Asset-price Inflation is Giving Way to Debt Deflation.
The Game is Over. There Won't Be a Rebound
Interview with Michael Hudson
By Mike Whitney
22/06/08 "ICH " — —
Michael Hudson: In academic economic terms, America has never been in as "optimum" a position as it is today. That's the bad news. An optimum position is, mathematically speaking, one in which you can't move without making your situation worse. That's the position we're now in. There's nowhere to move - at least within the existing structure. "The market" can't be stabilized, because it was artificial to begin with, based on fictitious prices. It's hard to impose fiction on reality for very long, and the rest of the world has woken up.
In times past, bankruptcy would have wiped out the bad debts. The problem with debt write-offs is that bad savings go by the boards too. But today, the very wealthy hold most of the savings, so the government doesn't want to have them take a loss. It would rather wipe out pensioners, consumers, workers, industrial companies and foreign investors. So debts will be kept on the books and the economy will slowly be strangled by debt deflation.
The US can't reduce the balance-of-payments deficit without scaling back its foreign military spending.
...do what FDR did, and challenge the financial oligarchy with new government regulatory agencies staffed with real regulators, not deregulators as under the Bush-Clinton-Bush regime.
...make large depositors and "savers" take the losses on their bad bets. ...repeal the Clinton repeal of Glass Steagall.
...have to make the tax system back progressive again if the domestic market is to recover. He should remove the tax-deductibility of interest payments, and do what the original 1913 income tax did: tax capital gains at normal income rates rather than subsidizing speculation. The great majority of such gains do not accrue to entrepreneurs, but to real estate speculators. A good tax code should encourage equity financing rather than debt pyramiding.
Social Security and medical care should be paid out of the general budget, not as user fees. And until this change is done, FICA withholding should be levied on total income, without an upper cutoff point. There should be a LOWER cut-off point, however: Only people who earn over $60,000 a year should contribute. This would end up being fairly revenue-neutral. ...make them [the rich] pay their way once again by favoring a strong middle class.
Unless he does this, what used to be a democracy will be turned into an oligarchy. And oligarchies historically are so short-sighted that they stifle the domestic economy, driving enterprise and emigration abroad. This threatens to reverse America's long-term affluence, which means literally a flowing-in - an inflow of capital, of skilled immigrants and other labor, of technology, and of foreign support. All this has now been put in danger by the policies pursued at least since 1980.
Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world's first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich's Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). 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) He can be reached via his website, michael-hudson.com
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