Wednesday, June 22, 2011

From Michael Hudson at Gang8

The full post is here.

I want to quote the first paragraph... and highlight just the parts that I worked out for myself, independently, and agree with absolutely:

Financial crashes were well understood for a hundred years after they became a normal financial phenomenon in the mid-19th century. Much like the buildup of plaque deposits in human veins and arteries, an accumulation of debt gained momentum exponentially until the economy crashed, wiping out bad debts – along with savings on the other side of the balance sheet. Physical property remained intact, although much was transferred from debtors to creditors. But clearing away the debt overhead from the economy’s circulatory system freed it to resume its upswing. That was the positive role of crashes: They minimized the cost of debt service, bringing prices and income back in line with actual “real” costs of production. Debt claims were replaced by equity ownership. Housing prices were lower – and more affordable, being brought back in line with their actual rental value. Goods and services no longer had to incorporate the debt charges that the financial upswing had built into the system.
Not too shabby. All of the meat is highlighted. None of the human veins and histories.

Other important bits of the Hudson post:

The United States emerged from World War II relatively debt free. Downturns occurred, crashes wiped out debts and savings, but each recovery since 1945 has taken place with a higher debt overhead.

Debt accumulation is the problem. "Higher debt overhead" is Hudson's phrase. "Debt accumulation" is my phrase for the same thing. You can see it in my D.P.D. graphs.

Regarding "the post-2008 crash" Hudson writes:

Most unique is the crash’s aftermath. This time around the bad debts have not been wiped off the books. There have indeed been the usual bankruptcies – but the bad lenders and speculators are being saved from loss by the government intervening to issue Treasury bonds to pay them off out of future tax revenues or new money creation. The Obama Administration’s Wall Street managers have kept the debt overhead in place...

I think it had to be done. We have just so much debt. You couldn't let the bankruptcies happen. They would have been like a chain reaction, where each one sets off three more. Blink twice, and the whole financial edifice is in ruins.

To be sure, I don't care about the financial edifice. But its collapse would have brought down everything else with it. And that had to be prevented. So, to save the stuff I wanted them to save, they had to save the stuff they did save.

This is the stuff dark ages are made of.

They have kept the debt overhead in place. That is the reason the economy cannot recover. It is the reason I keep offering these oddball notions, like print money and use it to pay off debt. I don't know which methods are practical and which are not. But there can be no doubt that debt reduction is the one thing that must be done.

Nah. Don't read Hudson's post. Soon after the last excerpts above, Hudson gets all agenda-driven, and boring.


Related post: Whaddya mean, "It's not economics": "A policy of prevention of small forest fires led to less frequent, more severe large fires."


Clonal said...


The problem with finance resides in one of its core tenets -- namely the time value of money, otherwise known as interest.

A Much better view of Hudson's ideas can be had in the following articles.

The Mathematical Economics of Compound Rates of Interest: A Four-Thousand Year Overview Part I

The Mathematical Economics of Compound Rates of Interest: A Four-Thousand Year Overview Part II


Why the “Miracle of Compound Interest” leads to Financial Crises

They are well worth reading

The problem of exponential growth and the time value of money has also been discussed extensively by Margrit Kennedy

See her mongraph Interest and Inflation Free Money

You are absolutely right in seeing debt as the problem. More than just the debt, the problem is interest.

Clonal said...

Also Margrit Kennedy's Lecture -Why Do We Need Monetary Innovation?

In this lecture I will pursue the question: Why do we need monetary innovation?” Firstly, I will describe three misconceptions most people hold about money; secondly I will explain three results of these misconceptions, and thirdly offer three possible solutions in terms of monetary innovations.

What is money? Let’s take the good news first. Money is one of the most ingenious inventions of humankind. It helps the exchange of goods and services and overcomes the limitations of barter, thereby creating the possibility of specialization, which is the basis of civilization. Why then do we have a money problem?

Here is the bad news. Throughout most of history, the circulation of money has been based on the payment of interest. Interest leads to compound interest. Compound interest leads to exponential growth. And exponential growth in turn is unsustainable. Therefore, in order to understand how our monetary system works as an‘invisible wrecking machine’ since its inception, it is useful to understand three basic misconceptions about money which almost everybody holds.

Also one of her few videos in English

The Arthurian said...

Lots of reading there, Clonal.

I like the opening of Kennedy's "Interest and Inflation Free Money" -- she's not an economist, too.

And already, in the first paragraph of Hudson's Part One, I was thinking about using it for a new post. (I like that, but it shows down the reading...)

"More than just the debt, the problem is interest."

Agreed: If it cost nothing, debt would be no problem.

Thanks for the links.

The Arthurian said...

It slows down the reading, doh.