What Flavor Oligarchy?

Michael Hudson in conversation with Pepe Escobar, March 29, 2021

Introduction

The economist Michael Hudson spoke recently with Pepe Escobar and others for two hours about the fundamental problems faced by citizens of the declining American empire. The video and the full transcript are available at the link above, but some readers might prefer the short version prepared here. This version eliminates a lot of redundancy in the two-hour version. To put it concisely, Professor Hudson explains that the problem is that private banks create money, then lend it to the government and to citizens to keep them both in debt bondage. We have a planned economy, but it is planned by and for the wealthy. This has resulted in a restoration of feudalism—ironically the very thing that the English, American and French revolutions overthrew in the 17th and 18th centuries to make room for capitalist development, liberal democracies, and socialism. Professor Hudson stresses that alternative reform at the margins, or islands of progress within the system, are doomed to failure. A new constitution and a new system are necessary.

Partial Transcript (3,441 words)

50 years ago, I wrote Super Imperialism about how America dominates the world financially, and gets a free ride. I wrote it, right after America went off gold in 1971, when the Vietnam war—which was responsible for the entire balance-of-payments deficit—forced the country to go off gold. And everybody at that time worried the dollar was going to go down. There’d be hyperinflation. But what happened was something entirely different…

Once there was no gold to settle U.S. balance-of-payments deficits, America strong armed its allies to invest in US Treasury bonds, because central banks don’t buy companies. They don’t buy raw materials. All they could buy is other government bonds. So, all of a sudden, the only thing that other people could buy with all the dollars coming in were US Treasury securities. The securities they bought essentially were to finance yet more war making and the balance-of-payments deficit from war and the 800 military bases America has around the world…

The world has changed so much in the last 50 years that what we have now is not really so much a conflict between America and China, or America and Russia, but between a financialized economy, run by financial planners allocating resources and government spending and money creation, and an economy run by governments democratic or less democratic, but certainly a mixed economy…

Everything that made industrial capitalism rich, everything that made America so strong on the 19th century, through its protective tariffs, through its public infrastructure investment all the way down through world war two and the aftermath, was that we had a mixed economy in America…

But in America you’ve had something entirely different (since 1980). Something that was not foreseen by anybody, because it seemed to be so disruptive: namely, the financial sector saying, “We need liberty—for ourselves, from government.” By “liberty” they meant taking planning and subsidy, economic and tax policy, out of the hands of government and put into the hands of Wall Street. The result was libertarianism as a “free market.” In the form of a centralized economy that is concentrated in the hands of the financial centers—Wall Street, the City of London, the Paris Bourse. What you’re having today is an attempt by the financial sector to take on the role that the landlord class had in Europe, from feudal times through the 19th century. It’s a kind of resurgence of feudalism…

Michael Hudson, Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy (Counterpunch, 2015)

If you look at the last 200 years of economic theory from Adam Smith and Marx, onward, everybody expected a mixed economy to become more and more productive, and to free itself from the landlords—and also to free itself from banking. The expectation was to make land a public utility, the tax base, and to make finance basically something public. Government would decide who gets the funding. Thus, the idea of finance in the public sector was going to be pretty much what it is in China: You create a bank credit in order to finance capital investment in factories. It means the production of machinery, agricultural modernization, transport infrastructure of high-speed trains, ports and all of that…

But in the United States and England, you have finance becoming something completely different. Banks don’t lend money to build factories. They don’t create money to make means of production. They make money to take over existing assets. Some 80% of bank loans are mortgage loans to transfer the ownership of real estate…

The middle class was able to buy its own housing. It didn’t have to pay rent to landlords or absentee owners, or to warlords and their descendants as in England and Europe. They could buy their own homes. What nobody realized is that if you borrowed the money to take a mortgage, there’s still an economic rental value. Most of it is no longer paid to the landlords. It’s paid to the banks. And so in America and Europe, the banks now play the role that landlords played a hundred years ago…

So, you have a relapse of capitalism in the West back into feudalism, but feudalism with a financialized twist much more than in medieval times…

The fight against China, the fear of China is that you can’t do to China what you did to Russia. America would love for there to be a Yeltsin figure in China to say, let’s just give all of the railroads that we’ve built, the high-speed rail, let’s give all the factories to individuals and let them run everything. Then Americans will lend them the money or buy them out and thus control them financially. China’s not letting that happen. And Russia stopped that from happening [after 1999]. The fury in the West is that the American financial system is unable to take over foreign resources and foreign agriculture. It is left only with military means of grabbing them, as you are seeing in the Near East, and you’re seeing in Ukraine right now…

What is needed for the ideal world that we want? Well, for starters you’re going to need a lot of infrastructure. In America and Britain, infrastructure has been privatized. It has to make a profit. And railroads or electric utilities, as you’ve just seen in Texas, are natural monopolies… If you give it to private owners, they’ll charge a monopoly rent…

China’s idea is to provide the educational system freely, and let everybody try to get an education. In America, to get an education you have to go into debt for between $50,000 and $200,000. Most of whatever you make is going to be paid the creditor. But in China, if you give free education, the money that students earn will be spent into the economy, buying the goods and services that they produce. So the economy will be expanding, not shrinking, not being sucked up into the banks that are financing the education. The same avoidance of privatized financialized or monopolized rent-seeking applies to the railroads, and also to healthcare…

If you provide healthcare freely then employers do not have to pay for it. In the United States, if companies and their employees have to pay for healthcare, this means that employees have to be paid a much higher wage in order to afford the healthcare. They also have to be paid more in order to afford the privatized transportation that gets them work, or auto loans in order to drive to work. Such costs are free or at least subsidized in other countries. Their governments can create their own credit. But in the United States and Europe, governments feel that they have to borrow from the wealthy and pay interest. China’s government doesn’t need to borrow from a wealthy bondholding class. It can simply print the money. That’s Modern Monetary Theory… The banks fear this because they see that Modern Monetary Theory no longer gives them control. They want the rich One Percent to be able to have a choke point on the economy, so that that people cannot survive without borrowing and paying interest…

The US economy has been Thatcherized and Reaganized. The result is a fight of rentier economic systems against China and Russia. So it’s not simply a fight between who makes the best computer chips and the best iPhones. It’s over whether we are going to have a fallback of civilization back into feudalism, back into control by a narrow class at the top of the economy—the 1%—or are we going to have democratic industrialization? That used to be called socialism, but it also was called capitalism. Industrial capitalism was evolving toward socialism. It was socialized medicine, socialized infrastructure, socialized schooling. So, the fight against socialism is also a fight against what made industrial capitalism so successful in the United States and Germany…

What you’re seeing now is a fight for what direction civilization will follow. You can’t have a Bretton Woods for a single worldwide organization, because the United States would never join what it can’t control. The United States accuses a country trying to make its labor force prosperous, educated and healthy instead of sick with shorter lifespans of being communist or socialist…

Once you had capitalism free of the landlord class, … you wouldn’t have this overhead of the idle 1%, only consuming resources and going to war…

In the late 19th century the landlords and the banks fought back… largely through the Austrian School of individualism and the English marginalists, and they euphemized it as free markets. That slogan meant giving power to the monopolists, to the oppressors, to violence. A free market was where armies can come in, take over your country, impose a client dictatorship like Pinochet in Chile or the neo-Nazis in Ukraine. Americans call that a free market. The Free World was a world centrally planned by the American military and finance…

China is doing just what made America rich in the 19th century, and what made Germany rich. It’s the same logic of industrial engineering. This plan is based on economic expansion, environmental preservation and economic balance instead of concentration, so this is going to be a growing economy. So, you’re having a growing economy outside of the United States and a shrinking economy in the States and its satellites in Europe…

Europe has decided unanimously to forego growth and become a set of client oligarchies and kleptocracies…

Rome was a predatory economy held by military force that ultimately collapsed, and America is on the same trajectory as Rome…

These stimulus checks are just being used to pay the banks and the landlords, not to buy more goods and services…

when there is an economic interruption, you don’t leave people in debt…

China and Russia don’t have a backlog of arrears as a deficit. So, the West is beginning with 99% of its population deeper into debt to the 1%…

When you have a country that needs infrastructure and public, social democratic spending, you need a government to create the credit…

The function of the European Central Bank is to create money only for the purpose of saving the wealthiest 5% from losses on their stocks and bonds…

When I was in Greece years ago, we all thought it might join with Italy, Portugal and Ireland and say that the system wasn’t working. But everybody else said no, no, the Americans will just simply get us out of office one way or another…

… they want totalitarian control. And that is what a free market is: Totalitarian control by the financial class…

There’s a very simple way to keep housing prices down: Tax the land rent. Use the tax system not to tax labor, because that increases the cost of labor, and not tax industrial capital, but tax the land, the real estate and the banks…

Well, suppose you were to lower the price of housing in America from 40% to 10% like China. This is the big element in the cost-structure difference. Well, if people only had to pay 10% of their income for housing, then all the banks would go under, because 80% of the bank loans are mortgage loans…

The function of housing in a financialized economy is to force new buyers and renters into debt to the banks, so that the banks end up with all of the land rent that the landlord class used to get…

What if America would try to develop a high-speed railroad like China? Well, then you need the right of way [but] that would conflict with private property and most of the right of way is a very expensive real estate…

You could not have America adopt a China-type industrial program without what would be really a revolution against the legacy of monopoly of a private banking…

Well, what you call a disaster for the economy is a bonanza for the 1%. This is a victory for finance. You look at it as a collapse of industrial capitalism. I look at it as the victory of rentier finance capitalism… A large number of private capital firms have been created in the last year of wealth accumulation. They’re looking forward to great opportunities to pick up real estate at bargain prices, for the commercial real estate that’s broke, and all the buildings and restaurants that have to be sold…

In the early 1980s, when the World Bank projected that the global economy could actually work with only 20% of the global population implying that 80% of the global population was expendable…

They recognized that you can’t have a free market Chicago-style without being able to kill everybody who disagrees with you and who thinks that the market is for the people, not for the 1%…

Every country wanted more population. The idea was that population was the source of an army. It was a workforce to produce more goods and services. But now in the West, a population is who you want to get rid of…

[Russia and China] diplomatically made it very clear that they are not on board for the great reset. Herr Schwab’s absolutely ominous idea and concept, which is supported by the IMF, by the World Bank, by Prince Charles, by big multinational corporations, et cetera. It’s very crazy, because eugenicist ideas are at the heart of the great reset…

The problem is what we can do without a revolution. In the United States… the Democrats in Congress have a new voting law that tries to prevent any third party from being developed in the United States. So there can only be one party, the duopoly between the Republicans and the Democrats. You can’t have a Green Party… You can’t have any political alternative…

There’s no more [teaching of] history of economic thought, so you don’t read Adam Smith, John Stuart Mill or Marx. There’s no economic history. So, you don’t know what the fight against feudalism was all about. You don’t have an idea that there’s an alternative… Well, of course there’s an alternative, but if people don’t know that there’s an alternative, they’re going to fall for this line…

So, you can’t have an island of efficiency and public banking in a system that basically is still financialized. The problem is systemic…

Texans think, if they were to succeed it is not going to be along the lines of public banking that you want. It would be a private bank owned by the oil companies that calls itself, a public bank…

What can the Americans do? They have already voted. We have democracy. They’ve voted for what they wanted to do… They want shorter lifespans, lower wages, less education and less public services…

A hundred years ago… communities that were founded … had the idea that [they were] going to collect the land rent. They’ve all now become bourgeois, gentrified yuppie communities…

It’s a fight of economic systems. It’s a systemic fight. You can’t fix it at the margin. The problem goes deep to the core…

[If] the owners had to pay the full land tax that you and Henry George’s followers want, how would they pay the banks? Are they going to pay the land rent on top of the mortgage interest, or are they going to default? … You would have massive defaults and foreclosures by the banks taking over the properties of families and cities that had collected the land rent for themselves. You can’t have the same rent paid to two different parties. You have the land rent either paid to the government or paid to the banks… The banks will use American law to say that this is appropriation of property without compensation. You really would need a new constitution, and that would need a revolution. A revolution is a step function, a discontinuity. You cannot have a continuity to make a rational economic system pasted on to an irrational economic system at the margin…

You may be non-violent. But the bankers and the landlords are not. One group will be non-violent and the other will be violent. Who’s going to win? …

Well it’s true that much of the military did defect to Russia’s Communists in October 1917. But I’m not sure today’s military is like that…

So, what do we have now? We have the three sovereigns getting together: Iran Russia and China. We have a strategic partnership between peer competitors, Russia and China, which was Brzezinski and his acolytes’ supreme nightmare. The Americans need to prevent the emergence of a peer competitor in Eurasia…

The Americans want war. The people that Biden has appointed have an emotional hatred of Russia…

And Putin is quite right. America has got its power by breaking contracts. It broke all of the contracts with the native Americans to take their land. It’s broken the Iranian contract. It broke most recently the Ukrainian Minsk agreement, and the JCP before. So what’s the point of making an agreement with any Americans, if they’re going to say, “Okay, now that we’ve got a compromise… We’re going to break that old agreement and we’re going to ask you for yet more.” …

There are many areas where a mutualism works. Farmer’s markets, distributors and small factories… How are you going to have a mutual oil company? That’s very capital intensive. How will you have mutualism in a high-speed railway transport system? How will you have mutualism in building a system of foreign ports? Like what China’s doing with the belt and road extension… mutualism can only work as a particular sector of the economy. It can’t be the economy. Proudhon wrote … that debt is going to grow so large that it can’t be repaid. You’ll have to be able to deal with that. So you can’t really have a mutual banking based on compound interest and everybody getting deeper and deeper into debt… Marx wrote a long discussion explaining why a Proudhon mutualism wouldn’t work…

Western civilization made a complete break from the Near East. They didn’t cancel the debts. Western civilization was oligarchic from the beginning. There never was really a democracy here except for a very short revolution in the seventh and sixth centuries BC, catalyzed by the “tyrants.” What you think of as democracy, the rule by the people overthrowing the oligarchy, was called tyranny in Greece. In Rome it was called “seeking kingship,” because … kings kept the oligarchs in place, just as the tyrants redistributed the land and cancelled the debts in Corinth and other Greek cities…

The ruling classes in America and Europe wanted to concentrate all the wealth in their own hands. They were against the … democratic reform of the 19th century [which was] was for a land tax. It was for public banking. It was all for public infrastructure to lower the cost of doing business. This was taught in the business schools in America. But all that has been expurgated from economic history and from the history of social thought—into the memory hole, as George Orwell would say…

There is no need for China or Russia or Iran to go to war to [develop their nations]. They’re doing it… They don’t need a revolution to do it, because they don’t have a vested interest fighting against them and killing them if they do it…

If you have anyone in the West who tries to do something productive, you marginalize them and prevent them. And if there’s a threat of China and Russia and Iran growing, then you try to do what Americans did to Russia in the 1920s. You will fight it militarily at their borders, you fund color revolutions, so that they have to dissipate the wealth that they create in military overhead to match the military overhead of the United States. The dream today is to make Ukraine Russia’s Afghanistan. The difference is what gives China and Russia the advantage. Defense is only 10% as expensive as offense. America needs a huge offense, and it needs huge corruption. To be offensive, America has to corrupt European politics, corrupt the labor unions, corrupt the whole educational system, corrupt the media into junk media and junk economics…

And it has to have enormous profits for the military-industrial complex. That is America’s version of industrial capitalism. All China and Russia have to do is develop high-speed missiles, the defensive missiles to stop it. So they’re not being bled. It’s not going to be Russia’s Afghanistan. It’s America’s Afghanistan all over again…