Forum Post: There IS An Alternative To European Austerity: Modern Money Theory (MMT). Dr. Michael Hudson

“Our message is very simple. And that is why it is threatening. From Margaret Thatcher to President Obama, you were told that there is no alternative. And we are here—and will spend the next two days—telling you that there is an alternative. And we will spell out what the alternative is.

“What we are seeing now is a fight for what is going to be the rest of the 21st century by creating a new kind of class, a new class much like the invasions of Europe a thousand years ago. A thousand years ago, invaders from the north and from Italy would grab land and grab public utilities by military means. But today—ever since the United States went off gold in 1971—aggressors can no longer afford military war. So, what you have today is a new kind of a war. It’s a financial war. You can get by privatisation and financialisation what armies used to get by force of arms. This is not the class war that people spoke of a hundred years ago. It is a financial war. And it is a war that classical economists warned against.

(c. 20:51) “300 years of classical political economy sought to get rid of landlords and bankers. A hundred years ago people spoke of technology. Nobody believed that the vested interests could fight back. But they did fight back in the way that parasites do in biological nature. I’ve read in the Italian newspapers—coming over on the airplane—that people talk about parasites. And people think about parasites, as taking the host’s energy and lifeblood. But, in biology, the smart parasites do something else: They take over the brain of the host. They make the brain think that the parasite is part of the body, to be protected.

(c. 21:53) “In America, President Obama and Treasury Secretary Timothy Geithner, say the economy cannot survive without bailing out the banks, without bailing out the debt, without making the gamblers and the cleptocrats whole on what they have taken. The production economy, the consumption economy, the real economy is being sacrificed to the financial sector. But matters don’t have to be this way. There is an alternative. And we will be spelling out the alternative in the next two days.

(c. 22:36) “We’re overwhelmed that so many of you are here. We’re excited. And we will do our best to explain to you that there are many alternatives. And then it will be your turn to carry the fight on. [Applause]

(c. 23:03) “I’m going to elaborate in a different direction from what Stephanie has said. I’m going to discuss the difference between central bank credit, or money, and commercial banks. Central banks create money, you can say. And commercial banks create credit. The last three years since September 2008 have seen the largest money creation and credit creation in history in the United States. And, yet, prices have not gone up at all. That is, consumer prices have not gone up since 1980. Wages in the United States have drifted downwards for 30 years. And consumer prices and commodity prices have been stable. But there has been an immense inflation; the largest bond market price increase in history has occurred, as interest rates have fallen from 20% to only one-quarter of 1% today. What has gone up is the price of real estate, the price of bonds, the price of stocks. So, the result is that the value of wealth—and most wealth is held by the wealthiest1% of the population—wealth has gone way up relative to wages. The result is a new kind of class war, as I said last night. It’s not the typical kind of class war between employers and employees. It’s a war of finance against the economy.

(c. 25:10) “Under industrial capitalism, the idea was that credit would be created productively to fund capital investment that would employ labour. That is not what is occurring today. When commercial banks create credit, it is create claims on wealth. It is create mortgage debt. It is create corporate debt. It is to create personal debt, and student loans, and credit card debt. This is what makes commercial bank credit creation different from the central banks’ creation of money.

(c. 26:00) “When central banks create money, they do so for a long-term public purpose. They fund government spending and capital investment and public infrastructure. In most countries in the world, public infrastructure, roads, communication systems, railroads, water and sewer systems have all taken a capital investment that is larger than all the manufacturing capital investment. In the United States, the value of New York’s real estate, alone, is larger than the value of all of the plant and equipment in the United States. The result is: The textbooks that are taught in the United States ignore this difference that we have been talking about. There is a formula, MV = PT. It means an increase in the money supply increases the price level. But the price level that the textbooks talk about are only consumer prices and commodity prices. Nowhere in the textbooks do you find a relation between the credit supply and asset prices, real estate, stocks and bonds. And, yet, 99% of the credit spent in the United States economy is spent on these financial claims. Every day an amount equal to the entire year’s gross national product passes through the New York monetary clearinghouse and the Chicago Mercantile Exchange. The vast amount of payments are within the financial sector. And, within the last ten years or so, all of the growth of bank lending is to other financial institutions.

(c. 28:17) “In the textbooks there are happy pictures about banks lending to industry to build machines and factories with a smokestack coming out and employing labour. But this is a fiction; this is not what occurs in practice. All of the increased capital investment in the United States economy comes from the retained earnings of corporations—not from banks. Banks do not lend to bring new capital investment into existence. They lend against mortgages, against capital in place, against real estate, against assets that already exist—not to create new assets.

(c. 29:14) “So, when we talk about government money. We talk about government spending that is, indeed, to spur the economy, to spur economic growth, to spur new investments. The function of government investment and government central bank money creation is very different from the private banks. The government money is, indeed, debt, the lira that you have in your pocket are debt. Paper currency is debt. But it’s debt that nobody ever intends to be repaid because, if government currency is debt, than to repay it would mean that you would not have any currency left in the pocket.

(c. 30:00) “The commercial debt is expected to be repaid; and it bears interest. And, as this commercial debt has grown—the mortgages, the bank loans to companies, the corporate raiding debt—this has loaded down the economy with an enormous debt overhead. The more money commercial banks lend, the more interest has to be paid to carry this debt overhead. And the problem is that money that is spent on paying banks debt cannot be spent on goods and services. So, the result is that when commercial banks create debt, you have a diversion of income away from spending on goods and services—to pay debt service—and that is known as debt deflation. And when debt deflation proceeds as long as it has today, we move into a late stage of finance capitalism, which is the debt deflation stage—the austerity stage. And that’s the stage that Europe finds itself in today.