PRAXIS SUR

Esta vez, en la discusión sobre el capitalismo mundial, y a las puertas de la reunión de la Asamblea General de la ONU, reproducimos este texto remitido por nuestro interlocutor de la Universidad del Rosario, la entrevista con Michael Hudson, que publicó Counterpunch en su entrega del pasado 20 de septiembre. Esperamos comentarios y aproximaciones críticas al mismo. N de la R.

September 20, 2010

A CounterPunch Special Feature

Challenging the Model of the North

Where is the World

Economy Headed?

By MICHAEL HUDSON

Last Thursday Michael Hudson addressed the Council of Economic Advisors to the President of Brazil (CDES) . He offered an unsparing description of how the global economy is being shaped and exploited by Northern bankers.

Then he outlined the ways in which Brazil and other major “BRIC” economies – Russia, China, India – can steer an independent path and thus preserve and improve their nations’ condition .

CounterPunch is delighted to feature here Dr Hudson’s very striking address. AC/JSC

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

Brasilia

Toward what goal is the world economy steering?

That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves.

From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute.

The Norman conquerors endowed themselves as a landed aristocracy extracting rent, as did the Nordic conquerors of France and other countries.

Europe later took resources by colonial conquest, increasingly via local client oligarchies.

Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy.

This financial conquest is achieved peacefully and even voluntarily rather than militarily. But the aim is the same: to make subject populations pay – as debtors and as dependent junior trade partners.

Indebted “host economies” are in a similar position to that of defeated countries. Their economic surplus is transferred abroad financially, while locally, debtors lose sovereignty over their own financial, economic and tax policy.

Public infrastructure is sold off to foreign buyers, on credit and therefore paying interest and fees that are expensed as tax-deductible and paid to foreigners.

The Washington Consensus applauds this pro-rentier policy. Its neoliberal ideology holds that the most efficient path to wealth is to shift economic planning out of the hands of government into those of bankers and money managers in charge of privatizing and financializing the economy.

Almost without anyone noticing, this view is replacing the classical law of nations based on the idea of sovereignty over debt and financial policy, tariff and tax policy. Ideology itself has become an economic weapon.

Indebted governments have been told since 1980 to sell off their public infrastructure to foreign investors. Extractive “tollbooth” charges (economic rent) replace moderate or subsidized public user fees, making economies less competitive and painting them even more into a debt corner as the surplus is transferred abroad, largely tax-free.

What the world is experiencing in the face of today’s globalism is a crisis in the character of nationhood and economic sovereignty.

Bankers in the North look upon any economic surplus – real estate rent, corporate cash flow or even the government’s taxing power or ability to sell off public enterprises – as a source of revenue to pay interest on debts.

The result is a more debt-leveraged economy – in all countries. Foreign investment, bank lending, the privatization of public infrastructure and currency speculation is now viewed from this bankers’-eye perspective.

There is one great exception to relinquishing national policy to foreign control: the United States itself is by far the world’s largest debtor economy. While mobilizing creditor power to force other debtors to privatize their public sectors and acquiesce in a one-sided U.S. trade protectionism, the United States is the only nation able to issue its own currency (Treasury debt) and international bank credit without limit, at a lower interest rate than any other country, and even without any foreseeable means to pay.

This double standard has transformed the character of international finance and the meaning of capital inflows. Money no longer is an asset in the form of gold or silver bullion reflecting what has been produced by labor. Money is credit, and hence finds its counterpart in debt on the liabilities side of the balance sheet.

Since the United States suspended gold convertibility of the dollar in 1971, international money – the savings of central banks – has taken the form mainly of U.S. Treasury debt, that is, loans to the United States to finance its twin balance-of-payments and budget deficits (both of which are largely military in character).

Meanwhile, domestic commercial bank credit takes the form of private debt – mortgage debt, corporate debt (increasingly for debt leveraged takeovers), and even loans for speculation on financial derivatives and currency gambles.

Little bank credit has gone to finance tangible capital investment. Most such investment has been paid for out of retained business earnings, not bank loans. And as banks and brokerage houses have financed corporate takeovers, the new buyers or raiders have had to divert corporate cash flow to paying back their creditors rather than expanding production.

This is how the U.S. and other economies have become financialized and post-industrialized. Their experience should serve as an object lesson for what Brazil and other countries need to avoid.

U.S. bank lending has been the major dynamic fueling a global inflation of real estate, stock and bond prices, bolstered over the past decade by European bank lending. Dollar credit (like yen credit after 1990) is created “freely” without the constraint that used to occur when capital outflows forced central banks either to raise national interest rates or lose their gold stocks.

In fact, any economy today can create its own domestic credit on its own computer keyboards – those of its central bank and commercial banks. Under today’s conditions, foreign loans do not provide resources that host countries cannot create for themselves. The effect of foreign credit converted into domestic currency is merely to siphon off interest and economic rent.

It is not widely recognized that most commercial bank loans merely attach debt to existing assets (above all, real estate and infrastructure) rather than being invested in creating new means of production, or to employ labor, or even to earn a profit.

Banks prefer to lend against assets already in place – real estate, or entire companies. So most bank loans are used to bid up of prices for assets, especially those whose prices are expected to rise by enough to pay the interest on the loan.

The fact that bankers can create interest-bearing debt on computer keyboards with little cost of production poses the question of whether to leave this free lunch (economic rent) in private hands or treat money creation as a public “institutional” good.

Classical economists urged that such rent-yielding privileges be regulated to keep prices and incomes in line with necessary costs of production. The surest way to do this was to keep monopolies in the public domain to provide basic services at minimum cost or for free while land taxes and user fees could serve as the main source of public revenue.

This principle has been flagrantly violated by the practice of erecting privatized “tollbooths” that extract rent revenue without a corresponding cost of production. This has been done in a way that benefits only a select few.

The unchecked explosion of global credit and debt – and hence, pressure to sell off natural monopolies in the public domain – is largely a result of the credit explosion unleashed after gold convertibility ended in 1971.

The ensuing U.S. Treasury-bill standard left foreign central banks with no vehicle in which to hold their international reserves except loans to the U.S. Treasury. This gives the U.S. balance-of-payments deficit a free ride, which translates into a military free ride.

After the Korean War forced the dollar into deficit status in 1951, overseas military spending throughout the 1950s and ‘60s equaled the entire U.S. payments deficit. The private sector was almost exactly in balance during these decades, while U.S. “foreign aid” actually generated a balance-of-payments surplus, as a result of aid tied to U.S. exports rather than to the needs of aid-recipient countries.

While other countries running trade and payments deficits must increase their interest rates to stabilize their currencies, the United States has lowered its interest rates. This has increased the “capitalization rate” of its real estate rents and corporate earnings, enabling banks to lend more against higher-priced collateral.

Property is worth whatever banks will lend against it, so the U.S. economy has been able to use the dollar standard’s free ride to load itself down with an unprecedented debt overhead – an overhead that traditionally has been suffered only by countries fighting wars abroad or burdened with reparations payments. This is the Treasury-bill standard’s self-destructive blowback.

It is an object lesson for Brazil to avoid. Your nation today is receiving balance-of-payments inflows as foreign banks and investors create credit to lend against your real estate, natural resources and industry. Their aim is to obtain your economic surplus in the form of interest payments and remitted earnings, turning you into a rentier tollbooth economy.

Why would you need these “capital inflows” that extract interest, rents and profits as a return for electronic “keyboard credit” that you can create yourself? In today’s world, no nation needs credit from abroad for domestic-currency spending at home. Brazil should avoid letting foreign creditors capitalize its economic surplus into debt service and other payments.

The way to avoid this fate was outlined from the French Physiocrats and Adam Smith through John Stuart Mill and Progressive Era reformers: by ending the special privileges bequeathed by Europe’s military conquests (privatization of land rent), and by collecting “free lunch” rentier income as the tax base to save it from being privatized and capitalized into bank loans.

Taxing land and resource rent lowers the cost of living and doing business not only by removing the tax burden on labor and industry, but by holding down housing and real estate prices, because whatever the tax collector relinquishes is available to be pledged to carry bank loans to bid up property prices.

In the 19th century the American System of political economy was based on the perception that highly paid labor is more productive labor, such that well-educated, well-fed and well-clothed labor undersells “pauper” labor.

The key to international competitiveness is thus to raise wages and living standards, not lower them. This is especially the case for Brazil, given its need to raise labor productivity by better education, health and social support systems if it is to thrive in the 21st century.

And if it is to raise capital investment and living standards free of debt service and higher housing prices, it needs to prevent the economy’s surplus from being turned into a “free lunch” in the form of land rent, resource rent and monopoly rent – and to save this economic surplus from bankers seeking to capitalize it into debt payments. This is best achieved by taxing away the potential rentier charges that turn the surplus into unnecessary overhead.

But because the wealth of nations is now calculated from the banker’s perspective, surplus income is viewed as potentially available to capitalize into debt service. Rather than using the surplus to invest in capital formation and public infrastructure, the distinguishing characteristic of our time is financialization – the capitalization of the economic surplus (corporate cash flow, real estate rent and other economic rent, and personal income over and above basic living costs) into interest payments for bank loans.

This is the business plan of bank marketing departments and is a far cry from what Adam Smith wrote about in The Wealth of Nations. Loan officers see any net flow of income as potentially available to be pledged as interest payment.

Their dream is to see the entire surplus capitalized into debt service to carry loans. Net real estate rent, corporate cash flow (ebitda: earnings before interest, taxes, depreciation and amortization), personal income above basic spending needs, and net government tax revenues can be capitalized into as much as banks will lend. And the more credit they lend, the higher prices are bid up for real estate, stocks and bonds.

So bank lending is applauded for making economies richer, even as families and businesses are loaded down with more and more debt. And the easier debt leveraging becomes, the more asset prices rise.

Lower interest rates, lower down payments, more stretched-out amortization periods, and even fraudulent “devil may care” lending thus increase the “capitalization rate” of real estate and business revenue. This is applauded as “wealth creation” – which turns out to be debt-leveraged asset-price inflation and can infect an entire economy.

The limit of this policy is reached when the entire surplus is turned into debt service. At this point the economy is fully financialized. Income spent to pay debts is not available for new investment or consumption spending, so the “real” economy is debt-shackled and must shrink.

The financial takeoff thus ends in a crash. That is what the world is seeing today, at least outside of Brazil and its fellow BRIC countries. For these economies, the question is whether they will follow the same financialization path.