| Subject: | [socialcredit] Michael Hudson's harangue on Richard Cook | | Date: | Sunday, August 19, 2007 21:00:35 (-0700) | | From: | william_b_ryan <william_b_ryan @.....com>
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I am forwarding this posting from earlier today to
list gang8 from Michael Hudson regarding our friend,
Richard Cook.
For those of you who do not know of Michael Hudson, he
has been employed for most of his adult life by one
Georgist organization or another. He is a rather
extreme neo-Georgist, as you can see from his
harangue. Recently, he has been taking money,
indirectly if not directly, from Warren Mosler, the
multi-millionaire currency trader who wormed his way
into and thoroughly corrupted the Post Keynesian
movement--through his--meaning Hudson's--association
with the Mosler founded and funded "Center for Full
Employment and Price Stability."
Let me just point out this from Hudson's post:-
"Cook continues: 'However, when the money goes back to
the bank to cancel a loan, that purchasing power
disappears.' It doesn't really disappear, of course.
It is withdrawn from the 'real'
production-and-consumption economy and added to the
financial sector's purchasing power."
It doesn't really disappear? This is just pure
Georgist ideology in their perverse concept of "asset
price inflation."
The theorem known since as early as Douglas' time is
that loans create deposits; the repayment of loans
cancel deposits.
The theorem is accepted most prominently by the Post
Keynesians, at least by those who have avoided being
corrupted by Warren Mosler.
--------------------------------------------
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Posting from Michael Hudson:
August 19, 2007
Dear Gunnar,
Thank you for sending my Mr. Cook's article and your
comments. I'm told that he is to be joining my team on
behalf of Dennis Kucinich. So I want to make clear how
my ideas differ both from yours and his.
I realize that you are not going to agree with me
Gunnar. I have refrained from arguing with you in the
past, because I don't want to get into the situation
that led both Randy Wray and Stephen Zarlenga to
withdraw from this list. The best thing is that we
agree to disagree.
Here is where we disagree. I view "the economy" as
divided into two sectors. The biggest sector as far as
credit is concerned over 99% is the market for
financial securities, mainly bonds, stocks and
mortgage loans and other packaged bank loans. Each day
more than an entire year's GNP passes through the New
York Clearing House and the Chicago Mercantile
Exchange.
The small sector using about 1% of credit is the
sector that you and Mr. Cook focus on: the "real"
economy producing goods and services. Given the
disparity in sizes, most credit inflates asset prices.
In fact, since 1980 the U.S. economy has seen the most
rapid inflation in its history. But the inflation has
been considered "benign" and even "good" (Mr.
Greenspan called it "wealth creation") because it
increased the purchasing power over living labor of
property real estate and financial securities. The
dead hand of the past increased its weight over the
living.
You cite Cook's statement, "But the peculiar thing is
that because the borrowed money pays for labor,
commodities, rent, etc., it [He means, 'its financing
charges'] becomes part of the prices that are
eventually charged for goods and services." OR, the
borrowed money the great bulk of it is used to bid
up prices for real estate (70% of U.S. and British
bank loans are mortgage loans), stocks (for LBO loans)
and bonds (by flooding the economy with credit to
drive interest rates down, producing the greatest bond
rally in history as rates fell from 20% in 1980 to 5%
in 2005).
Cook continues: "However, when the money goes back to
the bank to cancel a loan, that purchasing power
disappears." It doesn't really disappear, of course.
It is withdrawn from the "real"
production-and-consumption economy and added to the
financial sector's purchasing power. That sector uses
its inflow of (re)payments to lend out to buyers of
real estate, stocks and bonds and entire companies to
further inflate asset prices.
As I'm sure all of us on Gang8 know, banks don't lend
to invest in tangible capital formation. That is
financed mainly out of retained earnings. Neither
James Watt, Henry Ford or industrialists in between
could borrow from banks to put their capital in place.
Banks lend to against assets already in place, or to
finance the sale of goods already produced and
ordered, but not to create "equity" investment in
tangible means of production. This is what warps the
private-sector banking system today, and I understand
that this is Mr. Cook's criticism too. (Chris Cook
might also agree here.)
Mr. Cook concludes that "The economy is thus a
treadmill that borrowers must constantly trudge along
in order to have enough money for survival." I think
it is a treadmill that becomes increasingly steep. The
debt repayment burden mounts up at compound interest.
You comment: "In the circular-flow view of
Entrepreneurial Production, newly created
credit/money/ purchasing power enters the economy
through the market for Factor Services and exits the
economy through the market for Final Goods and
Services."
Again "the economy" here is divided into two sectors.
This is my major point. Credit is NOT transformed
"into Final Goods and Services," but into asset-price
inflation.
You ask, "Why, then, does Cook assert that "this
process creates a chronic shortage of purchasing
power"?
My answer is that debt service mounts up faster than
the economic surplus, and ends up absorbing it.
Yours is, "Because he defines 'credit' as synonymous
with the economy's potential productive capacity and
takes as given that actual mobilization of Factor
Services must fall short of that potential." This
sounds like the old Social Credit idea.
You point out his citation that all definitions of
credit "have some connotation of the concept of
'value.'" I would rather say, "Price." Value in the
sense the classical political economists used the term
reflects socially necessary costs of production.
Credit and other financing costs are external to the
production-and-consumption sector, being wrapped
around it as I have shown in the diagrams in my Kansas
City and Harpers articles. These financial charges are
institutional, not technological.
You focus on the "real" economy, as does Cook here
until he criticizes the fact that today's banking
credit is extended largely to finance predatory
property acquisition.
You then cite a sentence that seems to reflect both
your views in common: "The idea of credit when viewed
from a macroeconomic perspective refers to the ability
of an economy to produce goods and services of value
to the members of that community."
My point is that credit been turned into its opposite
increasing the economic power and price of property
over labor, as it takes more and more wages to buy a
home, more and more profits or rental income to buy
commercial real estate, or more and more labor income
to buy a flow of retirement income.
Cook writes: "Without the credit-potential of a
producing economy, money has no meaning."
My point is that it HAS a meaning, but one that takes
the corrosive form of asset-price inflation. This
becomes clear when one looks at the buildup of
interest-bearing debt at exponential rates the
"miracle of compound interest."
Cook points out that "the 'real' credit of the U.S.
economy was much higher, because our economy is not
running at anywhere near its full capacity."
To me, the answer is different. The volume of capital
and debt far exceeds GNP. Hence, financialized
asset prices are expanding much larger than actual
production. Credit is not extended to produce goods
and services, increase national income and GNP, but to
buy assets and financial securities.
You now quote from Cook's article, WHERE MONEY COMES
FROM. I think he makes a good point when he writes
that: "Actually, an economy functions according to the
principles according to which it is designed and
regulated. If it is designed to funnel wealth into the
hands of the monetary controllers, then that is what
the 'market' and the 'invisible hand' will do.
Unfortunately, we march today to the tune of the
monetary elite, so they are the ones who reap the
profits and the benefits. They are the ones on whom
the 'invisible hand' lavishes the wealth of the
world." Bravo!
He continues: "It is done through the process of
bank-created credit. While during the nineteenth
century other forms of money circulated, such as large
quantities of coinage, silver certificates, and
government-issued greenbacks, almost all the money
that exists today originates through a loan by a
financial institution to an individual or a business."
OK.
He then proceeds: "When a loan is made it is issued as
a liability on the bank's ledger. When it is repaid,
the liability is canceled." But in the interim, the
bank receives interest which tends to accumulate
exponentially to reflect the build up of loans. The
"administrative fee" he refers to as "interest" is
indeed an "administered price," and hence a monopoly
right and as such, a form of economic rent.
Cook recognizes that "Some credit is used by
businesses or individuals as investment in order to
generate profits over and above the amount they must
repay to the bank with interest."
Profits are not really the key these days. "Capital
gains" have become the name of the game in today's
"Ponzi" stage of the business cycle, to use Minsky's
terminology.
Cook realizes this when he writes that "Unfortunately,
large amounts of credit are used mainly for
speculation, not for any benefit to the producing
economy. This includes securities bought on margin and
borrowing by hedge funds where the fund may make a
profit even if the value of its investments goes down.
Bank-created credit in this case is little more than
chips in a casino."
It actually is more than this. Credit bids up asset
prices in the "large" finance-and- property sector
that is wrapped around the "real" production-and-
consumption economy. This is the major cause of
economic polarization in today's world.
This is why I find M3 an important measure, and why
Stephen Zarlenga has proposed the Monetary
Transparency Act so that we are in a better position
to measure the extent to which the banking system is
contributing to asset-price inflation, loading down
the economy with debt in the process.
Cook makes an excellent point in arguing that
"individual consumers should never have to borrow in
the first place. And we never ask ourselves why, with
the abundance that is possible from modern science and
technology, should people have to borrow money at
interest for the necessities of life--a house, a car,
household expenses, an education, etc. Thus we realize
that the financial system works against what should be
the real purpose of money, which is to serve as a
ticket for the purchase by people of articles they
need to survive or otherwise desire to utilize once
the demand for survival has been met."
Again, I'm sympathetic to this, and also to his
pointing out something with which we all agree: "money
is being mis-defined as a commodity. People who
believe money is a commodity think it has value
in-and-of-itself."
Unfortunately, he defines money (and credit too?) as
"anything that a willing buyer and a willing seller
agree to exchange for something else."
From ancient times, anyone could create credit simply
by NOT PAYING. Most debts in ancient Babylonia were
arrears of payments for land rent, consumption, taxes
and fees (as the volume from our British Museum
conference edited by Marc Van De Mieroop and myself on
"Debt and Economic Renewal in the Ancient Near East"
has shown).
So to conclude, Cook gets confused by pointing that
while "the 2006 GDP of the United States was $12.98
trillion. But actually, the 'real' credit of the U.S.
economy was much higher, because our economy is not
running at anywhere near its full capacity."
That's not the reason at all. The reason is that
credit is used to finance assets and financial
securities, and as such, claims ON wealth (as Soddy
pointed out), not goods and services.
Credit is extended NOT for production, but for
property rights and financial claims ON the economy.
It becomes a purely mathematical Ponzi scheme in the
end. This is the stage in which we find ourselves
today.
Inasmuch as the right to create interest-bearing debt
is the right to a form of economic rent, I can agree
that "Therefore, credit can and should be viewed as a
communal endowment, a public phenomenon, a part of
what is called 'the commons,' even with the normal and
natural fact of the existence of private property.
So the use of credit and its distribution should be
treated as a public utility, like water or
electricity. Everyone should have a right to its use,
according to some rational, lawful, and humane
criteria of need or contribution to creating it. "It
is no exaggeration to say that the existing system is
one whereby the financial elite has confiscated and
privatized the most important public resource of all,
more important than water, land, electric power, etc."
I wish his argument was that this resource has been
distorted by the fact that banks and the financial
sector generally has a short-term "extractive" outlook
that has a disconnect with the production and
consumption sector, and actually works against it by
inflating asset prices rather than financing capital
formation.
His argument reads as if consumers need more credit to
help GNP be fully realized. Producers also need
credit, but instead, corporate raiders are granted
credit to take over, downsize and outsource the labor
force, carve up the companies and avoid paying taxes
in the process.
Michael Hudson
michael.hudson@earthlink.net
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