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.

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