing the delivery of humanitarian aid. Saudi airstrikes on a funeral procession in Yemen killed at least 155 people- the US approved another $1.3 billion arms sale to Saudi Arabia, adding to the $22 billion in weapon sales to the Saudis since March 2015. The US blames Houthi rebels for firing missiles at a US ship in waters off the coast- as of press time, the US is firing missiles into Yemen.

From CUBA  In Colombia President Santos and FARC rebels have pledged to continue talks to complete their peace agreement despite losing support in a very close popular referendum. 20 Latin American countries met in Ecuador to work toward a legal international treaty that would hold transnational corporations accountable for human rights abuses. Answering a call from the School of the Americas Watch, hundreds of activists met on both sides of the US/Mexico border to protest a US military station and in support of migrant rights.

From RUSSIA  On his show Going Underground, Afshin Rattansi interviewed US activist Medea Benjamin. She spoke about the Israeli seizure in international waters of a boat carrying women activists, including a Nobel peace laureate, that was heading to Gaza. Congress overrode Obama's veto on the right of 911 families to sue Saudi Arabia, which may lead to lawsuits against the US government for human rights violations.

"No act is of itself either good or bad. Only its place in the order of things makes it good or bad." --Milan Kundera

PROGRAM NOTES 07oct16

This weeks show features stories from RADIO DEUTSCHE-WELLE, SPANISH NATIONAL RADIO, SPUTNIK RADIO, and RADIO HAVANA CUBA.

From GERMANY  The UN announced that the Paris Climate Change accord had been ratified and will go into effect on November 4th. On Monday Germany celebrated its 26th anniversary of unity but there were protests against Chancellor Merkel and refugees. Hungarians voted to not accept refugees and in Poland there were protests against a proposed ban on abortions. British appointed PM Theresa May expressed her conditions for Brexit. The Turkish parliament extended the state of emergency, while a German court dropped the case against a comedian who ridiculed President Erdogan. The Syrian government demanded that rebels leave Aleppo followed by the US suspending negotiations with Russia on reviving the gutted ceasefire in Syria.

From SPAIN  One section of what Alison Hughes presented on Panorama this week was Princeton Professor Emeritus Stephen Cohen spoke on the new cold war between Russia and the US. The end of the ceasefire in Syria, which collapsed with the US bombing of Syrian troops, indicates that either the US did not want a ceasefire or that President Obama is not in control of war policy in Washington. If the US and Russia had successfully ended the fighting in Syria, the cold war would be null, and there would be no justification for the NATO buildup on the Russian border.

From RUSSIA  Three clips from Afshin Rattansi's program called Going Underground. It has been revealed that the Pentagon has paid up to $500 million to a public relations firm to create fake news reports and propaganda to entrap potential jihadists. The use of predator drones continues to escalate with increased terror threats to civilians in the countries deploying them. The BBC and American media continue promoting the cold war between the US and Russia.

From CUBA  In Honduras, the case files on the murder of environmentalist Berta Caceres have been stolen further discrediting the investigation. The failed peace referendum in Colombia has left FARC rebels saying they will fight no more, while President Santos has announced that the ceasefire ends October 31. Wikileaks will soon release 1 million documents involving 3 different nations that will influence the US election, but that there is no intention to harm Democratic nominee Hillary Clinton.

"O take heart, my brothers. Even now, with every leader & every resource & every strategy of every nation on Earth arrayed against Her - Even now, O even now, my brothers, Life is in no danger of losing the argument! - For after all, (as will be shown) She has only to change the subject." --Kenneth Patchen, "What Shall We Do Without Us?"

PROGRAM NOTES 30sep16

This weeks show features stories from RADIO DEUTSCHE-WELLE, SPUTNIK RADIO, RADIO HAVANA CUBA, and NHK WORLD RADIO JAPAN.

From GERMANY  Germany and India have committed to comply with the Paris Agreement On Climate Change. Two reports on the Russian/Syrian attacks in Aleppo on rebel forces which the US and UK said were war crimes. The US will send 600 more troops to Iraq, Turkey is extending the state of emergency, and Greece cut pensions in new austerity measures. Two mosques were fire-bombed by German xenophobes in Dresden, and French President Hollande promised to dismantle the refugee camp in Calais by the end of the year.

From RUSSIA  Afshin Rattansi interviewed Dr. Suliman Alshahmy, the founder of the Libyan stock market. The discuss NATO attacks on Libya five years ago, which were said to save civilians caught in a civil war in Benghazi. Suliman describes how the standard of living has been destroyed in the richest country in Africa, and how Gaddafi's plan to unite African currencies may have been a reason for the devastation. Suliman responds to Hillary Clinton's pride in killing Gaddafi, and the EU returning refugees from many countries to Libya.

From CUBA  On Monday the Colombian government and FARC rebels signed a historic peace deal after 4 years of negotiations in Havana. Bolivian President Evo Morales criticized the US Presidential debate as a show, saying that elected Presidents are ruled by bankers and businessmen. The Nicaraguan Vice President blasted a US congressional bill to prevent her country from getting international loans. A spokesperson for the Russian Foreign Ministry rebuked statements by the US Ambassador to the UN, Samantha Power, on Russian and Syrian attacks on rebels in Aleppo.

From JAPAN  Japan continues to call at the UN for the total abolition of nuclear weapons. The US Defense Secretary Ash Carter said the US will sustain nuclear deterrence with a $108 billion over 5 years- President Obama has approved a nuclear weapon modernization plan estimated at $1 trillion while seeking a world free of nuclear weapons. Members of the IAEA have criticized North Korea for its nuclear and missile programs. The US congress voted to override Obama's veto of a bill allowing families of victims of the 911 attacks to sue Saudi Arabia- the Saudis threatened to sell off $750 billion worth of US bonds if the bill becomes law.

"I won't be a party to a conspiracy to mobilize the Arabs against the Persians. Only the forces of colonialism benefit from such a conspiracy. I won't be a party to a conspiracy that splits Islam into two - Shiite Islam and Sunni Islam - mobilizing Sunni Islam against Shiite Islam." --Muammar Gaddafi, 2007

PROGRAM NOTES 23sep16

This weeks show features stories from NHK WORLD RADIO JAPAN, SPUTNIK RADIO, RADIO HAVANA CUBA, and SPANISH NATIONAL RADIO.

From JAPAN  Outgoing UN Secretary-General Ban ki Moon is confident that the Paris agreement on global warming will go into effect soon. The Foreign Ministers of Japan, Germany, Brazil and India are calling for democratic reforms in the UN Security Council. 27% of the Japanese population is now over 65 years of age. Japan is considering permanently decommissioning its current fast-breeder nuclear reactor. China and Russian navies performed a joint landing drill in the disputed South China Sea.

From RUSSIA  Afshin Rattansi interviewed retired Colonel Lawrence Wilkerson, former Chief of Staff for Secretary of State Colin Powell. He discusses the future of warfare with Hillary Clinton as President. He goes on to say that terrorism is not a new threat, and that abandoning rapprochement with Russia is dangerous and provocative. He also criticizes the so-called velvet revolutions as morphed CIA interventions. He praises Edward Snowden and says it is unsafe for him to ever return to the US.

From CUBA  Ecuadorian President Correa warned about the existence of a new Operation Condor being perpetrated against progressive governments in Latin America. When Brazilian President Temer spoke at the UN General Assembly the delegations of 6 Latin American nations walked out in protest. Amnesty International says a US made bomb was used in an attack on Doctors Without Borders hospital in Yemen, while 4 US Senators are pushing to ban weapon sales to Saudi Arabia. Saudi Arabia is accused of using internationally banned white phosphorous in its war on Yemen.

From SPAIN  Alison Hughes reports on migration, including the revelation that 4 war-torn countries have each produced more than one million refugees. While the US media focused all attention on pressure cooker bombs in New York city, the US led coalition bombed Syrian troops thus effectively ending a fragile ceasefire in Syria, saying it was an accident. Russia demanded an emergency UN Security Council meeting which was ridiculed by US ambassador Samantha Power.

"My party (Republican), unfortunately, is the bastion of those people, not all of them, but most of them, who are still basing their decision on race. Let me just be candid: My party is full of racists. And the real reason a considerable portion of my party wants President Obama out of the White House has nothing to do with the content of his character, nothing to do with his competence as commander-in-chief and president, and everything to do with the color of his skin. And that's despicable."
--Colonel (ret) Lawrence Wilkerson 2012

PROGRAM NOTES 16sep16

This weeks show features stories from SPANISH NATIONAL RADIO, RADIO DEUTSCHE-WELLE, RADIO HAVANA CUBA, and NHK WORLD RADIO JAPAN.

From SPAIN  Alison Hughes reported on 911, pointing out that Congress passed a law allowing the families of the victims of the attack to sue Saudi Arabia (though Obama says he will veto the bill). Then the words of Barbara Lee, the only member of Congress who opposed giving the President authorization to use all force necessary against anyone deemed responsible for the attack. The war in Syria is a result of that authorization, called external interference by an international panel studying that war, with regime change and weapons profits as the goals.

From GERMANY  As of Wednesday night the US and Russia agreed that the ceasefire in Syria was holding. The head of the European Commission said insists that Brexit will not sink the EU which is moving forward with plans to create a combined military force. Germany closed its embassy in Turkey to avoid attacks, while China and Russia are engaged in large scale war games in the South China Sea. Philippine President Duderte wants US forces out of the south of his country. North Korea did an underground nuclear bomb test and the US flew nuclear capable bombers near the North Korean border. There is a new NATO mission in the Mediterranean Sea, and 800,000 Catalans took to the streets to demand independence.

From CUBA  Obama extended for a year trade restrictions with Cuba. Venezuela is hosting the 17th Summit of the Non-Aligned Movement, with 120 nations it is the second largest international body on the planet. The former Attorney General of Brazil says he was removed in order to sink the ongoing corruption investigation, while the current legislature is considering privatizing oil and other national resources. The ACLU and activists have launched a campaign to lobby Obama to pardon government whistleblower Edward Snowden before a new president is sworn in.

From JAPAN  The UN Security Council is considering a draft resolution barring nuclear weapon explosion testing, the US is still hanging up the non-proliferation treaty, and North Korea had a rally celebrating their fifth nuclear weapon test explosion.

"The great fear that I have regarding the outcome for America of these disclosures is that nothing will change. People won't be willing to take the risks necessary to stand up and fight to change things. And in the months ahead, the years ahead, it's only going to get worse. The NSA will say that because of the crisis, the dangers that we face in the world, some new and unpredicted threat, we need more authority, we need more power, and there will be nothing the people can do at that point to oppose it. And it will be turnkey tyranny."
--Edward Snowden

PROGRAM NOTES 09sep16

This weeks show features stories from NHK WORLD RADIO JAPAN, RADIO DEUTSCHE-WELLE, SPANISH NATIONAL RADIO, SPUTNIK RADIO, and RADIO HAVANA CUBA.

From JAPAN  After the G20 summit Japanese Prime Minister Abe and Chinese President Xi Jinping spoke together for the first time in a year, saying they would try to improve ties. The New York Times reported that Obama is likely to abandon his proposal to ban first-strike use of nuclear weapons. Obama and South Korean President Park Geun-hye agreed on the importance of deploying the advanced missile system despite Chinese opposition

From GERMANY  The German government has been criticizing the Turkish crackdown on journalists, and this increased with the Turkish seizure of DW footage this week. There was a new wave of Turkish tanks, ground forces and artillery into Syria, and Erdogan wants a no-fly zone in northern Syria. Turkish police continue to arrest more citizens suspected of involvement in the attempted coup in July. According to the UN, nearly 50 million children have been uprooted worldwide, with 28 million driven from their homes because of war.

From SPAIN  Alison Hughes reports on the migration situation in Europe. The instability in Libya has made it a hub for human trafficking mafias. The French town of Calais has seen local protests about the migrant camp, demanding it be torn down. Recent German elections saw the rise of the new far-right anti-immigrant political party, called Alternative For Germany, or AFD, which many see as the beginning of the end for Angela Merkel's rule.

From RUSSIA  George Galloway and Gayatri interviewed Dr. Juan Grigera from University College London on the shifting politics in Latin America. The leftist movement, named the pink tide, which had grown to almost every nation in South America is rapidly vanishing. Why is this happening and what does it portend?

From CUBA  Brazilians opposing the ouster of Dilma Rousseff have been facing military police repression. After the G20 summit in China Obama visited Laos where he offered some restoration funds but no apology for the years of intense bombing. Thousands staged a demonstration in the Hague against the visit by Israeli Prime Minister Netanyahu.

"No great movement designed to change the world can bear to be laughed at or belittled. Mockery is a rust that corrodes all it touches." --Milan Kundera

 

PROGRAM NOTES 02sep16

This weeks show features stories from RADIO DEUTSCHE-WELLE, RADIO HAVANA CUBA, NHK WORLD RADIO JAPAN, SPANISH NATIONAL RADIO, and SPUTNIK RADIO

From GERMANY  The German Vice-Chancellor says that there will be no fair trade agreement between the EU and the US, though possibly one with Canada. Central European nations are urging a European army. Chancellor Merkel says that Germany can cope with the refugee crisis, while the Italian Coast Guard rescued 10,000 migrants from the Mediterranean in just 2 days. The European Commission ordered Ireland to recover 13 Billion Euros in back taxes from Apple computers. Venezuela is accusing the US and political opposition of plotting a coup against President Maduro.

From CUBA  France also announced opposition to the free trade proposal with the US, the TTIP, the TransAtlantic Trade and Investment Partnership. On Monday tens of thousands of Brazilians protested the impeachment hearing for Dilma Rousseff. Before the Brazilian senate voted on impeachment, acting President Temer cancelled a popular and effective literacy program in the country. Then on Wednesday the Senate voted to impeach suspended President Dilma Rousseff, which many describe as a farce and Parliamentary coup.

From JAPAN  Following her impeachment, Dilma Rousseff said she will be back in political office soon. Following a recent court ruling against anti-whaling group Sea Shepherd America, the Australian branch announced a new high speed patrol boat to block Japanese whaling in the Antarctic Sea. There is an international conference on the fate of blue fin tuna which are approaching critically short stocks in the Pacific Ocean- environmental groups want a total ban rather than establishing quotas. An aide to Obama reports that he will be pushing to complete the TPP free trade agreement before he leaves office since Trump and Clinton have both stated that they oppose the pact.

From SPAIN  Alison Hughes reports on the accord reached last week in Colombia, ending a war between government forces and FARC rebels. Some 220,000 people died in fighting during the last 50 years. FARC stopped fighting last summer, wants recognition as a political party, and reintegration into society. There will be a referendum in October, but some oppose any deal, including former President Uribe who is accused of creating right-wing death squads.

From RUSSIA  George Galloway and Gayatri interviewed Dr RS Karim, co-founder of a relief agency in Yemen. They discuss the under-reported Saudi led war on Yemen, which is having its people and infrastructure devastated by an enormous wealth of weapons sold by the US, the UK, and France.

"Why do they say I hate my country? And what does that even mean? Am I supposed to hate my town, am I supposed to hate all English people, or my government? And if I do hate my government, does that mean I hate my country? It's a democratic duty to criticize the government."
--Ken Loach, director "The Wind That Shakes The Barley"

PROGRAM NOTES 26aug16

This weeks show features stories from NHK WORLD RADIO JAPAN, RADIO DEUTSCHE-WELLE, RADIO HAVANA CUBA, and SPANISH NATIONAL RADIO.

From JAPAN  North Korea launched a ballistic missile from a submarine into the Sea of Japan in protest of US/South Korean military exercises. Japanese self-defense forces have begun tr

          The Future of Greece        
An interview with Costas Lapavitsas

Syriza continues to oversee the implementation of austerity. But all is not hopeless in Greece.

In Greece, it’s not quite accurate to talk about the “rise and fall” of the left-wing party Syriza. “Rise and plateau” would be more fitting.
Syriza came to power in January 2015 promising to confront the “troika” — the European Commission, the European Central Bank, and the International Monetary Fund — to secure an exit from the Greek debt crisis and end the austerity under which Greeks were suffering. Thus commenced five months of high-drama negotiations that culminated in a national referendum in which the Greek people said a resounding “no” — â€œOxi” — to the deal offered by the troika.
Yet in the face of this historic response, Syriza prime minister Alexis Tsipras went towards the creditors, signing a third memorandum resigning the country to ever deeper austerity and mounting privatizations.
Tsipras’s unprecedented capitulation was followed by another: his decision to stay in power to implement the terms of the memorandum. To many, Syriza’s rapid climb to state power, its tough talk in negotiations, and its feints towards “Grexit” signaled an acceleration of the class struggle in Greece. Its capitulation proved an abrupt end to that feverish process. Now the party lumbers on, zombie-like, dully implementing anti-worker and anti-left measures of historic magnitude.
Costas Lapavitsas accompanied every step of this dizzying process as an MP for Syriza and a member of the Left Platform, a bloc within the party that called for exit from the European Monetary Union and the preparation of the Greek people for confrontation with international creditors. Had the Left Platform won the strategic and political argument in Syriza, Greece likely would have gone down a very different path.
Today neither Lapavitsas nor the Left Platform continue to be part of Syriza. Yet Lapavitsas has not relinquished the Left Platform’s central assertion: that the subjection of Greece’s working class is not inevitable.
Here, George Souvlis, a PhD candidate in history at the European University Institute in Florence, and Petros Stavrou, a former Syriza adviser and current member of the radical left initiative ARK, speak with Lapavitsas for Jacobin about Syriza’s government, the struggle against austerity across Europe, and the prospects for reviving the Greek left.


GS: By way of introduction. Would you introduce yourself by focusing on the formative academic and political experiences that strongly influenced you?

CL: I come from the generation that began to understand the world after the fall of the dictatorship in Greece. During this period, radicalization was a crucial feature of Greek society. My own family was on the Left, so I was naturally radicalized long before I began my university studies. But the wider context of the 1980s in the UK was crucial for my formation. During this period I realized that the world was far bigger, and the ideological and political issues at stake were far wider, than I had experienced in Greece in the 1970s.  Much of my political maturing, in other words, occurred in Britain. Since then, I have been active in the ranks of the British Left. Another crucial intellectual experience for me was discovering Japanese Marxism nearly three decades ago. It provided me with an even wider aspect of both Marxism and economics as well as a broader way of looking at capitalism.

GS: Could you name some of the intellectuals—such as economists and political theorists—that were crucial for your intellectual formation as a Marxist economist?

CL: The first book I read in political-economy was Sweezy and Baran's Monopoly Capital, when I was pretty young. It’s a great book, one of the most important contributions to Marxism in the twentieth century, and gave me a lasting respect for Sweezy's economics. Needless to say, I have also read the bulk of Marx’s writings carefully, but never treated them as holy texts. For me, Marx was a great thinker and revolutionary, but that is about it. I have also read the usual complement of Marxist classics. I should single out Trotsky in particular, whose writings on the Russian Revolution, the development of the Soviet Union, and the emergence of fascism in the interwar years have influenced me greatly. I have long belonged to the part of the Left that is heavily critical, even rejectionist, of the Soviet Union. Finally, my specific understanding of Marxist economics is a mixture of, first, the Anglo-Saxon Marxist renaissance of the 1970s and 1980s and, second, of the Japanese Marxism of the Uno School. I owe a great debt to many but I would single out Ben Fine and Laurence Harris in the UK and Makoto Itoh and Tomohiko Sekine in Japan.  

GS: Let's discuss Greece. SYRIZA—after the defeat of the new bailout—has created a narrative about the unavoidable nature of this development, suggesting that this was the only way to move forward. Do you share this understanding of events? If not, what was the other way? In terms of economy, what should SYRIZA have done to avoid these developments?

CL: It is interesting to note that the main argument that comes from the current leadership of SYRIZA is that there was nothing else that could have been done. This is also exactly the argument deployed by New Democracy, PASOK, and everyone else who has run Greece for decades. Yet SYRIZA rose to power by promising another way that would deliver real change in Greece and Europe. I supported SYRIZA at the time because another way was indeed possible. If not, what exactly was the point of SYRIZA? To have Alexis Tsipras as Prime Minister instead of Antonis Samaras of New Democracy? To have people in government who call themselves “left” and will hopefully implement the bailout policies more “softly?” I completely reject this view.

The real problem with SYRIZA was not that there was no other way. The real problem was the strategy adopted by its leadership was unsound from the start. It was wrong politics, wrong economics, wrong understanding of the world. In short, they aimed to oppose the lenders and transform Greece, while remaining in the European monetary union. This was never possible, as I argued at the time along with several others in SYRIZA. We gave battle, opposing the leadership and arguing for an alternative path by exiting the EMU and defaulting on the national debt. That was the only realistic alternative for Greece, which could have opened a fresh path of radical social change. Events showed that we were absolutely right and the strategy of the leadership was nonsense. But we were not able to win the political argument, and that was the crucial thing. After the failure of his strategy, Tsipras surrendered to the lenders and adopted their policies. The surrender of SYRIZA is a black mark for the whole of the European left.    

GS: What you are suggesting above is at a macro-economic level. Don’t you think that there were other short-term tactical alternatives? (Such as organizing an earlier referendum, to impose—from the first day they took the power—capital and banking controls.) Because what happened in the end was to impose capital controls at the last minute in a very difficult conjuncture when the Greek state was almost economically paralyzed.

CL: For what? What would have been the point of the earlier tactical application of controls, if SYRIZA was not prepared to go all the way by exiting the EMU and defaulting on the debt?

GS: It’s not my position, but some argue that these moves would have gotten better results in the negotiations between SYRIZA and the Troika compared to what the bailout agreement brought. Do you share this position?

CL: Better negotiation to achieve what? This is just wrong thinking. The problem of SYRIZA was not tactics, although the negotiating methods of Tsipras, Varoufakis, and the others were also clumsy from the beginning. What is the point of aggravating the lenders with a provocative style and verbiage when you lack the steel to go all the way? It is far better to wear a suit and tie but stand ready to declare default when it is necessary. The problem with SYRIZA, however, was not its methods, but its strategy. They did not understand what Europe was about, how implacable the lenders were. Above all, they did not understand that the only way to combat the enormous power of the European Central Bank over the availability of liquidity in the economy was to produce a national currency. There was no other option for a left government. I told Tsipras this in private conversation but he did not want to hear it, for that would have involved a real break with the institutions of the EU. And a break was not what he wanted by training, disposition, and political outlook.  

GS: I think it was crucial for the failure of SYRIZA—and this is my opinion—that the party didn’t tell Greek people the truth during the period of negotiations. The truth of what was going on between the two sides and what interests were at stake. I’m sure you remember that the main discourse produced on behalf of the party during this period was that everything was under control, that there would be a fair agreement that both sides would benefit from, etc. I think this was a wrong tactical step because in that way SYRIZA demobilized the people, delegating the process of negotiations to a group of specialists, the team around Tsipras. In that way, SYRIZA made people believe that sooner or later there would be a solution in favor of their interests. The people were neither accurately informed about was happening in Brussels nor were they ready to protest en masse against the menaces of the Troika.  I believe that the Plan B would have involved preparing the Greek people as much as necessary for a possible brake with EU. What do you think?

CL: Popular support and political preparation of the working class and broader social layers would have been of paramount importance for any radical government that truly wanted to change things in Greece.  SYRIZA had the opportunity to engage in that after the 2012 election, when it became the official opposition, but it didn’t. Instead, the leadership followed the path of promoting Alexis Tsipras as the next prime minister and a figure of the global Left. After coming to power, they never came clean on key questions, even though people wanted answers. The only point on which they were adamant was that they wanted to stay within the European institutions. That is one of the few issues on which they were honest. They were, and remain, committed Europeanists. How, then, could they have prepared the people for a major clash with European lenders? Even at the time of the July 2015 referendum, which could have evidently been a point of rupture, they meticulously avoided preparing the people for battle. Powerful centers in Greece and abroad were systematically trying to scare the Greek people by saying that a ‘No’ would mean exit from the EMU and disaster. SYRIZA and its leadership never put it that way but always said that the referendum was merely another weapon in the negotiations with the lenders. And in the end they surrendered and turned ‘No’ into ‘Yes’. They never wanted a real fight.

GS: Do you think this strategic choice is connected with the strategy that Eurocommunist parties adopted during the 1970s, or was it strictly a decision by the people around Tsipras? For example, Giorgos Stathakis, the current minister of environment and energy and one of Tsipras’s most important economic advisors, was one of the most sincere people in SYRIZA, having said from November 2016, that the only realistic option for the party in power was immediately to sign a memorandum with the Troika. What is your take on this?  Can this choice be explained with reference to ideological, economic, or personal reasons, or is it some intersection of these factors that can effectively decode the adopted strategy?

CL: I do not think that we can directly connect the shambles of SYRIZA with the Eurocommunist tradition. There were many historical currents of the Left that went into SYRIZA. Some came from Eurocommunism, but some of the most prominent ones came from the Stalinist tradition of the Greek Communist Party. A good proportion of SYRIZA’s leading cadre were straight down-the-line Communist Party cadre and not Eurocommunist by any stretch of the imagination. The real problem with SYRIZA was not Eurocommunism but how the party was constituted, and what it became. It began in an uncertain way in the early 1990s, mostly as Synaspismos, effectively an offshoot of the Communist Party that was always top-heavy and not rooted in the working class. It became SYRIZA in the 2000s, a small outfit that saw itself as potentially an important player in Greek politics because it seemed to be offering a new way of doing politics that would be pluralist, democratic, and so on. The major change in SYRIZA occurred under the leadership of Alekos Alavanos, who was probably the most talented politician of his generation on the Left. SYRIZA acquired the features of a new mass party that could attract many different currents of the Left in an environment of constant discussion and exchange of opinion. It was also consciously movementist.

The disastrous mistake that Alavanos made was to appoint Tsipras and his small group as the new leadership of SYRIZA, thinking that he was opening the way for a new, fresh, and radical generation. Tsipras proved enormously ambitious and equally adept at taking over the party. He pushed SYRIZA toward great electoral success in 2011-12. Around 2010, SYRIZA was just a small party among many on the Left and, to be frank, it spouted the greatest nonsense regarding the nature of the unfolding crisis. Tsipras boldly pushed it to take part in the mass protests that then occurred in the Squares of the Greek cities. Above all, Tsipras was prepared to say that he was ready to govern, unlike all the other leaders of the Left. The combination of his willingness to govern and the involvement of SYRIZA in the movement of the Squares propelled the party forward in the elections of 2012. It became the government in waiting.

For a short period of time it seemed that SYRIZA represented a new form of organization that could be the future for the Left not only in Greece, but in Europe. A loose alliance of various currents engaging in constant debate, with a powerful cadre, which could attract electoral support and become the party of government. The reality became clear in 2015. SYRIZA was not a new way of doing politics for the Left, but merely the latest way in which the Greek political establishment could continue to rule. Endless political debate and movementism proved neither a guarantee of internal democracy nor a challenge to capitalism. SYRIZA has shown itself to be completely undemocratic in government, an amorphous political body with an all-powerful leader at the top and no real political debate. It’s an electoral machine that has become imbricated with the Greek state and seeks only to maintain itself in power. There is no future for the Left in the SYRIZA model, that’s for sure. 

GS: A discursive motto that informs the official narrative of the Greek government after the July 2015 agreement is that its governance, despite the many difficulties it’s confronted until now, can defined as a success story due to its fiscal performance increasing the state's primary budget surplus to roughly 4% of GDP in 2016. Do you share this optimism on behalf of the Greek government? Could we define its economic performance as a successful one?

CL: Let me put things in context. The great economic contraction in Greece ended in 2013. Since 2014, the Greek economy has been effectively stagnant: a litle bit up, a little bit down. The worst part of the crisis was already over a year before SYRIZA took power. So it’s ludicrous to say that SYRIZA has delivered some kind of success for Greece, or the Greek people. In factual terms, after SYRIZA took over, the economy returned to mild recession and has continued on an indifferent path throughout 2016 and so far in 2017. Of course, in Greek politics it is possible to create a parallel reality through the constant repetition of falsehoods, and SYRIZA is very good at this. But the truth is obvious in the figures and in the lived experience of people.

In terms of actual economic policies, SYRIZA has proven to be the most obedient government Greece has had since the beginning of the crisis. They have accepted the economic policies of the lenders, signed the third bailout agreement in August 2015, and have been meticulous in applying it. There is no evidence of independence, no exercise of sovereignty. In this respect, the latest agreement they signed in May 2017, completing the second review of the third bailout, once again obediently followed the dictates of the lenders. During its ascent to power, SYRIZA made a huge fuss about negotiating hard, being tough, and standing up to the lenders, unlike the previous, “soft” Greek governments. In practice they have proven the worst negotiators Greece has had during the crisis. The lenders have completely dominated them, imposing austerity, taxes, and pension cuts, without providing any debt relief.

The future looks bleak for Greece. It will probably continue to stagnate: growth will perhaps pick up a little, then it will decline a little, and then again the same. It will become a country with a permanently high unemployment rate and high income inequality; a poor country whose trained youth will leave; an aging country crushed by huge debt; an irrelevant little country on the fringes of Europe. Its ruling class has accepted this eventuality, it is a historic bankruptcy of its rule. SYRIZA is also playing a part in this disaster.

GS:  And what about the debt? SYRIZA has claimed that there will be debt relief soon.

CL: In May 2016 the Eurogroup, which is the body that basically runs the monetary union, decided a framework for the Greek debt, which SYRIZA has accepted. There will be no “haircut,” because there is no mechanism within the monetary union for one state to take the losses from the policies of another. According to the framework, Greek debt will be considered sustainable as long as the total cost of servicing it (interest and principal) does not exceed 15 percent of annual GDP. Greece might be offered some help to achieve this “sustainability” by lengthening the term of some of the existing loans and providing a reduction of interest. This is the best that Greece can hope for from its “partners” in the EU. For that, Greece will have to shape its fiscal policy to achieve a very substantial primary surplus for a long time. That is, low government spending and high taxation, i.e., deep austerity, for decades. By implication, rates of growth will be lowered. This is an awful predicament that makes the Greek debt decidedly unviable in the medium to long term.

In May 2017 the SYRIZA government signed a further agreement based on precisely this framework. They have legislated fresh measures, reducing pensions and imposing taxes to ensure eye-watering austerity of 3.5 percent primary surpluses a year until 2022. They have also agreed to achieve further surpluses of 2 percent a year until 2060! Despite legislating these extraordinarily harsh measures, they have received absolutely no concessions on the debt. It is amazing incompetence. They have capitulated, surrendering every last vestige of national sovereignty and imposing harsh measures on working people, while failing abysmally to secure any terms that would allow the Greek economy to recover, thus reducing unemployment. The SYRIZA government is a disgrace to the Greek people but also to the international Left.    

GS: Do you think that this situation in Greece can be compared to that of Latin American states during the crisis of the 1980s, since a debt crisis was a determining feature in both cases?  

CL: To an extent, yes, because the Greek crisis was in substance a balance-of-payment crisis. Moreover, the crisis has been handled by the IMF, so one can find similar results to Latin America. However, the real analogue for Greece is not Latin America but the German crisis after the First World War, the war-reparations crisis. After losing the war, Germany was forced to make huge reparations, mostly to victorious France, while at the same time it faced restrictions on its economy that reduced its capacity to export, and thus to make the payments required. Throughout the 1920s Germany was put in an impossible position, as John Maynard Keynes realized immediately. The end result was, of course, the rise of Hitler, who denounced the debt and militarized the economy in preparation for the Second World War. Greece is in a similar position today. It has a huge external debt and is obliged to make foreign payments, but it cannot generate the external surpluses since the monetary union effectively does not allow it. The budget surpluses at present are created by squeezing the domestic economy, thus reducing the prospects of growth. It is an impossible situation for Greece, which could only be resolved by forcibly breaking out of the trap.

GS: The ex-minister of finance Yanis Varoufakis has endorsed recently that there was a Plan B. Do you believe this statement? If there was one, why was it not used as an option by Tsipras’s team during the negotiations with the Troika when there was still time and space for maneuvers? In the case that Tsipras would play this card, what impact do you think that it would have in economic and political terms? 

CL: It’s a common thing to create a narrative about the past that allows you to live with yourself. It is also common to keep reinventing the past to suit better the needs of the present. People often do that in politics, though I personally try to avoid it as much as I can. There was never a Plan B in a real sense—that is, a plan to take Greece out of the monetary union and break with the European Union. At most there were some back-of-the envelop exercises on what to do if the pressure of the lenders became too much. They never amounted to a Plan B such as I kept demanding – and proposing – that is, a coherent whole that would be based on popular support. And there could not be for SYRIZA because such a plan would have necessarily involved exiting the EMU. SYRIZA leaders, including Yanis Varoufakis, were committed Europeanists who would not countenance a break with Europe. The SYRIZA members who were not Europeanists and demanded a break, were eventually pushed out by Tsipras.

GS: Recently you and Theodore Mariolis wrote an analytic report, “Eurozone failure, German policies, and a new path for Greece,” published by the RL Institute, in which you describe, the steps that a future government should conduct in order for Grexit to be a feasible project without destructive consequences for the majority of the Greek people. What should a future government do to make a possible Grexit a success story, even in the long term?

CL: The steps of Grexit have long been well understood. There is no mystery. Grexit requires, first, recapturing monetary sovereignty through an act of parliament, thus redefining the legal tender of the nation. An 1:1 conversion rate would be immediately applied on contracts, money flows, and money sums that are under Greek law. At the same time, there would be bank nationalization, capital controls, banking controls, and steps to ensure that there is a regular supply of medicines, food, and energy in the initial period until the economy turns round. The most serious economic problem would be the devaluation of the New Drachma, the extent of which will depend on the state of the current account and the strength of the economy. In the case of Greece, it is not easy to estimate it, but I would guess that a devaluation of 20-30 percent in the new position of equilibrium would be likely. Devaluation would be positive for Greek industry, which needs to recoup competitiveness in the international markets and domestically. Workers would also benefit in the medium-term as employment would be protected, but they would require support in the short-term, particularly through subsidies and tax relief. This is not an easy path by any stretch of the imagination, but it’s perfectly feasible and requires determination and popular participation. There would probably be a period of considerable difficulties, perhaps six to twelve months, but then the economy would turn around.

Exit, however, was never a cure by itself for Greek problems. I have always understood it as part of a different set of economic policies that would change the balance of social forces in favor of labor and against capital, thus putting the country on a different path. Greece needs a progressive exit, in other words. For that, two steps are fundamental. First, the government should lift austerity, abandoning the ridiculous and destructive aim of 3.5 percent for primary surpluses. It should boost public spending for investment and other things, aimed mostly toward services because that is where employment could be rapidly created. Second, the government should adopt an industrial strategy using public resources to rebalance the economy in favor of industry and agriculture rather than services. If these policies were adopted, the benefits for working people would be substantial, the balance of class power would change, the conditions of wage labor would be improved, and there would be scope for income and wealth redistribution. It would be possible to talk of Greece entering a different path of development with a strongly anti-capitalist character that could lead to the socialist reorganization of society.

GS: In a possible Grexit scenario, where would a Greece outside of the EU fit in the global economy—what would it trade, with whom; would it expect a trade war with the EU?

CL: The “trade war” argument is typically employed by people who either wish to continue with the bailout policies or are too scared even to contemplate radical change. Greece would certainly face difficulties if it went down the path of rupture, not least because it would inevitably have to default on its debt. But then, it is widely known and accepted that Greek debt is unsustainable. Default is a serious business, but today it does not lead to war, boycotts, and other colorful outcomes. Countries continue to operate and survive. After all, it is the state that would default, not the individual productive agents. Far more risky than default is the prospect of a break with the European Union, which would not occur simply because of defaulting, but also because Greece would adopt economic policies that would contradict those of the EU. Greece would have to be prepared for that in order to put its economy back in order. There are no shortcuts. It would have to negotiate special terms, exemptions, and so on, and it would have to be prepared for a fight to adopt the policies that it needs. If the workers and the popular strata were determined, the country could be successful.

GS: Now let's move to the EU developments. What do you think is the future of the Eurozone and how do you see the European Commission's scenarios for a multi-speed Europe, which appears to be the plan that Germany currently has for the EU?

CL: The Eurozone crisis as a distinct period in the historical development of the EU is practically over. Germany has imposed its own solution and defeated all opposition. The point bears restating: Germany has prevailed and imposed its will on Europe during the last seven years. It has emerged as the indisputably dominant country. As that has happened, it has also become clear that the new Europe is a highly stratified entity, with a core and several peripheries. The old distinction of core and periphery that Marxists used to talk about has reemerged in Europe in new and virulent ways. The core, more specifically, is the industrial base of Germany which mainly consists of cars, chemicals, and machine tools. There is no other industrial complex in Europe that is remotely comparable to the German, with the possible exception of Northern Italy.

The core has defined several peripheries, two of which stand out. The first is immediately attached to the German industrial core: Poland, the Czech Republic, Hungary, Slovakia, and Slovenia. This periphery acts as a hinterland of German industrial capital, providing labor, resources, and productive capacity, all bolted onto Germany. The second periphery is in the South: Greece, Portugal, and Spain. These are economies with weak industry, low productivity growth, and low competitiveness, which used to have a large public sector that provided employment but can no longer do so. Their role is to provide trained labor personnel to the German core.

This stratification of Europe provides the foundation of enormous German political power. The ascendancy of Germany has not resulted from a plan by the German historical bloc, though after a point it became a conscious policy. The most important lever in ensuring the ascendancy of Germany has been the monetary union, which has provided Germany with the means to dominate Europe commercially and has acted as the base for German industrial capital to export to China, the United States, and so on. Through the monetary union Germany has emerged as a major global power. But like any capitalist process of this type, tensions and internal contradictions have also emerged. These have mostly to do with the core of Europe, and two issues are of paramount importance.

The first has to do with Germany itself. The rise of Germany exporting industrial capital has happened on the back of German workers: continuing austerity in Germany, wage restraint, tightened public spending, a lack of domestic investment, and the compression of domestic demand. This is the foundation for German capitalist domination of Europe and has provided the wherewithal for German capital to gain share in the world market. It is clearly an unstable and untenable situation in the long-term. Two-thirds of German labor survives on precarious terms, with low wages and tough labor conditions.

The second are relations between Germany, France, and Italy. This is a point of major weakness. France is of course a country of the core but it cannot survive with Germany because it does not have the industrial base, the competitiveness, and the ability to shape the monetary union. In effect, its historic bloc lacks a strategic plan on how to confront Germany and is fast becoming subservient to Berlin. Italy is even worse. It has a significant industrial base but its presence in the monetary union is deeply problematic because it cannot compete on reasonable terms and its growth rate is very weak. Italy has been in a state of low level austerity for years. This cannot persist for ever and tensions will break out at some point. To sum up, the rise of Germany has stratified Europe in ways that have never been seen before, creating enormous tensions. This is where I expect to see eruptions and the acceleration of history in the years to come.

GS: Do you think these eruptions will come from above or below?

CL: In recent years we have seen the rise of right-wing populism and authoritarianism, often in fascist form, in several parts of Europe. This is a result of the stratification of Europe and the emergence of German domination. It is also the result of the retreat of democracy as Europe has become more and more unequal. The failure of parliamentary democracy, which is manifest across Europe, and the fact that  the political process has become detached from the concerns of working people, is part-and-parcel of the ascendancy of German capital across Europe. The reaction has inevitably taken the form of demanding more sovereignty, and it has come from below: people sense that they have lost power over where they live, where they work, who makes the laws, who enforces the laws, who is accountable, and how. There are demands for popular and national sovereignty across Europe.

In the past the forces of the Left in Europe would have been formulating these demands to express the needs and aspirations of working people, opposing big business and German ascendancy across Europe. The tragedy is that the Left has not played this role in Europe for years, and as a result, the right has stepped in, often even appropriating the mode of expression of the Left, and giving an authoritarian turn to popular demands. But there is nothing inevitable about this development. It will all depend on how the Left reacts from now on. There is no firm attachment of working people to the far right in Europe. The real issue is whether the Left can get its act together and begin to intervene effectively. The potential exists. What is lacking is a clear understanding of the burning political issues in Europe as much of the Left continues to operate within the framework of the 1990s and 2000s. It is time for the Left to break out of that and once again play its historic role in Europe.



          Gain From Market Correction via Inverse ETFs        
Though the U.S. stock market rode past the nagging Greek debt drama in July, occasional sell offs in China and severely low oil prices this year, it lost steam in recent sessions. A wavering Chinese economy and the consequent
          Asian Shares Rise on Greek Optimism        
Asian stock markets were higher on Wednesday as Greece edged closer to resolving its debt crisis, with the improved sentiment helping push the Australian market to a five-session high. Japan's Nikkei Stock Average rose 1.3%, Australia's S&P/ASX 200 advanced 1.2% to 4561.1, South Korea's Kospi Composite gained 1.1% and New Zealand's NZX-50 was up 0.6%.

Dow Jones Industrial Average futures were up 16 points in screen trade. Wall Street's sharp rise on Tuesday and news Greece's Prime Minister George Papandreou had survived a crucial confidence vote in Parliament supported regional sentiment.

The positive result for Mr. Papandreou raised expectations that the Greek parliament would pass fresh budget cuts by the end of the month, which European Union officials are insisting as a condition of granting further aid to the debt-stricken country.

"The Greece situation in recent days has at least shown signs of progression rather than stagnation," said Tim Waterer, senior currency dealer at CMC Markets in Sydney.

"The march higher in equities...provided some comfort to a market which is desperate to latch onto any hint of good news," he said.

The improved global sentiment supported markets from Australia to Japan.

"Developments regarding the U.S. economy and Europe determine the global risk appetite and the short-term concerns in Europe for now have subsided," said Hisatsune Kobayashi, general manager at SMBC Nikko Securities in Tokyo.

Thirty one of the 33 Topix subindexes were higher, with Sony up 2.1% following recent sharp losses, Toshiba added 1.6%, while Toyota Motor advanced 0.8%.

Elpida Memory jumped 4.0% on news it has developed the world's thinnest mobile DRAM chip package.

In Sydney, the benchmark S&P/ASX 200 rose to a five-day high of 4565.9 in opening trade, with materials leading broad-based gains after their offshore peers outperformed on Tuesday.

BHP Billiton added 1.6% and Rio Tinto rose 1.8%. In the energy sector, Woodside Petroleum rose 1.3% and Paladin jumped 8.3% after Citi upgraded the stock to Buy.

Virgin Australia dropped 5.4% after Qantas shares were put on a trading halt. Brokers suspect the Australian flag carrier will issue a profit-warning—-the carrier is currently experiencing major disruptions due to an ash cloud created by a Chilean volcano.

Foster's Group continued to gain as investors expect SABMiller to raise its offer price after the Australian beer maker on Tuesday rejected an initial A$9.51 billion (US$9.98 billion) offer from the global brewing giant. The stock was up 1.5%.

The Seoul market largely ignored news that South Korea will remain under review for an upgrade by MSCI, as expectations for an upgrade "weren't that high," said Daishin Securities analyst Choi Jai-sic.

Construction and securities firms shone on bargain hunting, with Daewoo Engineering & Construction up 2.9%, while Woori Investment & Securities advanced 3.8%.

Hynix Semiconductor rose 4.1% as creditors-turned-shareholders of the chip company on Tuesday relaunched the sale of their controlling stake.

The creditors are seeking to complete the sale of their combined 15% stake in the world's second-largest computer memory chipmaker by revenue by the end of this year.

Industrial Bank of Korea underperformed its peers, losing 6.3% on news the government plans to sell 45.78 million of IBK Shares.

In foreign exchange markets, the euro was trading slightly lower against the U.S. dollar after briefly rallying on news that Greek Prime Minister Papandreou's government had survived a confidence vote in parliament.

Traders say the investors will remain cautious as they wait for Greece's parliament next week to support the government's proposed €28 billion ($40.35 billion) in spending cuts and new taxes over the next five years--a crucial process to securing fresh aid from the euro-zone.

"Euro sentiment is likely to remain somewhat fragile given the ongoing uncertainties," Credit Agricole said in a note to clients. It added currency markets will now focus on the outcome of the U.S. Federal Reserve rate-setting meeting later in the global day.

"This is unlikely to bode particularly well for the U.S. dollar given that the Fed is set to downgrade its growth forecasts, with the comments on the economy likely to sound a little more downbeat given the loss of momentum recently as reflected in a string of disappointing data releases," it said.

The euro was fetching $1.4388 against the dollar, from $1.4408 late on Tuesday in New York, and ¥115.51 against the yen, from ¥115.59. The dollar was at ¥80.27, from ¥80.21.

September Japanese government bond futures were down 0.06 at 141.09 points amid easing Greek debt concerns, while the 10-year cash JGB yield was flat at 1.125%

Spot gold was at $1545.00 per troy ounce, down $2.20 from its New York settlement on Tuesday. August Nymex crude oil futures were down 47 cents at $93.70 per barrel on Globex.

source wsj

          THE DEFLATION DELUSION        
Years ago a friend of mine in New York told me about his massively overweight neighbour who took to wearing a black t-shirt with “I beat anorexia” printed on it.
 
I think that is how our central bankers look at the wonderful job they are doing. Since the last link to gold was severed in August 1971, the dollar has lost 82 percent of its purchasing power and the global economy is more geared than ever and now in the death throes of a four-decade leveraging bonanza but our central bankers proudly tell us, hey, at least we beat deflation!


Image by scottchan
 
Every day we are told that the world is in the grip of a deathly deflationary spiral. Or that it would be in a deathly deflationary spiral if it weren’t for the valiant efforts of our central bankers. Here is the Wall Street Journal reporting on those efforts:

    “The growth in balance sheets (since 2007) has been startling: The combined assets of the four central banks will top $9 trillion by the end of March, compared with $3.5 trillion five years ago, Deutsche Bank says. The European Central Bank’s €3 trillion ($3.93 trillion) balance sheet is the biggest relative to the economy, at 32% of nominal euro-zone GDP,…”
 
Remember the ECB just gave another freshly printed €1 trillion to European banks at practically no cost for three years.
 
So, how are we doing on the deflation front?
 
Here is the outlook from the ECB at last month’s press conference:
 
    “Euro-zone inflation will stay above 2% this year ‘with upside risks prevailing’ Mr. Draghi (the President of the European Central Bank) said.”
 
Upside risk? No kidding.
 
Is anybody surprised that an orgy of money printing has lead to, what’s the term Draghi used, ‘stubbornly high inflation’?
 
In 2011, inflation in the eurozone rose throughout the Greek debt crisis. Now inflation is above target and ‘stubbornly high’, yet the ECB expanded its balance sheet by a cool 55% (in words: fifty five) over the past 12 months – most of it towards the end of the period, meaning the full inflationary effects are still to be felt in the future. Upside risk indeed.
 

Is inflation caused by inflation?
 
No doubt, the ECB will take credit for avoiding deflation but will take no blame for inflation. This is entirely somebody else’s fault.
 
    “The ECB raised its inflation forecasts in response to a mix of higher oil prices and tax increases. ECB staff expects inflation to average 2.4% this year, well above the ECB’s 2% target, before declining to 1.6% in 2013.”
 
Get it? Deflation can be avoided through money-printing, but money-printing doesn’t cause inflation. Inflation is rising prices, which can be explained by, er, rising prices, such as oil prices. Genius.
 
But the advocates of easy money, and they are numerous, tell us that we are splitting hairs here. Thank God we didn’t get that nasty deflation. Because economies grow when they have inflation and contract when they have deflation. Every child knows that.
 
So with that stubbornly high inflation we get some growth in Europe, right?
 
 Well- no, we do not.
 
    “The ECB said its staff economists shaved their euro-zone gross domestic product forecast for 2012 from 0.3% growth to a slight contraction. Still, Mr. Draghi said he expects the economy to recover “gradually” over the course of the year,…”
 
So an explosion in euro-liquidity has raised prices but the economy is still contracting, if only mildly. No surprises here, I would say. Just what one should expect. The ECB’s policy – and that of any other central bank – is not designed to solve the crisis but to arrest the collapse, to cover up the problems, to sustain balance sheets and asset prices at artificial levels, and to postpone the day of reckoning – preferably to after the retirement date of the present policy elite.
 
Not on my watch.
 
But, of course, by extending the problem they are making it bigger.
 

No deleveraging please!
 
When I presented my book to various groups of investors and hedge fund managers at the end of last year, I was often told that we would be subject to considerable deflationary forces as a result of the deleveraging of the European banks. That deleveraging would, of course, be an important step towards unwinding the excesses from the credit boom but it would be deflationary.
 
Guess what. Deleveraging has been put on ice. With limitless money for free the European banks are not in the mood for scaling back. Here is the Wall Street Journal again:
 
    “The long-awaited restructuring of Europe’s banking industry has creaked into motion, but the pace may remain sluggish thanks in part to the European Central Bank’s recent wave of cheap lending to the Continent’s banks. …
 
    ‘It isn’t as important now,’ said the chairman of a major European bank. His bank has temporarily shelved plans to sell certain portfolios of real-estate assets, figuring that the bank can afford to wait until prices bounce back from their current lows.
 
    The ECB loan program ‘has bought time,’ said Richard Barnes, a credit analyst at Standard & Poor’s.”
 
Pricewaterhouse Coopers estimates that European banks plan to shed €2.5 trillion of non-core assets over the next, wait for this, ten years. That is right. Slowly, slowly catchy monkey.
 
Make a guess how much will be shed this year! – €50 billion.
 
Well, the ECB just pumped a nifty €1,000 billion into the banking sector in three months and the banks ‘delever’ by €50 billion in 12 months? – Dear hedge fund managers, please forgive me if I do not take the deleveraging argument seriously.
 

Where we are going.
 
I am not saying that two-and-a-half percent inflation is a disaster in itself. But it won’t stay at 2 percent, and it certainly won’t go down to 1.6 percent as the eggheads at the ECB with their stupid output-gap models are telling us. All central banks tell us that inflation will go down next year. Always next year. That is what their models tell them.
 
I am not arguing for deflation per se. Deflation in itself has no benefit but deleveraging has. After a credit boom that is what is needed to get the economy back in shape. Economies are not growing because of deflation. That is nonsense. Economies are not growing because of the massive imbalances that have accumulated as a result of years and decades of cheap credit. A cleansing correction  – in balance sheets, state budgets and debt levels – is urgently needed. Present policy doesn’t allow it. So the economy won’t grow.
 
We should accept that deleveraging is ultimately unavoidable. If it comes with a period of deflation – so be it. But we will get neither. The system will be sustained at this stage of arrested collapse for as long as policymakers can get away with it. My outlook is that we will get even bigger central bank balance sheets (forget exit strategies! There is no exit!), we will get no sustained growth but inflation will creep higher.
 
The noisy advocates of easy money and of government stimulus always pretend to care for Europe’s unemployed youth. It is today’s youth that would have most to gain from a cleansing correction now, and it is those who already made their money and who sit on inflated assets and overstretched balance sheets that have most to gain from the central bank’s policy of extend and pretend. That is, until the whole thing goes pop anyway. Which won’t take too long.
 
In the meantime, the debasement of paper money continues.
 

[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice.  Click here for full disclaimer]

 

          BONDVIGILANTES MEET PORTFOLIO REVIEWER        
“Western economies are bust and, well, that’s the good news.” 

So began Jim Leaviss, Head of Retail Fixed Interest at M&G Investments and creator of their famous BondVigilantes blog.  Jim was chatting with David Stevenson at one of Portfolio Review Online's events.  David also runs the Financial Times’ ‘Adventurous Investor’ column. 

After describing how western economies had bankrupt themselves by borrowing from future growth, based on a model of leverage and over-consumption, David and Jim went on to talk about bond market opportunities and the infamous Eurozone problems.  Here are a few of the key takeaways: 

- Governments unlikely to be able to inflate away all their debt (this time)
The high inflation period following the Second World War reduced the debt burden on governments by reducing the value of debt to be repaid.  In 1981 the UK issued its first index-linked gilt (ILG), with both interest payments and repayment of principal  rising with inflation.   With ILG’s making up a quarter of the UK government’s outstanding debt (DMO data), the value of UK PLC’s liabilities (debt) will increase in line with rising inflation – certainly a consideration for the Debt Management Office in deciding whether to issue RPI/CPI linked gilts.
 
- There’s enough cash to solve this crisis
Japan has managed to survive a prolonged deflation and stagnant economy due to the vast amount of savings held by its citizens, both in Japan and abroad.  Countries like Italy also have enough cash to survive the crisis, it’s just that those holding the cash are not willing to lend it to their government – unless yields rise and investors are compensated for the extra risk.  Getting some of that idle cash into productive investments is key to improving the economy.
 
- Be aware of X-Factors not currently in market prices
The efficient markets hypothesis suggests that all publicly known information is reflected in an asset’s current price.  It’s what is not priced that investors should be careful of.  Examples cited were the US Federal Reserve potentially shifting priority from controlling inflation to boosting growth and gilt prices continuing to rise should the Bank Of England continue to purchase assets/ease quantitatively – UK yields reaching Japanese levels not impossible in current macro environment.
 
- Index-linked versus nominal bonds
When is an investor better off owning bonds linked to inflation versus those with no linkage?  Jim suggested owning index-linked bonds when current Retail Price Index (RPI) is higher than breakeven inflation (BEI) and, conversely, preferring nominal bonds when RPI<BEI.  This makes sense but investors would still need an accurate prediction of RPI and BEI before re-allocating any of their portfolio – as cental banks have seen, inflation is a tough beast to control or forecast!
 
- European resolution
Only an undemocratic entity, like the European Central Bank (ECB), is able to produce the monetary firepower required to solve the Eurozone crisis.  They could, for example, set a specific target for government bond yields whilst promising to purchase bonds should any bond market vigilantes  demand higher yields to hold the debt.  The question remains whether the ECB will receive/accept/act upon this mandate before more troubled Eurozone countries go the way of the Greek debt-dodo.

David’s events always bring up some interesting thoughts/ideas and the BondVigilantes financial blog is one of the best out there - you can find out more here:

- Portfolio Review Online Events
- BondVigilantes Blog

[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice.  Click here for full disclaimer]


          TROIKA AIRLINES AT POINT OF NO RETURN?        


Troika Airlines had a busy weekend flying delegates back from the G20 Summit in Cannes.  Investors waited anxiously for signs the Eurozone crisis would ease, hoping policymakers had agreed on a way forward.  Given yesterday's market action, those positive signs did not appear.


Italian government bond yields (above) rose 30bps on Monday, closing the day at a 14 year high above 6.65%.  The market has labelled 7% as the unofficial 'Point of No Return' for governments - tough to argue against when you look at Greek, Portugese and Irish government bond yields after they broke above this level (bond prices fall as yields rise, leaving bondholders with losses).

What happens at the Point of No Return?  Troika Airlines re-directs some of its fleet to the affected country's capital city, carrying fresh cash from its stakeholders (ECB, IMF, EU) which is used to hoover up the country's debt and (hopefully) leave a clean state.

Most countries flew through the early parts of the 'Great Financial Crisis' in relatively healthy shape - investors punished banks and homebuilders but sovereigns went below radar.  Now all that has changed as the growth necessary to service national debt has not materialised, partly hindered by the size of the national debt and partly by policymakers' dithering.

Most recently, the spotlight has turned on Italy which has an outstanding debt greater than Greece, Ireland, Portugal and Spain combined.  If Italy were to go to the way of Greece, Portugal or Ireland even a €1-2trn bailout vehicle (such as EFSF) would not be enough to contain the contagion.  The rise in yields comes despite reports of ECB buying Italian debt yesterday, in addition to €9.5bn of Eurozone debt bought last week.  They do not give a breakdown of which debt was bought, but Reuters reports:

"However, analysts and traders estimate it has bought around 45 billion euros of Greek debt and has concentrated largely on Italian and Spanish debt with the 100 billion euros plus it has spent since restarting its purchases in August."
- Reuters

If the ECB had to mark its bond holdings at current market prices, it would be require a bailout from, em, uh, hmm....! 

As investor focus bypasses the political shenanigans in Greece and switches to antics in Italy instead, I wonder how long it is before we start talking about Portugal again.  Portugese austerity measures are due to kick-in early next year but speaking with some friends in Lisbon, the measures already seem in place.  They talk of 4-5 restaurants closing every week as the Portugese now view eating/drinking out as a luxury.  Instead, supermarkets are full as locals decide to eat, drink and entertain at home in an effort to save costs.  More worryingly, young workers unable to find jobs are heading abroad in search of work - the net result being lower tax receipts from corporates and individuals.  Most worryingly, if the Portugese economy does not pickup soon then Spain could be the next domino to wobble (Spain is the largest foreign owner of Portugese debt, with Germany being Spain's biggest creditor and the French holding the most Italian debt - see this Reuters graphic for details). 

At a time when both sovereigns and banks are seeking billions in fresh capital, the ECB/BOE/Fed bond buying programmes are no panacea to growth - investors, especially pension funds, should be wary of this.  'Panacea' was the mythological Greek goddess of healing, Troika Airlines would dearly love her to be their guardian as their policymakers fly us through this 'turbulence'.
 
[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice.  Click here for full disclaimer]

 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:

Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.

Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.

Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.

I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.

In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.

Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?

Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.

Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …

Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.

Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?

Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.

Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.

One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.

So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.

Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …

Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?

Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …

Dr. Schirrmacher: Wegen der oberen 1 %.

Wagenknecht: … The upper class has to take the losses.

Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.

But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.

So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?

Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?

Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.

The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.

It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.

But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.

Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?

…

Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.

Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.

But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.

Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.

Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.

What they call “class war” is simply society trying to protect itself from the 1 %.

Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?

Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.

If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.

None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.

…

Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …

Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.

When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.

In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.

Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.

The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.

The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.

Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.

That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.

The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.

Dr. Schirrmacher: That is what you say about Europe?

Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.

Dr. Schirrmacher: But what is with the unions? Normally …

Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
….

Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau

Wagenknecht: You are insane … What do you say as a scientist to this question?

Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.

Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.

So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.

The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.

Prof. Hudson: Impoverishment.

Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?

….

Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …

Wagenknecht: Nein, albern hat er …

Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?

Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.

Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?

Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.

So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.

So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.

Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”

It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …

Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.

That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?

Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.

The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.

It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.

Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
…

Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?

Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.

Dr. Schirrmacher: Exactly that is what they did.

Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.

Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.

Prof. Hudson: You can’t provoke them.

Wagenknecht: Provoke you can, but …

Prof. Hudson: You can only replace them with a new generation.

Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.

Prof. Hudson: That is what Dr. Caligari said.

Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.

Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.

Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?

Dr. Schirrmacher: And why does Robert Harris? Did you read the book?

Prof. Hudson: Yeah, wonderful.

Dr. Schirrmacher: "Fear," Robert Harris

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 35 emigrated or announced its intention to emigrate. They would go to countries like Ireland which also was being financialized. So the Baltics still, even last year, were celebrated by the Institute for International Economics, the Peterson Institute, which is a bank lobbyist in the United States, and by the applauder of Russian privatization, Anders Aslund, the Swedish neoliberal lobbyist. Latvia is applauded as a model for which Europe should emulate. So you can expect your wages to be cut by 30%, you can expect people will have to go into a lifetime of debt in order to buy housing. They will have to have to inherit money if they want to get an education.
 

 
Dr. Schirrmacher: That is what you say about Europe?
 

 
Prof. Hudson: I said, if you follow the Latvian model. This is the ideal. The basic principle when I talk to bankers is: You don’t know how far wages can be pushed down until somebody pushes back. And so far, nobody has pushed back.
 

 
Dr. Schirrmacher: But what is with the unions? Normally …
 

 
Prof. Hudson: The communist countries did not have unions because they were supposed to be one big union. So the working conditions in the Baltic States have the worst accident rates, the worst workplace conditions, and their workers report the most abusive treatment by their employers. The workplace conditions in the post-communist economies are much worse than those in the capitalist economies, where there has been a symbiosis between labor and capital, a symbiosis between the private sector and the government.
 
….
 

 
Dr. Schirrmacher: Just, I mean, off the record, but one of the advisers of chancellor Merkel is sometimes amazing, and he keeps telling this. He says: No, don’t write that. He says: It’s illegal, it’s against the treaty. I mean, that’s his last argument. So, I would like to … from scientific point of view. Frau
 

 
Wagenknecht: You are insane … What do you say as a scientist to this question?
 

 
Prof. Hudson: Let’s simply look at the empirical facts. Since 2008 you have had the largest monetary creation in the 20th century’s history. The central banks have fueled this money creation. In America alone they have added $13 trillion dollars to the federal debt by bank bailouts. Yet prices have remained quite stable. Wages actually have fallen for the last 30 years, despite the wave of asset-price inflation fueled by commercial bank credit.
 

 
Central bank economists talk about consumer price or commodity price inflation. But commercial banks fuel asset price inflation, by lending money against real estate, stocks and bonds already in existence. As they make credit terms easier, people need more access to bank credit in order to buy a house. They have to bid against other. So bank credit inflates real estate prices. The upshot is that now you have to take more years of your income to buy a home. In the United States, the average American worker now pays 40% of family income for housing, 15% of income more for other debt service on credit cards and student loans. Another 15% is for wage withholding, and about another 15 % in other taxes, including sales taxes. This means that only about a quarter of American workers’ income is available to be spent on goods and services. Bank lending has absorbed so much of the income of workers that money that is spent to pay the banks is not available to be spent on goods and services.
 

 
So the flip side of asset price inflation is debt deflation. More and more money has to be spent to carry the debt overhead. The problem is not central banks financing domestic government budget deficits. Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.
 

 
The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.
 
Dr. Schirrmacher: Now, to leave that economical …, to go to the interpretation of what will come. So, when I get it right, what you say, and Frau Wagenknecht says it too, there will be a … Wir werden ärmer. Also der durchschnittliche Deutsche wird verarmen oder ärmer.
 

 
Prof. Hudson: Impoverishment.
 

 
Dr. Schirrmacher: Right. And not a revolution, not a moment where the society says no? That’s my question. But at the same time, what we are observing is that it is not only a change of the social standards of human beings in Europe but of the whole idea of democracy as well. This is something that strikes me most, which I would never believed. I must say, ten years ago, I would have said: conspiracy. And many like me would have said that the banks are so powerful and so on. Now, we start thinking whether “conspiracy” is the right word for it. And the same with the democracy, democratic question. I learned at school that the “Soziale Marktwirtschaft”, as we termed it, definitely requires Pluralismus, Demokratie, Partizipation, all that. But, and that is my question, are we, as Colin Crouch writes, postulating a post-democratic system? Is one of the prizes we have to pay for it, that democracy becomes weaker and weaker, and isn’t that a very dangerous development?
 

 
….
 

 
Dr. Schirrmacher: Und da hätte ich eine Frage, die auch ganz aktuell ist, an Michael Hudson, vielleicht more in a theoretical way. Our new president said apparently, it is ridiculous to protest against, how did he say it, the capitalistic system, or something like that. Es ist lächerlich …
 

 
Wagenknecht: Nein, albern hat er …
 

 
Dr. Schirrmacher: Albern, ja, another word, it’s like ridiculous. And there we are, the point of question is, after the end of the communism, there was the idea, there is the triumph of capitalism. And now the people who are very social saying, I am repeating what they said in Germany: Now we can have a chance really, we don’t need the money for Rüstung anymore, and for armies, and against the Soviet Union, and so on. And now, we are in the third phase, and that’s why the (spot) that is so interesting, is the question: There is no alternative. Nobody really likes it, many people suffer. But the idea is, they managed to get the system like die beste aller möglichen Welten, there is no alternative to that all. What do you say to that, and what do you say to this quote?
 

 
Prof. Hudson: It is very interesting that the destruction of communism, or what passed for communism in 1990, made possible the destruction of industrial capitalism. What you have today is not capitalism as it was known when I grew up. It is not the capitalism that was talked about by Adam Smith, Ricardo, John Stuart Mill or even Marx. It is something that is evolved into finance capitalism, that is going through a number of stages. Pension-fund capitalism is exploiting labor, not by hiring it to produce goods and services, but to dock savings and channel them into the hands of financial managers – to bid up stock market prices.
 

 
Dr. Schirrmacher: Is it not the case, that this system did exist in the 20s?
 

 
Prof. Hudson: No, it only existed since 1950s. That is when General Motors started its pension fund. Pension funds soon became the single largest purchasers of stock, pushing up stock prices. The major sellers of stock have been management insiders, and increasingly those exercising their stock options, selling them in effect to the pension funds. So, the function of labor was to provide pension fund savings to spur stock market gains for the managers that have been financializing industrial companies – and in the process, de-industrializing them.
 

 
So, I’d like to plug this into the earlier discussion you just had. When you use the word “post-democratic society”, that is a byproduct of the post-industrial economy, which essentially means a financialized economy. It also was post-modern, if you think of “modern” as what existed in the early 20th century in the Progressive Era. That was the Modern Era. We are now in a post-modern era. The pro-financial strategy is essentially an anti-government strategy. That is because every economy is planned by someone or other. Most economies throughout history have been planned by the government, or whoever controls it, whether it’s been the landed aristocracy or bankers. If the government does not do the planning, this function is forfeited to the banks. And that is where we are today. Just like the case in which, if taxes are cut and the government does not get the revenue, it is available to be pledged to the banks and capitalized on the debt.
 

 
So the planning process passes to the banks, and they claim that they are the brains of society. They say, there is no alternative. But they are not the brain; they are something alien to industrial capitalism. This is what the Saint-Simon and his followers discussed in the 19th century. It was discussed in every country. The financial strategy now is to prevent people from studying what this body of classical economics was. It sought to free society from interest. Today’s banks are playing upon anxiety and fear, like a high-pressure salesman threatening to bring on a collapse if industrial economies try to protect themselves. They say: “You have to make up your decision in a hurry, if you don’t do this, you are going to lose your money, you are going to lose this opportunity.” They try to make it appear that this not only is the only alternative, but that it will make you rich.
 

 
Banks have been saying this for 30 years. This is the first time in history that people have believed they could get rich by borrowing money to buy assets that are increasing in price, or that they may get rich by the hyperinflation of property prices, and by the stock and bond prices that bank credit has inflated. Banks have managed to prevent the government from regulating and preventing this hyperinflation – and they even have called it “wealth creation.”
 

 
It is really debt creation. Debt is a claim on the means of production, and on labor. It is not a process of real growth. So what banks are saying is that there is no alternative but to let debts grow, at compound interest. This means reducing wages, as more and more must be spent on debt service. This eats into corporate cash flow and profits. So more and more are siphoned off to pay creditors. Debt also eats into the government revenue, so that the government does not have enough to pay for social programs and pensions. It only has enough to bail out the banks on exponentially growing debt that can never been paid, mathematically. That is the empirical fact. All you have to do is draw a statistical chart of the growth of debt, and compare it to the growth in wages. And you’ll see …
 

 
Dr. Schirrmacher: How do you explain from a business point of view … I take the example of Dresden. I was in Dresden two weeks ago, and there they explained to me, the people I met from the city and from Volksbank and all these … They explained to me that Dresden, which I didn’t know, sold parts of their Stadtwerke and so on, and bought it back now because they realized that it was a mistake. I hear this from many, many other cities. Now, in my understanding of society, someone apparently made mistake here, the people who sold this, or at least, put the pressure. And normally, you would have to pay a price for making a mistake, and society would say: How could this happen? But the contrary is true, first of all, nobody discusses this, I can’t see it in den Städten.
 

 
That’s the first. And the second is, the made a mistake but became rich, from what I see. They are not sanctioned at all. So, I always ask you for the gesellschaftlichen Folgen. Isn’t this something what really is the most frightening result of this new era that things we once learned when we were kids, are not true anymore? The question of, it’s not that you are sanctioned when you make mistakes but that you can benefit in this regard?
 

 
Prof. Hudson: This is a question that I have discussed in Russia and China with their leaders. Fortunately, there is an alternative that they are well aware of. There is a way to recover the property that has been turned over to the privatizers. The answer is very simple: a windfall gain tax or a rent tax. If the land is been privatized, as it has been in China and Russia, all you have to do is tax the land’s value – the natural value, not the building value, but just the economic rent. You will recapture for the state the free lunch of economic rent.
 

 
The same principle applies to mines and fuel resources. You will simply have a mineral depletion tax that will recapture the value of what nature has provided freely. So the alternative is for the government not to tax profits, not to tax wages, not to tax income, but to tax economic rent. Because what the national income account pretends to be empirical, pretends to be “earnings” of the banks and other rentiers, is actually a transfer function – and often, outright theft.
 

 
It’s remarkable that French novelists realize this, such as Balzac who said that behind every great family fortune is a great theft. Economists don’t rise to the level of 19th century French novelists when it comes to understanding the economy.
 

 
Dr. Schirrmacher: So to get back to your outlook again, talking about Europe, we have another debate that is quite interesting, which I think might be important to see. The one debate is, Greece is a lazy country and …, a new nationalism. The other one which I hear from bankers, by the way, sometimes, is, they say it ganz leise: It’s all America. So, it’s a huge American conspiracy. And they say: Wir wissen auch, dass das System nicht funktioniert, aber das ist ein amerikanischer Druck auf das, was jetzt mit Europa passiert usw. My question is, again, I think of Peter Hacks and Rahmentheorie. Ist das ein – das ist etwas, was ich für das Allerwichtigste halte – ein Prozess, der nicht mit einem big bang …
 
…
 

 
Dr. Schirrmacher: Das wäre Occupy. Will "Occupy" be a revolutionary agent?
 

 
Prof. Hudson: We’re not trying to be a revolutionary agent. We are in a pre-revolutionary situation, so the aim is to raise consciousness – at this point, simply to explain how the world works. And many people want to … They sense that the economy does not work the way that textbooks say. But they can’t reinvent the rules by themselves. So most of the reason “Occupy Wall Street” is on Wall Street is because that is where the problem is. And most of the financial advisers, like myself, are lifetime workers on Wall Street, specialists in financial maneuvering and behavior. So our job is to explain to people, to popularize what used to be classical economics. Right wing interests have inverted the classical idea of free markets and captured its vocabulary, hijacking the repertory of classical, socialist and social democratic rhetoric.
 

 
Dr. Schirrmacher: Exactly that is what they did.
 

 
Prof. Hudson: I want to comment on your earlier point. It is true that the parasitic financial dynamic stems from America. But that is official policy; it is not a secret. It is not a conspiracy, it is very open. I am told that when Mr. Geithner came here to meet with the German bankers about the Greek debt, the Germans and Mrs. Merkel were in favor of a default, saying: Look, they can’t pay. But Mr. Geithner said that the German and the French banks and other banks have taken out credit default insurance with the American banks. These American banks would go under if Greece defaulted. Mrs. Merkel agreed to sacrifice the German banks and to impose losses on the German banks in order to help America. She seems to have put American interests before her own national interest, and cost the German people hundreds of billions of dollars by doing this. It is as if the leaders of Europe are hypnotized by a kind of Dr. Caligari who ends up to be running the asylum.
 

 
Dr. Schirrmacher: (…) I think, it gives sehr große Einsichten, das ist faszinierend. The idea behind is, a little bit to … first of all to show that the position Frau Wagenknecht postulates, is not a position of two people in the world, but that there is a debate about it. And the other one is to provoke the others, the economists in Germany.
 

 
Prof. Hudson: You can’t provoke them.
 

 
Wagenknecht: Provoke you can, but …
 

 
Prof. Hudson: You can only replace them with a new generation.
 

 
Dr. Schirrmacher: What I found out, what they really need to understand them is psychology. Of course, they need media power, and the consensus. The idea that you are insane if you are questioning certain aspects.
 

 
Prof. Hudson: That is what Dr. Caligari said.
 

 
Dr. Schirrmacher: Yes, that’s right. Or Dürrenmatt, “Die Physiker”, that’s exactly the same. Economists are like “Die Physiker”.
 

 
Dr. Minkmar: Once you can put a label on them, like “umstritten,” and you’ve already won.
 

 
Prof. Hudson: Why do Hollywood movies understand this better than economists and politicians?
 

 
Dr. Schirrmacher: And why does Robert Harris? Did you read the book?
 

 
Prof. Hudson: Yeah, wonderful.
 

 
Dr. Schirrmacher: "Fear," Robert Harris
 

          Fireside on the Great Theft        
A recent interview in Frankfurt’s FAZ newspaper:
 

 
Dr. Schirrmacher: And then, just to find a starting point, maybe we can start with the personal, and then at least I would ask you both. Maybe that is a good starting point, very basic: What is the future of Europe? So, what do you conceive what will happen, and what is going to happen? Sie können sich auch gegenseitig … Now, Michael Hudson, you are in Germany and you are known to our readers, and Sahra Wagenknecht, of course, as well. Just very briefly your background. In your DNA, in your genetic code, you have traces of Indian roots.
 

 
Prof. Hudson: Well, I am one-eighth (Chippewa) Indian, so I’m half Irish, a quarter Swiss, one eighth English. I grew up in Minneapolis, which was the center of America’s labor movement in the 1930s. The general strike in 1936 shaped the American labor scene.
 

 
Minnesota had a governor, Floyd B. Olson, who said that he hoped capitalism run right to hell. The Trotskyists were the main opponents of the Stalinists at that time. The irony is that you had the right wing ganging up with the Stalinists, all against the Trotskyist leadership because the Stalinists feared that a non-communist socialist leadership would build up the labor unions, as Minnesota was building up the Teamsters. So in 1941 my father became one of the Minneapolis 17, the first people committed under the Smith Act. This was ostensibly against advocating the overthrow of the government by force and violence, defined so loosely that in the presentation before the jury, it meant simply having the works of Marx and Lenin on your bookshelf.
 

 
I later was asked, when I went to work for Herman Kahn at the Hudson Institute, whether there was any reason why I could not get a top secret security clearance. I mentioned that my father was a Trotskyist leader, and he said: Oh, they know about that, that Stalin and Roosevelt made a deal around 1941 that if Roosevelt would prosecute the Trotskyists, the Communist Party promised not to pull out any of its Labor unions on strike during the balance of the war. The U.S. Attorney General later wrote in his autobiography that it was the only thing that was ashamed of doing, because by no stretch of the imagination could the Trotskyists have been any threat to the country.
 

 
In fact, it was the Trotskyists that called in the National Guard to protect the workers and the strikers against the police force that was working on behalf of the large companies. The lawyer for the Trotskyists in the trial was Al Goldman, who had been a colleague of Rosa Luxemburg and Karl Liebknecht. As I was growing up, most of the radicals who were still living throughout the world and from the United States would come to my house, and tell me their stories and their experiences.
 

 
Dr. Schirrmacher: What could they say about Luxemburg and Liebknecht?
 

 
Prof. Hudson: Al Goldman was still trying to find out who was responsible for killing them. But we decided that it really does not matter who the individuals are. They are usually killed by their bodyguards. The key is people behind them that order the killing.
 

 
Dr. Schirrmacher: But you don’t have a memory of an anecdote or whatsoever, an anecdote about Luxemburg or Liebknecht, what they …
 

 
Prof. Hudson: No. Mainly, they talked about revolutionary theory. I wanted to grow up and go to jail like all of the people that my family admired, and their colleagues admired. So now I’m ashamed that I’ve never been able to go to the University of the Revolution.
 

 
Dr. Schirrmacher: But you worked with Kahn, and I remember that Kahn was the person who proclaimed golden ages ahead of us. And he was the futurist who always said we will be so happy and so lucky. Am I right?
 

 
Prof. Hudson: Yes, he was basically a military theorist who wrote a very good book on atomic warfare, saying that some people would survive. He was the model for “Dr. Strangelove”. And he felt so bad from being attacked for his military theory – and he was indeed a brilliant military theorist – that he decided to form the Corporate Environment study. But he was wrong in almost everything economic he said, so he brought me on to disagree with him on everything, as a foil. We liked each other. He was a very nice guy. In fact, we liked each other so much that we could not believe that the other person actually believed what they were saying publicly.
 

 
Herman Kahn weighed 400 pounds. I remember once in Paris, we were leaving the hotel to go to the airport, and I tried to hand him his pants. As far as my hands would stretch, they still weren’t long enough for the waist. He also had narcolepsy. When he was not speaking at a public lecture, he would fall asleep – usually in his food. He would rise from the table with the food flowing down his necktie, talking about the world economy an expanding pie, and in another generation, the whole world could live just like him. And everybody would go on diet, over a long time.
 

 
One of the big problems we had was when he wanted me to project the gross national product and hence living standards at 6 % or 4 % per year, which economists were doing at that time. He thought that all the technology and power somehow would make all countries rich. I refused to make that calculation, even though when I joined the Institute I insisted that the one perk that I wanted was an HP 75 calculator that could calculate exponential growth. I told Herman that the only growth that is exponential is financial – the magic of compound interest. And the more compound interest grows, the more it slows the economy, like driving a car with the brake on.
 

 
So that is where we differed. It turned out that most of his clients ended up hiring me instead of him, and I ended up getting a collection of Tibetan art as a result, and buying enough real estate, so, I’ve never had to work ever since and could spend all of my time writing.
 

 
Prof. Hudson: You talked about rescuing the banks, and that is really a phrase for trying to rescue a whole financial growth function to somehow save debts that can’t be paid. The question is: Who is going to take the loss? It really is trying to keep the debt overhead in place, by making the public sector absorb all the losses of the banks that have made the bad loan. And beyond this, it is really an ideology – an ideology that somehow the debts can all be paid. And beyond that, there is something else. Saving the banks is a slogan …
 

 
Dr. Schirrmacher: Sahra Wagenknecht, did I get you right that you say they can be paid?
 

 
Wagenknecht: They can’t. Also vorläufig können sie immer wieder, aber irgendwann …
 

 
Dr. Schirrmacher: Wegen der oberen 1 %.
 

 
Wagenknecht: … The upper class has to take the losses.
 

 
Prof. Hudson: The bailout is not saving the banks. The banks could function very well the next day after a debt cancellation. You are saving the bank stockholders and the bondholders and the rich counterparties to the banks. You are saving the gamblers who have accounts with the banks, not saving the banks.
 

 
But there is something even worse. The slogan “saving the banks” means a program for the governments to be financially responsible, which means financially self-destructive. The bailout is forcing Greece to sell its public domain, its water and sewer systems, its land, its real estate, its buildings, to sell to private buyers who are going to borrow money at interest from the bank to buy these public assets, and to treat them like a toll road.
 

 
So in the broadest sense of the term, saving the banks means to achieve by financial terms what it took an army militarily to counter a thousand years ago. Saving the banks thus is destroying society. Is that worth the payment?
 

 
Dr. Schirrmacher: Very good and very understandable, but a question again. We can’t be too economic but … You say, you don’t save the banks. But what is, let’s say, my life insurance. What they say to me is that my bank has Staatsanleihen from …, at a normal average term too, so I would lose as an average person … I mean, by saving the banks, don’t they save me as well?
 

 
Prof. Hudson: No, that’s the trick that they are playing. For instance, in the United States the largest bank is Citibank. That was insolvent as a result of being one of the most abusive fraudulent banks with junk mortgages and similar gambles. The head of the Federal Deposit Insurance Corporation, Sheila Bair, said that she argued with the Obama administration saying that she could close down Citibank and save all of the insured depositors. She could have saved all of the basic banking functions.
 

 
The only people who would not have been saved would have been the gamblers at the top, on whom Citibank had written derivative gambles. It is as if in a horse race somebody goes to the casino and gambles, and then can’t pay their debt. The casinos say: We can’t operate at all, if the losers can’t pay what they owe. So, you – the government – have to levy a tax, to enable the losers to pay the winners.
 

 
It’s true that not everybody’s savings would have been saved under this plan. But normal operations would have been. And it’s the same with AIG, the Insurance conglomerate that was bailed out with $184 billion dollars. All this loss went through the London office making financial gambles, losing bets as to which way interest rates and junk mortgages would move. The government could simply have closed down AIG, taking it over and said: We are saving all of your normal insurance policies, we are saving all of your normal business, but the gamblers we are just not paying.
 

 
But in that case, Goldman Sachs would not have been paid $18 billion dollars. And Goldman Sachs had its representative Hank Paulson as Secretary of the Treasury. The Treasury was paying its private colleagues on Wall Street, instead of saving the normal depositors. The intention of this bank bailout is to wipe out the normal depositors and only save the rich of the top. Pretending to save the poor, the working class,and the middle class, they want to save everything for the top 1%. That is what they did with Citibank, and that is what they did with AIG. Citibank makes money by lending to people like Sam Zell, who would buy a company, look at the pension funds or Employee Stock Ownership Plan (ESOP), and empty them out to pay his creditors. So, what the government is saving are the parasitic functions of the banks.
 

 
Dr. Schirrmacher: To make it clear, and ask Frau Wagenknecht too: It could be possible not to save the banks, und würde trotzdem nicht diese Lebensversicherungen und Alters … das kann man trennen?
 

 
…
 

 
Dr. Schirrmacher: Nein, that is very important for you to understand that people like me, I take me as a durchschnittliche …, believe in a kind of empirical or scientific rationality and all this stuff. And if I am told by Hans Werner Sinn or other people, der frühere Regierungssprecher, Ulrich Wilhelm, you have to save the banks because then you save your life assurance, for example, then I believe it, and everybody believes it, because you say: Well, they are mathematicians or whatsoever.
 

 
Prof. Hudson: What if I say: You have to make me rich in order to give me an incentive not to wreck society. What the banks are really saying is that: We will wreck the payment system, and we will stop paying, and we will cause a crisis if you don’t give us what we want. We are holding you hostage.
 

 
But all you really have to do is take them over and replace them with other people. You save the basic banking and insurance functions. There are plenty of good assets in there. Even junk mortgages are worth something. They are worth enough to save all of the normal activities for 90 % of the population. The losers in this case would only be the 10 % at the top … And all these gains for the last 20 years have been to the top 10 %. They would lose their gains – but there is enough to pay everybody else.
 

 
Dr. Schirrmacher: Normal understanding is, politicians need majorities, and not the 10 % of the top.
 

 
Prof. Hudson: You talk about empirical studies. If the statistics were publicized to show what I am talking about, everybody would see in chart form that there is enough money there. The Federal Reserve has them. There are many statistics available, but the newspapers don’t publish them. They find it politically incorrect to do so.
 

 
What they call “class war” is simply society trying to protect itself from the 1 %.
 

 
Dr. Minkmar: One key argument in your system of thinking is the role of central banks. And now today we think that central banks are there to supervise things and see that everything runs smoothly. But what would you advice central banks to do?
 

 
Prof. Hudson: Central banks began to be created in 1694 with the Bank of England, and down to the Federal Reserve in the United States in 1913 their function was to finance government budget deficits by printing money. All governments over time run deficits – at least, most of the time – because that is how they supply the economy with the purchasing power and the money it needs to grow. The role of a central bank is to create money to finance the deficit.
 

 
If it does not do this, then the commercial banks end up performing this function. However, the commercial banks creating credit on their own computer keyboards have a different role from that of the central bank. When the central bank finances government spending, this is supposed to promote growth, full employment and industrialization. But that is not the object of a commercial bank. Banks, in the first instance, make loans against property already in place – mainly real estate and also the buyout of entire corporations. So they provide credit that bids up the price of housing, making it more expensive for workers. They also loan to buyers of commercial buildings, making it more expensive to do business, Takeover loans enable corporate raiders to bid up the price of stocks and bonds, making them yield less, so it costs more to buy a retirement income. And now, commercial banks are moving from finance capitalism to casino capitalism to make big gambles. They are essentially financing gambling. That’s what derivatives and “hedge fund” trading are.
 

 
None of this funds industrial investment. From the United States to Germany, almost all industrial capital formation is now funded by the retained earnings of corporations, not by bank borrowing. Even the stock market does not fund new direct investments. It has become a vehicle for corporate raiders to go to the banks to borrow the money, to buy a corporation on credit with junk bonds, retire the stock, and use the corporate profits to repay the banks – and then try to steal for themselves the pension funds, or sell off the assets, or just work the labor force more intensively; longer hours, outsource labor and move to the un-unionized labor. So the banks are no longer part of the industrialization process; they are part of the de-industrialization process. This is applauded as the post-industrial economy.
 

 
…
 

 
Dr. Minkmar: You were talking about Europe as being the new third world as a model for politics …
 

 
Prof. Hudson: In the 1970s and 80s, the International Monetary Fund imposed austerity on indebted countries. The conditions were that if the countries did not pay their foreign debts, they would be treated like Cuba or Iran, and made into pariahs in the international community. So, they were forced to sell off and privatize.
 

 
When I worked for Chase Manhattan Bank in 1964, my first job was to analyze the economies of Argentina, Brazil and Chile. My job was to calculate/estimate how much potential they could export and raise, one way or another.
 

 
In Latin America it could only be imposed at gunpoint, as you saw in Chile. So the first privatization, the first free-market model, was imposed at gunpoint in Chile under general Pinochet, under the direction of Henry Kissinger and the Nixon administration, and the University of Chicago Economics Department under Harberger and other operatives down there.
 

 
Once they did that, the next big test was the former Soviet Union. Unlike the West, the Soviet Union had no background in Marxism. They had no group that was familiar with Marx and Engels or classical economics. So in 1991 they immediately adopted the neo-liberal approach that said: We can promote millionaires by privatizing the property. Many friends of mine tried to go over and promote a more reasonable tax system. The post-Soviet economies after 1991 would have financed themselves by taxing natural resource wealth and real estate. But as soon as these good advisors would go over there, right-wing institutes like the Lincoln Institute or the World Bank would come and tell the mayors of a town: We’ll give you a million dollars in computers if you follow our system and give the assets to your insiders to create a new nomenklatura of vested property interests – specifically, rentier interests, who would issue stocks in their companies and sell them to U.S. and other foreign investors. The idea was to let the West buy out the key rent-yielding assets in the former Soviet Union, above all mineral rights and public utilities, as well as centrally located real estate.
 

 
The government would put a deposit in one of the banks of the nomenklatura. In the Loans-for-shares program in 1994, the banks right say: 100 million dollars to buy Yukos oil company. The government would redeposit the check in the bank, so that they got the company for nothing, that is, no cash of their own. And then, when the government did not repay the debt, the bank would get many billion dollars worth of an oil or mining company.
 

 
The Americans did this because they realized that if a kleptocrat could buy Russian resources for one cent on the dollar, they would be happy to sell it for two cents on the dollar. That made the Russian stock market the best performing market in the world from 1994 to 1997. Russia let itself be financialized.
 

 
Other parts in the Soviet Union did not have raw materials. So a more accurate dress rehearsal would be what happened in Latvia, where they imposed a neo-liberal paradise. As in Russia, the neo-liberals had a free hand as to how to design what they said would be an ideal economy. Their way of creating such an economy and its financial and fiscal system was to say: “Don’t set up your own banks. Let foreign banks create the credit on their own keyboards.” Labor in Latvia has to confront a 59% set of flat taxes on employment – taxes that together are 59%. The real estate tax is only 1%, based on the most recent appraisal of Latvian property, which was in 1917 just before the revolution. So, the result was the largest real estate bubble of all.
 

 
That is basically the neo-liberal plan for how to get rich in a post-industrial economy. A property is worth whatever a bank will lend, because without taxes the value of this economic rent became available to be paid to the banks as interest rather than as taxes. The value of the site’s location should have been the basis of public financing, as in America. It’s the basis for most localities to pay for their school systems. If you are not going to tax property, if you are not going to tax monopolies, if you are not going to tax finance, then you have to tax labor. That’s why you have a 59% tax on employment in Latvia.
 

 
The result was an economic collapse in Latvia, Lithuania and Estonia. The result is that one third of the Latvian labor force of working age between 20 and 3