Odd Lots - Michael Hudson On Why The US Risks Becoming The Next Greece

Episode Date: October 12, 2020

In the wake of the Great Financial Crisis, you heard a lot of talk about the US becoming like Greece unless the budget deficit were brought under control. However, these warnings proved to be unfounded. That being said, there are risks of a different variety. On the latest Odd Lots, we speak with the economist Michael Hudson on the risk of too much private sector debt, which could lead to permanently degraded consumption and investment.See omnystudio.com/listener for privacy information.

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. So Joe, I think we've spoken about this a lot, but one of the defining factors of the COVID crisis and its impact on the economy has been this idea that economic time has sort of stopped.

People weren't going out as much. They weren't shopping as much. They weren't eating. but financial time kept going. So even though businesses aren't getting revenue and income, they still have to pay rent, pay back any loans they might have and pay taxes and things like that. I think you actually wrote about this when we're just getting started with the coronavirus crisis. Yeah, that was kind of like identified as the early theme, which is like, okay, even if we can get through this crisis in a expedient manner, which at least in the U.S. we haven't, you still have this issue of like,

the bills pile up today or next week or the month later, and without revenue, those bills suddenly become defaults and potentially bankruptcies. Right. That's exactly right. So a lot of the policy responses we've seen so far have been focused on bridging that gap between economic time and financial time, if you want to call it that. And they've been offering things like tax relief and loan forbearance. But the question, of course, is eventually, you know, people, are going to have to pony up the money that they owe and what happens at that point, especially after they may have endured months, possibly even years of economic weakness, right, and less revenue than they would otherwise have gotten. Yeah. I mean, I think one way to sort of like conceptualize

the policy response, at least in the U.S., is that to some extent, you have the Federal Reserve having backstopped a fairly significant portion of credit markets and done a number of things that actually caused sort of credit issuance to boom, even in the middle of the crisis so that companies would have enough liquidity. And then the other side of the coin, so to speak, would be fiscal policymakers and then the health policy makers trying to sort of get us to that other side so that all these bridge loans that have been taken out can actually be paid for at the other rent. Yeah, that's right. And of course, the concern that you hear quite a lot is always that one man's or one person's repayment is another person's income, right? So if you stop the flow of rent,

for instance, landlords aren't going to be getting the income that they're expecting to get. I know there's probably not a lot of sympathy for landlords at the moment, but the concern is that that ends up impacting the banking system, it ends up impacting the flow of credit, which feeds back into the economy in a negative way. So today, instead of talking about debt forbearance, we're going to be focusing on something slightly different, and that is the notion of debt forgiveness. So not just telling everyone that they can pay their bills or their debts in a few months' time, but actually writing them off. Right. That is not something that we've ever really done much in this country. There was a lot of talk about it.

after the great financial crisis, after 2009, there really wasn't much. You hear about it with student loans. You hear about the idea of like, okay, this time we need a wash. But I would say both sort of culturally and politically, we're sort of allergic to this idea of just sort of writing them off. Yeah, I think that's exactly right. Okay. Without further ado, we're going to get into all of that. We have the perfect guest for this particular topic. We have. Michael Hudson. He's the president of the institution for the study of long-term economic trends, also a professor of economics at the University of Missouri, Kansas City. He's also the author of numerous books, including and forgive them their debts, which is a sort of very long-term history and overview of the tension between creditors and borrowers, a really good book. So the perfect person to give us perspective on what's going on right now and how it compares. to thousands and thousands of years ago. Professor Hudson, thanks so much for joining us.

Well, it's good to be here, Tracy. Thanks for having me. So maybe just to begin, I mean, where do we begin? Can you sort of give us your top level view of how you view the coronavirus crisis and the impact on the economy in terms of creditors versus borrowers. Like where does the power actually lie at the moment? And where is the biggest pain threshold? Well, both you have already in the introduction gone over what the problem is. And I think it's much easier to understand the logic of debt cancellations, write downs, if you look at what happens if you leave business as usual. What happens if you leave things the way they are right now? Well, think of restaurants, for instance,

restaurants in New York City have been closed or operating at a minimal basis for six months. They've accrued back rents and taxes. There's no way that they can reopen and hope to earn the six months rent in the next two or three or maybe four years. And if they did have to pay the rents that have accrued when there are no revenues at all, then they're going to have to go out of business. And there's talk of 70% of restaurants in New York City going out of business. You could say the same for gyms. You've seen the Metropolitan Opera closed down, Carnegie Hall concert stopping.

So you're having an interruption in economic activity. And the main effect of debt, people think of debt, is transferring interest and money to the creditors. But in this case, we're talking about transferring property to creditors. We're talking about landlords or people who bought a house in a mortgage. They've lost their job or they're on a part-time basis, and they're in danger of defaulting on the mortgage. And there's a danger of the same kind of decline in homeownership today that you had

after 2009 when there were the widespread defaults. So the question is, radical as it seems, to write up. down the debts, it's even more radical to say, well, let's transfer property to creditors, let's close down family businesses that have been there for many decades. Let's completely leave the economy in a closed down position. The reason people have canceled debts over the time is to restore economic normalcy. And this has been going on for over 3,000 years, 5,000 years. My book, What is much in the news right now are acts of God by insurance companies. You can look at the virus as being a kind of act of God. What do you do when something happens

from outside the economy? It's not the fault of the income earner. It's not the fault of the restaurant. It's not the fault of the homeowner who's lost the job. It just happens from outside the economy. Well, for thousands of years, not only in Babylonia, but in Rome, when there was a problem, a disease, a flood, or a drought, the ruler would say, okay, the taxes don't have to be paid, and in fact, the debts don't have to be paid. Most debts in the past were tax debts. And if they're not paid, the problems were really taxes. And here in New York, that's especially important. The transport system has been almost empty for six months. It's run up a debt of $4 billion. The city has run up a debt of about $6 billion. What is going to happen? The mayor has talked about

drastically closing city services, laying off municipal labor, raising the transport fares on the subway. obviously there's going to be a break in the chain of payments. How do you avoid that? Well, there are a number of ways of avoiding that. One would be for the Federal Reserve to simply create the credit to sustain the system for people who can't pay, to transfer income to the restaurants enough to pay the costs of operation, the rents and the labor costs, to pay Carnegie Hall and the Metropolitan Opera enough not to go under. The other way is, to simply write down the debts, because if you don't write down the state and local and public debt in this case, you're going to have a slash of government services, and the government has said, well, what can we sell off? We're going to have to begin to sell off public enterprises,

like Chicago sold off the parking meters in the streets. We're going to have to sell off parks. We're going to turn roads into toll roads. You can see the problems are going to occur. You have to look at it as an overall system. And if you don't write down the debts or if you don't provide the money, just print the money, to let the economy tread water, what you call time out of time, then you're going to have a drastic change and shrinkage of the overall economy and will end up looking like Greece dead a few years ago. I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets.

From corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso.

Subscribe today wherever you get your podcast. So what is an example in history? I mean, you mentioned you do a lot of work with history, and you mentioned this idea of debt forgiveness going back 5,000 years. What's a sort of relevant period we might look to a specific example where a disease came or some act of God happened and the solution was right off the dead? Well, the laws of Hamarabi were announced. around 1750 BC are an example. That's the first set of laws that explicitly refer to an act of God.

In this case, Adad, the storm god. Hamarabi says that if the storm god added floods the fields or cancels the debts, floods the fields that causes a drought, then the taxes don't have to be paid and the debts don't have to be paid. In another part of the laws of Hamarabi, he said, if there's a disease and the disease prevent people from operating in normal activity, then the debts that they are canceled. Now, the reason he did that was if he did not cancel those debts of the cultivators, and we're talking about an agricultural economy, low-surplus economy, then you would have the debtors fall into bondage to the creditors,

just like you have in the Bible, debt bondage, when you can't pay the debts. And if a debtor ended up owing his labor time to the creditor, then he wouldn't have the opportunity to work on Corvay labor, that is, public labor, to build the castle, the walls, to dig the irrigation ditches. He wouldn't be able to serve in the army. And if he owed the crops to the creditor, and we're talking about 33 and a third percent interest for crop loans, then he wouldn't be able to pay this. taxes. So the Hamarabi would have, the palace economy would have not only collapsed, but you would have had the wealthy creditor class emerging from the palace bureaucracy, the local, local leaders. And the first thing they would have done once they got power was to overthrow the king, as they did in Byzantium, powerful enough to overthrow the king and prevent the king from having

that power to tax them and the whole economy would have turned into an oligarchy instead of a steady state system. Now, the idea behind Hamarabi was taken over from the Samarians, and their word for these debt cancellations, think of it as a clean slate. Everything goes back to the way things were before the crisis. And the word for clean slate in Samarian was Amargi from Amma, the mother. It was the mother condition, meaning it's the original condition. The whole idea is how do you come out of a crisis, whether it's a doubt, drought, or a disease, and end up in the kind of way you were before, which you assume to be rough balance. People produce enough to live and pay their taxes and get by and conduct normal activity.

How do you restore the ability of life to get back to normal so that the equivalent would be in modern days? How do you let restaurants reopen without having to say, well, we're just going to go out of business, rather than pay all the money that we owe that we end up working for the landlords and for the creditors or the city, how do you enable the cities to start their transportation system again at rates that people can afford to pay on the subway or the other transportation? How do you prevent the economy from being permanently wounded? And again, the only way to do it is to write down, say, the debts don't have to be paid. Somebody has to suffer because, as Tracy pointed out, that one person's debt is another person's claim. And if you don't pay the debt, then some saver or creditor is not going to be paid.

And in this case, it would be either the landlords are not paid or in special conditions where small landlords, they'd lose the property. In some way, the banks and the creditors are obliged to take the law. because they're rich enough to take the loss without disrupting society. If you have the debtors absorb the loss, society's disrupted and torn apart, and the tax system's torn apart. If the creditors lose, well, they're not quite as rich as they used to be, but they still get by. That's why Hamarabi did not cancel the business debts.

Debt of merchants, debts that were denominated in silver for trade, none of the silver business debts were canceled. Only the personal debts, mainly of cultivators on the land were canceled. Same thing in Rome, when Emperor Hadrian canceled the debts. Rome had been engaged in fighting with the North, with the Germans. He canceled the debts so that you wouldn't have the army falling into bondage to creditors, so it couldn't fight in the army anymore and defend Rome. Fifty years later, Marcus Aurelius did the same thing for the same reason.

So almost every economy has in the past has come to the point where it says, well, it's easier to make the creditors absorb the loss than to have the rest of the economy fall into bondage and a transfer property to endow a creditor class that forecloses. And we end up in an economy with a very different shape. Do you really want the economy to change its shape that way? So I think there's a general sense out there that debt forgiveness or debt jubilees are a really leftist policy. And I mean, you just gave us all these great historical examples. Hamarabi wasn't exactly a liberal, right? He set out some pretty tough punishments for crime, for, I think theft, some thefts were punishable by death. you laid out a really good rational economic reason why he would be interested in debt forgiveness.

But I'm curious why that rationale doesn't seem to resonate in modern day times, especially in the U.S., as Joe kind of mentioned in the intro, whenever you talk about debt forgiveness in the States, even if it's something like student loans, you seem to get this knee-jerk reaction from people who say, well, you know, I paid my student loans. why do you get a free ride? And it feels like once the system is in motion, it's very hard to change it. Why do you think the attitudes are so different now to, I guess, what they were in ancient Samaria? I think because of unfamiliarity with history and the fact that the left in America doesn't discuss debt or finance. I don't think I've had any discussions about finance or debt for business or even monetary policy with the left at all. I've talked with Federal Reserve branches. I talk to Wall Street people. I talk to financial people. I talk to Republican politicians. Nobody on the left has been interested in this. And in fact, in China, where I was a professor for the last few years in Beijing at Peking University, I went over a few years ago along with David Harvey, a colleague of mine from Cooney here in New York,

and we didn't find any discussion in China about what are you going to do about the Chinese housing boom that's come up with all of the people borrowing to buy real estate on credit. And because everything has to be couched in terms of Marx's capital there because they say they're a Marxist state. David Harvey said, well, you know, Marx wrote more than volume one of capital, which is all about labor and employees working for their employers. There are volumes two and three in capital. Volume three, Marx talks about how debt grows by its own purely mathematical laws, which have nothing to do with the economic rate of growth. the financial system is wrapped around the economy as a whole and really is independent from capitalism. It existed long before capitalism and obviously is existing after capitalism in China. They did not seem very interested in this line of approach at all.

In fact, we could see that it made them feel very uncomfortable to talk about that. So I think the people who are realizing that something has to be done about that are mainly financial. They're mainly in Wall Street. For years, I worked with Chase Manhattan as our balance of payments economist. And it was the banks that saw, well, wait a minute, how much can a third world country afford to pay? How much can such and such an industry afford to pay? The banks know that many sectors can't pay. The rest of the economy isn't looking at this because there is a number.

assumption like you said, the assumption is that anybody can pay if they just cut back on their spending enough. But that's not the case. You mentioned student loans, and certainly many people think, well, I really scrape by to pay my student loan. Why would other student loans be forgiven? Well, the answer is simple. If you were able to scrape by and pay your student loan, good for you. You were able to survive. Most of the people who don't pay their student loans are not paying because they're going to the movies or they're gambling or they're consuming more, they're paying because they really don't have the money to do what you did, to scrape and pay, especially minorities who've gone to junk colleges, the sort of private colleges that say they're going

to get them a job in manual labor or some kind of technology that really doesn't work. There are many people stuck with loans that they're unable to pay, and if they do pay it, that all the people with student loans now actually have to pay the student loans. Then they're not going to have enough money to take out a mortgage to buy a home of their own and form a family. They're going to have to live with their parents. They get married. Are the children going to move in with the wife and kids going to move in with the parents? Having to pay the student loan crowds out the ability to take out a mortgage loan, to take out other loans. you need. And then, of course, you have the medical debt that is probably the main source of bankruptcy

for many, many people. You get sick, you go into the hospital, or even if you get tested, you're broke. And if the Federal Reserve is correct when it said that half the Americans cannot raise $400 in an emergency, and it costs that much just to have a COVID test, and it costs maybe $2,000 or more if you go in just to be admitted to a hospital. You can imagine the devastation that this causes to people that not paying a debt is not a matter of choice. It's a matter of the money isn't there. Michael, I want to go back to something you said, which is just that, you know, you could look at the current situation in which all these different entities, whether it's restaurants, whether it's museums, whether it's the New York City transit of things. authority. They all owe a lot of money. And there are sort of two different paths we could take.

We could cancel all the debt or some level of it, cancel debt. Or you have the government print a lot of money and sort of allow, just give it to people to make them whole. And you also said they're going sort of back to the ancient times that a lot of the debt that was in fact canceled was tax debt. So public debt essentially that the cost of the debt cancellation would essentially be on the public sector balance sheet. And so I'm curious whether functionally speaking, you know, talking about debt cancellation in terms of ripping it up sounds pretty radical, talking about massive fiscal aid so that all these different entities could pay their bills during the crisis sounds a little less radical. But I'm curious if functionally they're kind of the same thing, this idea that

what sort of in the ancient days was putting the, you know, having the public balance, sheet be the bearer of the losses, is more translatable to aggressive fiscal expansion as opposed to pure debt ripping up, per se? That happens very well. China is able to cope with this quite well because its monetary policy, its central bank is part of the government. There are many companies in China for the last 10 years or longer that have not been able to pay the debt. What do you do when a industrial company can't pay the debt. Well, in the West, if a company can't pay it debt, it goes bankrupt, and it's sold to the highest bidder, and it could be a foreign buyer, and it closes down, and the workers are unemployed. But what the Bank of China does,

the government simply keeps creating the credit and lending the bank, the money, the corporation that's the debtor of the money. here, that company would be called the zombie corporation, but China will just keep lending if the money, and then because it creates the money, it'll write it off. It's easy to cancel the debts when the debts you're canceling are owed to yourself. Homerabi could cancel the debts because most of the debts ultimately were owed to the palace. He didn't have to deal with an independent financial class that said, wait a minute, we're going to lose if you cancel the debts. We're going to overthrow you if you try to do that.

He was canceling debts to themselves. The Roman emperors were canceling debts owed to themselves, not to the wealthy Romans. Now, and China is canceling, well, because China's government provides a credit, it premises that finance and banking should be a public utility. It should not be privatized, and the advantage of having banking is a public utility, or like operating the Federal Reserve here is a public utility, is you can create the money, you can lend to keep a restaurant afloat or a museum afloat or a city and state afloat.

And then you can simply wipe out the debt. And you're only canceling the debt to yourself. You're not threatening to take it away from any banker or bondholder or a stockholder. So by making finance a public utility, or at least making the credit, emergency credit, public utility, You create the credit, and then you say, okay, we provided you the credit. And when we provide you credit in a shutdown, this is not inflationary. I think Germany is paying its labor, 70% of the normal wage income. The Federal Reserve could create enough credit to keep most employees who have lost the jobs,

able to break even. Most restaurants and most renters who are unable to do business. they'll owe a debt to the Federal Reserve that will continue to keep them afloat. And then when the crisis is over and the vaccine is in and life goes back to normal, the federal will say, okay, we've provided the credit. Now we can just wipe it out and life can go back to normal. The idea is to restore the status quo on anti. The idea is to make the economy as workable as it was before the crisis.

A lot of short daily news podcasts focus on just, one story. But right now, you probably need more. On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes because no one's story can capture all that's happening in this big, crazy world of ours on any given morning. Listen now to the Up First podcast from NPR. Since we're touching on fiscal stimulus as one way to keeping the economy afloat and making sure that there are jobs available for people. Joe is going to make fun of me for doing this, but I'm just going to go out, go ahead and ask you, what do you think about MMT, modern monetary theory?

It feels like it's maybe one version of what you're saying. And I know, I guess you would have worked with Stephanie Kelton when she was at the University of Missouri, Kansas City with you. What do you think about that policy and how much difference or daylight is there between MMT and its policy recommendations and the kind of debt forgiveness that you are discussing and advocating? Well, I was one of the developers of MMT

in the late 1970s. And Stephanie was our department chairman there. We were all brought to Kansas City together in order to popularize MMT. And Stephanie and I have gone around the world together giving lectures on it. She usually gives the introductory lecture about how running a deficit pumps money into the economy. And then I follow up with a second, and the economy needs to be pumped up or else will have austerity.

And then I give the lecture to say, well, the economy is really two sectors. There's the financial sector, finance insurance and real estate, the property sector on the one hand. And then there's the production and consumption sector on the other. Now, most MMT people talk about the government printing money into the regular economy of production and consumption people who work and produce things. But you've just seen the main practitioner of MMT, of course, is Donald Trump. And he just did the enormous 10 trillion MMT example. But he only put two trillion of that into the economy. The rest of the money went into the stock market and the bond market.

So the question is, who are you going to run MMT4? Are you going to run it just in order to pump up the stock and bond prices and real estate prices and to keep the debt system in place? Or are you going to pump it into the economy and let the economy survive? Something has to give. Either the economy loses or the financial sector loses. And that really is the debate on MMT. Mr. Trump didn't call what he was doing MMT,

but it's exactly what MMT is creating the government, just simply creating the credit. That's what quantitative easing is. That was all MMT, but it was MMT going into the stock market. And most of us at Kansas City are trying to create prosperity for the economy as a whole, for labor and industry and agriculture, not simply a high asset prices. So something you brought up, and I thought it was interesting,

the way you framed it in comparison with China and then what you identified right there, you know, thinking about MMT as a political project, or thinking about your own work, of course, as a political project, how much can you identify it as essentially what you said of no longer having the financial sector be this sort of third entity out there. You have the sort of productive capacity of the economy. You have the government. And in China, as you described it, the sort of there isn't much daylight between the financial sector and the government, whereas in the U.S., the financial sector is its own distinct set of private interests that's distinct from the government and distinct from

actual productive capacity. How much is, in your view, the solution essentially collapsing the financial sector so that it's just, it can no longer represent its own interests distinct from everything else? Well, what are its interests? I think you can say that a lot of the problems that America has been in slowing down for the last 10 years, really slowing down since 2009 has been financialization. And the problem is that the financial sector doesn't create credit for the reasons that MMT would. The financial sector creates credit against assets, against collateral. 80% of bank loans are for real estate. And so as the credit standards have been loosened for real estate, banks will lend more and more and more money against any given piece of real estate.

And the effect of financialization has been to increase, to inflate real estate prices. banks will lend money against stocks and bonds, and they'll lend money to finance corporate takeovers. And they also lend money, of course, for education. And just as a house is worth, whatever a bank will lend against it for the new buyer, an education is going to be worth, whatever a bank is going to lend to a student to buy an education. And as banks have made loans with government guarantees with no risk, they've made loans without cash. taking into account the ability to pay. When I went into Wall Street, 60 years ago, the first question any banker would ask is,

can the borrower pay? Well, right now, that's not asked anymore. Now that the FHA is guaranteeing mortgages and the student loan are guaranteed, banks don't have to worry about repayment. So they're just creating as much credit as they can without reference to the ability to pay. The government isn't looking at the ability to pay. The FHA no lets some mortgages be extended up to the point where they absorb 43% of the borrower's income to pay the mortgage. That'll be guaranteed.

Well, imagine if you're paying 43% of your income to pay your mortgage, you're paying taxes of maybe 10% or 20%, you're paying health insurance, you're paying your Social Security withholding, There's been less and less and less income available to spend on goods and services because more and more American income is being used to pay the financial sector and its associated real estate insurance sector. So as more money is paid to the financial sector, is debt growth. Same thing for corporations. As corporations have to pay more money to the bondholders and dividends and the banks, there's less and less for new capital investment in the economy. is shrinking, largely because there's been a diversion of income away from the real economy, the production and consumption economy, to the financial sector. So the financial sector in the United States, let's face it, has become dysfunctional.

And I think almost every financial manager that I know realizes that the sector has become dysfunctional. And they're saying, this is a hell of a way to make a living. I'm going to play by the rules of the game, but I would be nice if the rules of the the game were for me to be a banker and I was actually helping the economy grow instead of just diverting income from the economy into the banking system. So somehow the financial system has to be restructured so it can cope with a coronavirus trauma or act of God like we're having now and be able to restore normalcy. And I think the only way to do it would be,

I mean, China has shown the most successful way of doing it. There was hardly any interruption of activity there. There's a very quick recovery. And it's because of the way that China has structured its financial sector under public direction, instead of leaving it to individual banks that foreclosed, take over real estate, grab factories, and create, make the economy look like Greece. I have a related question, but I think when most people think about MMT and policy prescriptions, they think about things like a jobs guarantee or maybe a Green New Deal. But you just mentioned this idea of Trump as an MMT or himself, spending lots of money, but maybe spending it in the wrong way.

how useful is an economic theory that can lead to such different policy outcomes? The important thing about MMT is you realize that money doesn't, governments don't have to borrow to spend money. Governments can create the money. They don't have to borrow from a bank or a bondholder to lend out. The effect of borrowing from a bondholder and creating money is, Identical. If a central bank will print the money to spend into the economy, it's no more inflationary than borrowing from a bondholder. Because the bondholder do what a bank does. Simply decide, okay, I'm not going to spend money on other financial assets. A bondholder is not going to cut back consumption spending in order to lend money out to the government. Stephanie and MMT's point is that government money creation is no more inflationary than borrow. and you don't have to borrow and pay interest to an independent financial sector, where you're

limited to what bondholders will let you do, you can simply print the money. And by printing it, you save the amount of taxes that have to go to paying interest. You would save the amount of taxes that have to go to amortize and pay down the debt. Certainly for states and local governments here, it would be probably the only way the states and local governments can avoid drastic downsizing is government lending to them not going to private bondholders. Because in New York, if New York State a borrow some private bondholders, the bondholders will say, well, you'll have to balance the budget by selling off property or by cutting back public services, less transportation. And with less transportation, people are just going to begin moving out of New York.

it'll become not as livable as it used to be. So that's the main thing that MMT says, that there are two ways of creating financing governments, printing it, borrowing, and the effect on inflation is identical. I want to ask you, I want to go back to this situation in China again real quickly. We actually, several months ago, we actually talked to our Bloomberg, one of our economists here at Bloomberg, Tom Orlik, who is a new book, China, The Bubble that Never Pop.

And we talked about some of this, which is that due to the structure of finance in China, that all this sort of, oh, the debt bubble is about to explode fears. They're misguided. It's sort of based on a misunderstanding. Nonetheless, I'm curious what you see as the costs of a system like that, because some critics would look at it and say, okay, yes, you can certainly keep companies alive indefinitely, but what about corruption? What about productivity? What about the sort of what in the West, we might say,

is, well, what about the disciplining effect of the market by having, by not allowing, you know, companies to roll over their debts indefinitely? Do you see costs associated with the Chinese system whereby, okay, debts and bankruptcies aren't as much of an issue necessarily or systemic, but what are, but in terms of, you know, keeping all these companies alive with sort of ongoing access to credit? Well, I think the recent weeks newspapers have shown there's just as much corruption in the United States financial system as there is in China. I mean, look at Deutsche Bank and look at all the banks that have been involved. Ten years ago, corruption was a very serious problem in China. And when I'd lecture there to students, you could see the idealism.

I hadn't seen it in any other country, an idea that they can really, they'll graduate, they'll go. into government, they're going to clean up corruption. And really, they felt it was their country and they had a chance of actually shaping the economy because it was something entirely new. Well, the problem, 10 years later, that we can see is a cleaning up corruption does entail a lot of government oversight into the economy, and the cost of cleaning up corruption is a very heavily regulated economy. They're trying to get rid of corruption now, and they're...

From what I'm told by Chinese businessmen, it seems to be working quite well, certainly compared to what it was before. But getting back to the other question, what is the cost? What is the benefit? The benefit is when there's an economic downturn, like the coronavirus, the company did not go out of business, lay off its employees, and be sold to foreign buyers. It was, the economy was able to maintain stability. So the cost really is money is cost free if the government creates it. Borrowing is not cost free, but money creating is cost free as long as it's not inflationary. And China does not create money in an inflationary way.

It creates money simply to stabilize employment in a way that has not caused any more inflation there. then it would here. If New York City and New York State received money creation to just continue operation, that wouldn't inflate prices at all. In fact, what we're in now is debt deflation. If we don't write down the debts, then the debt service is going to cause a deflation of prices. That's the real problem today, not inflation, but deflation is people can't afford to buy goods and services and have to cut back their family budgets. and buy less and less to employ fewer and fewer people producing and selling goods and services, fewer restaurants and business and so on. So if you look ahead to the future and, you know,

if you recognize that there may be some desirable aspects of a Chinese-style command economy, as you're describing, or at least one where the government has a little bit more influence over the financial industry, do you see the U.S. becoming more. more like the Chinese system, or alternatively, do you see China becoming more like the U.S. system because of global competition? I'd be curious to get your views. You had to choose. China certainly is not going to privatize banking. It is absolutely drawing the line. It is not going to let banking be private because credit is the main public utility.

an economy is basically planned through its credit system. Who is going to supply the credit? America is turning into a centrally planned economy, not planned by Washington, but planned by Wall Street, just like European countries are planned by their financial sector. And the problem is who's going to do the planning, and what is their planning going to be for? Is it going to be to make the economy grow,

or is it going to get rich off the economy by shrinking the economy? That is the whole question. I don't see the United States getting more like China, despite MMT being used modestly. I see the United States getting more like Greece in England, austerity, more and more austerity, a slow crash, a slow debt deflation. And that's what I've outlined in my book, Killing the Host. I described debt deflation, which was discussed in the 1930s when it was actually happening, when people had to pay their debts and couldn't afford to buy goods and services. What happened in the Great Depression is happening to get again today, but it's happening in

slow motion. It's interesting, the Greece comparison, because I remember the Greece comparisons, like in 2011, and people would say, oh, the U.S. has all this national debt, we're becoming like Greece, but you're using it in a different way, not that we're piling on all this debt, but that we're unwilling to spend and going into this sort of forced austerity mode. And of course, we might see it here in New York City without further aid. I want to ask you a bigger question. You know, on episode after episode, interview after interview that Tracy and I do on this podcast, this sort of idea that, like, we've had this like 40-year run in a way of the existing model seems to come up.

And it comes up when we talk to economists. We recently talked to Paul McCulley, a few others, this idea that really over the last 40 years, we've crystallized this. idea of the sort of financialized asset-driven economy. And I'm curious whether you sort of see the same thing as roughly 40 years ago, either some turning point or some great acceleration towards now. And I'm curious also, it's like, is coronavirus, is this crisis a turning point for that or is it just, in your view, just going to sort of keep accelerating on the existing trajectory? Well, 1980 certainly was a turning point. You had Margaret Thatcher in England and Ron Reagan in the United States, the whole tax system was shifted to favor real estate and the

financial system, not the real economy. And then you had the shift of American corporate employment to low wage countries in Asia. So, yes, 1980 was the turning point. And all of the trends made that from World War II to 1980 for more and more prosperity for labor, were suddenly reversed. In retrospect, the 1970s looked like a golden age now. But since 1980,

real wages haven't really gone up very much. Death has gone way, way up. So you've had a debt-driven economy, debt leveraged economy. You had the corporate takeover and corporate rating movement began in the 1980s. You had the, as interest rates came down

from my former boss that chased Paul Volker's 20%, 1980, you've had the greatest bond market boom in history. Bond prices soared, stock market soared. You created huge financial wealth without creating actual industrial and consumer wealth. So you had a shift of the beneficiaries of the system from labor and business to finance, the Wall Street, the real estate sector, and the insurance sector. So the whole economy changed in 1980, and it's changed in a way that has left us now

debt-ridden. The economy's run up as much debt as it can. It can't really push up anymore, although the Federal Reserve can certainly keep pushing up the stock market, but it is not pushing up the economy the way it's going. And so I don't see the economy as recovering. The coronavirus is simply left us idling at a low level, and I don't see any way of getting out of the level, as long as we have to pay the debt legacy, the arrears that have all mounted up and are just a burden on families, on businesses, and on states and localities. They can't carry it,

and it's crunch time. And unless you alleviate the debt problem, you're going to be in a slow, new depression. It's always a good podcast when you can go from Hammurabi to Margaret Thatcher, I think. Right. Professor Hudson, thank you so much for joining us. I really enjoyed that conversation. Thank you. Yeah, that was great. Good to be here. Thank you. For having it. So, Joe, that was a wide-ranging conversation. It was. And, you know, of course, it did touch on a lot of themes that we've discussed lately. But A, I liked his sort of obviously historical perspective. That's a big part of what he's known for. But I thought the comparisons to the sort of Chinese model were pretty interesting.

And it sort of helped me crystallize like sort of what are some of the tensions here, perhaps, about going at things in a different way, whether it's through much more fiscal authority centralization of credit and spending, sort of a useful counterpoint, I think, to how things work out. Yeah, and it actually reminded me quite a bit of the episode we recorded with Victor Schwetz a few months ago. Yeah, definitely. I think he made similar points about what works in the Chinese model and this idea of the U.S., perhaps moving closer to it. There is another thing that I was thinking about, which is Professor Hudson's point about when something like this happens in the economy, you know an act of God, as you put it. You know there's going to be pain and the policy prescription is basically all about finding who can bear that pain most efficiently or who can bear it with minimum disruption to the economy. And, you know, as he put it, it's usually the creditors. They have lots of money.

They can do this. Or they could be backstopped by the government, which has the balance sheet to endure the pain. Yeah, I mean, right, exactly. I mean, it's almost like you could say that initially in the crisis, the sort of March and April consensus was like, nobody should have to endure the pain, right? That this was like a true act of God. It was extraordinary. And we're going to get things back to normal. No one should be permanently put out of work.

No one should have to lose their businesses. And we actually did a lot of spending that was on a scale and sort of, I don't say generosity, but maybe generosity is the word. It was sort of unparalleled throughout history. I mean, the fact that unemployment insurance was supposed to basically be a complete replacement for the medium worker, the fact that we had no strings attached, almost payroll protection program money for small businesses and so forth. But, you know, we did lose that appetite pretty quickly. And it's like, okay, even though the fact that public health authorities failed to contain the virus or people's behavior failed to, a few months later is like, all right,

you're kind of out of luck. Get back to work, find a job, do what you have to do. It's like, we didn't, that, that appetite really did not last very long in this country. Yeah. Well, I mean, not just that, but a lot of the forbearance programs that were either passed or the ones that were discussed like the payroll tax cut, all of those are still predicated on people eventually paying that money back. So for instance, in the housing market, I think most of the forbearance programs are renewed every three months. So you can kind of see this wall of forbearance, maturities coming every three months. And at some point, you get the sense that they're not going to be rolled over and, you know, all of a sudden,

the bills are going to come do again. And you're probably going to have a rerun of the economic pain that we experienced in March. The other thing to think about is not something we really went into, but, you know, there's a lot of like talk about the future of X, the future of cities, the future of offices, the future of working from high. home, the future of e-commerce and stuff like that, and, you know, all that's important. But there is a sort of sinister way to think about that, which is, because remember, you know, something that Professor Hudson said is like, no, the idea is like to just go back to the previous state.

And I forget the word he cited. But it's like, no, the purpose of a forgiveness and a blank slate is just, just go back to the pre-normal. And if you're sort of preoccupied with thinking about the future of X and how will coronavirus change everything, which there were like tons of articles about for the last six months. It almost like provides a pretext in a way for not doing the clean slate. In other words, it's like, well, we can't just go back to the old normal. We can't just wipe everything out because everything is going to change post-coronavirus. And maybe some things will change, but you can

sort of see how that rhetoric becomes a sort of excuse for not making everyone whole. I feel like there's a tension there because on the one hand, someone like Michael Hudson is very clear that the existing system is flawed. But on the other hand, the whole point of the debt relief, as you put it, is that blank slate to go back to where we were before. So there's a tension between wanting to fix the system and using a big moment of change to do so and doing maybe what might be most economically expedient and just going back to the system as it was before. Yeah. No easy, no easy answers to resolving that. And that always sort of is the challenge posed to sort of crisis policymakers of how do you fix a system and repair a system at the same time. It's kind of different thing. At the same time. Yeah. Under immense time pressure as well. Well, this is why we aren't policymakers. So we just talk about it. Right. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Oddlots podcast. I'm Tracy Allowway. You can follow us. me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of

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