What Recovery?

[CrackSmokeRepublican]

What Recovery?
By: Michael Hudson on: 11.10.2009
   
On the eve of an Australian speaking tour, highly-regarded US economist Dr Michael Hudson, of the University of Missouri, Kansas City, talks to Isabelle Oderberg about the economic recovery that isn't, and tells her:

The world is in the midst of a serious depression that's continuing to spread

A rise in Australian interest rates would result in a financial raid that would dramatically increase the tax burden on Australian taxpayers
Bursting real estate bubbles and rampant debt deflation are driving economies around the world to the brink
The Obama administration's determination to rescue the financial sector amounts to the "assisted suicide" of the US economy

Isabelle Oderberg: Quite a few of the economists that I've been speaking to seem to believe that the recovery is going to have sort of a W shape and that we're only at the bottom of the first V and that there's going to be more pain to come. What's your view on that? Would you agree?

Michael Hudson: Yes, I would. I don't see how there can be a serious long term recovery when the volume of debt is as high as it is. In the United States and other countries, although the residential real estate crash has happened, the commercial real estate crash has not yet happened. Here in New York, the largest residential real estate operation in the country is facing bankruptcy – Stuyvesant Town and Peter Cooper Village residential complex. The largest US commercial real estate firms are going under. And walking down Oxford Street in London the other day the big streets have vacancy signs, vacant stores that used to be bustling and this is going to lead to commercial property defaults in many countries – Iceland and Latvia I've been in – people are having to pay so much more money as their mortgages escalate that they don't have enough money to buy goods and services. If you pay the creditor the money you owe on debt, you don't have this available for spending on the market, so markets are going to shrink here and as markets shrink, stores pull out of malls and, certainly in the United States, when one big store pulls out of a mall all the other stores have the right to stop their leases and pull out.

So, what we see is a really serious depression continuing to spread and the only reason the stock market has gone up is because the government has given $US13 trillion of giveaway money to the large banks. Now, if you give $US13 trillion to the banks, obviously the net worth of the bank stocks is going to go up by $US13 trillion and there's going to be a recovery. But this isn't the economy, this is the stock market.

IO: But then if you're talking about a stock market recovery that's been inflated by a stimulus, some might say artificially because the core value of the rest of the market hasn't risen, then it's not really a recovery, is it?

MH: That's right. That's right and I was at a monetary conference in Chicago over the weekend and economists were talking about a jobless recovery. Well, that's sounds like an oxymoron; if it's a jobless recovery, how can you call it a recovery? If markets are shrinking and bankruptcy rates are rising and people are further and further behind on their mortgage, that's not a recovery.

IO: We've got two issues here, when you talk about debt. We've got, obviously, the rising levels of debt and the need to service those debts among the general populace; then we've also got the issue of debt deflation, where we've got the assets that have been funded by debt going down and the values decreasing. Can you tell me how those two relate to each other and what they mean in the context of either a recovery or another decline?

MH: Between about 2002 and 2006 people were able to, homeowners on a mortgage were able to pay their mortgage interest by taking out a new loan against the asset price inflation of their house. So, if their house went up in price they could borrow the money to pay the interest to the bank. But now that the housing prices are not going up anymore, you have negative equity and with negative equity you're not able to borrow against the bank. And that means that you can't borrow against the house to pay your credit card, you actually have to pay the credit card out of money that you earned. And that means you have to pay it by not spending on things you were spending before. So that's debt deflation.

There are economies like the Baltic economies and almost all of the post Soviet economies that have been in chronic trade deficit since they got their independence in 1991. The trade deficit was financed by foreign currency borrowing to fund their real estate bubble, but now the real estate bubble has burst, so there's no foreign exchange money coming in to finance their real estate bubble anymore and so this won't finance their trade deficit, so the currencies are collapsing. The IMF came in and told Latvia "close down half of your hospitals, fire half of your doctors, close down your schools, lay off your school teachers, tell your people to emigrate." Now, when that happens that's debt deflation.

IO: You're painting a grim picture.

MH: Well, that's what I'm hearing all over the world.

IO: So, we've got a situation where consumers all over the world are in debt up to their eyeballs; where do we go from here? How do you fix it? A nice, easy question for you!

MH: There's a basic mathematical principle; a debt that can't be paid won't be paid. These debts are beyond people's ability to pay and so we're going to see breaks in the chain of payment and this means that a lot of debts are going to go bad. It means that people are going to hesitate to realise that they can't pay, a kind of cognitive diffidence that people have about the fact that they really can't pay their debts. They're willing to run down their savings, they're willing to sell off their assets and do everything, but in the end they default and this is what breaks the back of an economy. The houses are defaulted on, they're put up for sale, that crashes real estate prices all the more and, again, the commercial real estate is even in more serious condition than residential real estate right now.

So, it looks as if all of the debt that's been run up is now going to work on the opposite end of debt deflation and just squeeze the economy below subsistence standards for many people, and unless they have assets to sell off, they're going to be homeless.

IO: I just want to touch on the financial sector especially in the US. You've described it as parasitic and said that, since the American economy is dead, the finance sector in America is trying to suck as much blood out while the corpse is still warm.

MH: I don't remember saying that at all... I think that may have been somebody's attempt to paraphrase.

IO: I guess I was interested in the description of parasitic and whether that has changed at all over the last few months and how you see it evolving in future.

MH: Well, parasite-ism is a word that's usually misused and very few people who use the word parasite study it in biology. Most people think of a parasite simply as extracting nourishment from the host, like the financial sector adding $US13 trillion worth of government bonds, making taxpayers pay to bail out the sector, squeezing debt service out of the economy and all of that. But in nature, the distinguishing feature of a parasite is it takes over the host's brain. It makes the host imagine that the parasite is part of the body and even the baby to be nurtured. So Obama, in this country, and the Liberals abroad have a choice – they can either save the economy or they can save the finance sector.

Obama has said to the economy here; drop dead. There's not enough unemployment. It has to go up. Wage levels have to go down, way down. Living standards have to go down, way down, if we're to give money to the financial sector – my major campaign contributors – at the rate that compound interest grows mathematically. So the real economy here is being sacrificed to the financial sector and that's done by the lobbyists taking over the brain, the public media, to believe that, somehow, making Wall Street and the financial sector rich is making the people rich.

In Australia, people thought they were getting rich when housing prices were going up since about 1990, but the reality is that a house is worth what a bank will lend and all of this rise in housing prices for Australia has forced people to go further and further into debt to obtain housing, so now an Australian has to work many more years of their life to repay the mortgage than they did when housing prices were much lower. Meanwhile, now that taxes have been cut on real estate to push housing prices higher, this had to be shifted onto labour, so labour has less of a take-home pay than it had before and it believes that it's getting wealthy. They call this wealth creation and in fact it's debt creation. That's what the parasite does when it takes over the mind of the economic media.

IO: There's been some suggestion in some of the commentary I've read coming out of the US lately that the US economy is sort of dying and there's no indication that it's going to become healthier...

MH: Dying is what happens naturally. This is not natural. It is being killed by the financial sector, or persuaded to commit suicide voluntarily. When the government of Latvia says we are going to close down half the hospitals, fire half the doctors and shorten lifespans, increase the heart attack rate, increase the rate of stroke, this is not simply dying, this is assisted suicide.

IO: But if that is the case, and the American economy continues to ail as it will under this scenario, unless something changes there's been some suggestion that the finance sector will jump to another host in the parasitic model. Do you believe that's true and if so where would it go?

MH: We're looking at a worldwide phenomenon here. America, actually, is in a better position than many other countries because its diplomats around the world are aggressive enough to make the other countries bear the pain. America will tell England or Europe or Japan to commit economic suicide and they will gladly do it. Other countries are willing to die quickly in order to make Americans a little bit richer. That's their philosophy.

IO: In Australia there have been indications over the last couple of days that our Reserve Bank is considering upping interest rates. Now, I know that we've been somewhat buffered by our much healthier banking sector in Australia, but do you think it would be a mistake to start increasing interest rates now when the international community is predicting more pain overseas and we are so susceptible to overseas ailments?

MH: The effect of raising interest rates is going to be to attract capital from abroad. If Australia raises its interest rates, then speculators in the US, where you can borrow for almost zero, there'll be a carry trade converting out of the dollars into the Australian dollar to buy higher yielding bonds. And what this will do will be to not only strengthen the currency, but to increase Australia's reserves and at a certain point corporate raiders can come in and they'll say, here is a country with a lot of reserves. Well, that's like a country with a big oil well. We can come in, empty them out and raid them and make the Australian people pay and we'll get rich. So, Australia is setting itself up for a financial raid that's going to increase its taxes much more, so Australia has just... is planning to sharply increase the tax burden on most Australian taxpayers.

IO: So, bad then?

MH: Very bad. Very bad. Why would Australia need to attract foreign capital when it already has the natural resources to make it one of the prime economies in the world?

IO: Companies here have been complaining about a lack of capital. There has been a lack of capital in the Australian market just like there has everywhere in the world, I guess.

MH: But if you lower the interest rate, then a company can afford to borrow much more capital on the basis of a given flow of earnings. The lower the interest rate, the larger the flow of revenue can be capitalised into a bank loan.

IO: In terms of the US economy where can it go to from here? Where do you think it will go and do you think that the Obama Administration has the qualifications to deal with it?

MH: The Obama Administration has the qualifications to drive the economy downwards and tax labour and impoverish the economy much more than the Bush Administration had. If you're going to bleed an economy to take money out and pay yourself, the Obama Administration certainly has the power to give yet more bailouts and to become the most exploitative, unequal administration in the last 50 years in its viciousness towards labour and its desire to extract income for its main campaign contributors which are Wall Street and that's what I see for the future. I think the Obama Administration will succeed in increasing the amount of government debt that it pays to the financial sector. I think that it will be very successful in destroying what industrial base is left. It will succeed in reducing living standards here. That's its job. That's what its backers financed it for in the election. That's what the economic advisors believe will cure the problem. To Obama and his economic advisors, they believe there's not enough poverty here and they're going to cure the problem by increasing the degree of poverty and reducing the standard of living to promote the financial sector in the belief that the economy is the financial sector, not the real economy.

www.businessspectator.com