Michael Hudson — The Bubble and Beyond

Hudson, Michael. The Bubble and Beyond. Fictitious Capital, Debt Deflation and Global Crisis. Desden: Islet, 2012.

The problem is that credit is debt and paying debt service to bankers and bondholders (and various grades of loan sharks) leaves less income available to spend on goods and services. So debt deflation is today's major problem, not inflation.
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The question is whether finance will promote economic growth and rising living standards, or create unproductive credit and use government to enforce creditor claims by imposing austerity reducing large swaths of the world population to debt peonage.
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German fear that central bank credit creation is dangerously hyper-inflationary fails to recognize that all hyperinflations have resulted from balance-of-payment deficits. Never in history has hyperinflation resulted from goverments monetizing domestic spending.

p.6

Economic statistics as currently reported are fucked up because:

Interest is treated as "profit" earned by producing the bankers' product: the debt taken on by borrowers. Treating the banks' privilege of debt creation as tangible industrial investment conflates money and credit as a "factor of production," so that interest, penalties and fees appear as part of the production process, not external to it.
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As financial charges rise to absorb more corporate cash flow, real estate rents and wages, debt-burdened economies find themselves priced out of world markets. International trade competition now reflects financial, insurance and real estate (FIRE) charges more than the prince of bread and other basic commodities.
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The economic tragedy of our time is the decoupling of banking, the stock market and the rest of the financial sector from the funding of new capital formation.
p.66


For over a century, the neoclassical (that is, anti-classical) counter-revolution has insisted that all economic activity is productive. This philosophical approach understandibly is preferred by the most unproductive sectors, and by the recipients of what the classical economists called unearned income (or "economic rent"), wishing to claim that their wealth and revenue is as justifiably earned as all other forms.
This was not the view of the Saint-Simonians, who pointed to the extent to which wealth was inherited rather than created by its owners. I was not the view of Adam Smith, who described landlords as loving to reap where they had not sown. It was not the view of Ricardo and subsequent rent theorists who showed that rent was a "free ride," an element of price that found no counterpart in cost defrayed by the rent recipient.
If industry has not broken from the Chicago School's financial philosophy, it is because the goals of today's industrial corporations have become increasingly financial in character. Manufacturing companies are now being run by financial rather that industrial engineers. Wall Street controls "Main Street" not the other way around. It is the essence of today's "postindustrial" economy that finance capitalism has absorbed industrial capitalism and subordinated its drives for profits with a drive to obtain financial returns, including capital gains (that is, asset-price gains) from channeling credit into securities and real estate markets. Thus, contra Marx, the dynamics of finance capital have diverted from those of industrial capital to the point of stifling industrial potential and raising the specter of plunging the industrial epoch back into the ancient usury problem that nineteeth-century observers believed was becoming a thing of the past.

p.67

The reality is that bank credit today has no cost of production beyond a modest administrative overhead. Interest rates have no determinate foundation in the "real" economy's production and consumption functions, although they intrude into that system's circular flow by siphoning off debt service, late fees — and publuc bailouts when the financial system becomes too "decoupled" from the "real" economy. Such financial charges cannot be assigned to labor or other "real" costs of production. The administered prices for interest and underwriting fees are akin to economic rent, out of which the financial sector's bloated salaries and bonuses are paid. Utilitarian economics does not apply to looting.

p.125

After the Great War's aftermath derailed the path of development toward which the Progressive Era seemed to have been heading. The vested financial and property interests mounted an ideological counter-attack, and a major arena was economic theory. The new theory's political aim — its value system, price theory, monetary theory and the tax policy this theorizing implied —reflected the shift in alliances between finance capital, real estate and industry. Instead of continuing to oppose the landed interest, the 20th century's democratization of property ownership — on credit — led to a symbiosis of finance, insurance and real estate (FIRE). To the extent that finance interfaces with industry, it has been to financialize industrial companies, not to industrialize the financial system as seemed to be occurring in the late 19th century from Germany and Cental Europe to Japan. And to the extent that finance interfaces with governement, it is first of all to finance the public construction of capital infrastructure, and then to force its sell-off — at prices far below the original cost — to buyers on credit, permitting them to factor in a proliferation of financial charges into the access fees they extract from the population. The result is the opposite direction of evolution from which 19th-century economic Darwinians expected. Instead of lowering a nation's cost structure to make it more internationally competitive, fianacialization increases prices across the board.

As noted above, the definition of "free markets" has been turned upside down. Instead of freeing markets from rent-seeking, taxing groundrent and keeping major infrastructure monopolies in the public domain, economies were deregulated to "free" fianace to load industry and governement with debts, turning profits and disposable peronal income into interest charges. Taxes has been shifted off real estate and finance onto labor and industry, while the post 1980 New Enclosure movement has increasingly privatized the public domain. And to cap matters, under the slogan of "free markets" as the antithesis to "the Road to Serfdom" (defined for all practical purposes as public regulation of the FIRE sector) planning has been centralized in the financial centers, from Wall Street to the City of London, the Paris Bourse and Frankfurt.

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