Short update about the Ruble and a great interview of Michael Hudson

The Ruble is slowly climbing back up and is already treading at a much more reasonable rate (with probably more readjustment ahead).  See for yourself:

But his happened at a great cost.  See ZeroHedge about this: http://www.zerohedge.com/news/2014-12-25/ruble-rallies-34-after-biggest-russian-intervention-5-years

Also, I would like to highly recommend the analysis of my favorite American economist, Michael Hudson who does a superb job explaining the Russian strategy for the Real News Network: http://michael-hudson.com/2014/12/russian-pivot/

Cheers,

The Saker

Europe’s Transition From Social Democracy to Oligarchy

By Michael Hudson for Frankfurter Allgemeine Zeitung via Information Clearing House

The easiest way to understand Europe’s financial crisis is to look at the solutions being proposed to resolve it. They are a banker’s dream, a grab bag of giveaways that few voters would be likely to approve in a democratic referendum. Bank strategists learned not to risk submitting their plans to democratic vote after Icelanders twice refused in 2010-11 to approve their government’s capitulation to pay Britain and the Netherlands for losses run up by badly regulated Icelandic banks operating abroad. Lacking such a referendum, mass demonstrations were the only way for Greek voters to register their opposition to the €50 billion in privatization sell-offs demanded by the European Central Bank (ECB) in autumn 2011.

The problem is that Greece lacks the ready money to redeem its debts and pay the interest charges. The ECB is demanding that it sell off public assets – land, water and sewer systems, ports and other assets in the public domain, and also cut back pensions and other payments to its population. The “bottom 99%” understandably are angry to be informed that the wealthiest layer of the population is largely responsible for the budget shortfall by stashing away a reported €45 billion of funds stashed away in Swiss banks alone. The idea of normal wage-earners being obliged to forfeit their pensions to pay for tax evaders – and for the general un-taxing of wealth since the regime of the colonels – makes most people understandably angry. For the ECB, EU and IMF “troika” to say that whatever the wealthy take, steal or evade paying must be made up by the population at large is not a politically neutral position. It comes down hard on the side of wealth that has been unfairly taken.

A democratic tax policy would reinstate progressive taxation on income and property, and would enforce its collection – with penalties for evasion. Ever since the 19th century, democratic reformers have sought to free economies from waste, corruption and “unearned income.” But the ECB “troika” is imposing a regressive tax – one that can be imposed only by turning government policy-making over to a set of unelected “technocrats.”

To call the administrators of so anti-democratic a policy “technocrats” seems to be a cynical scientific-sounding euphemism for financial lobbyists or bureaucrats deemed suitably tunnel-visioned to act as useful idiots on behalf of their sponsors. Their ideology is the same austerity philosophy that the IMF imposed on Third World debtors from the 1960s through the 1980s. Claiming to stabilize the balance of payments while introducing free markets, these officials sold off export sectors and basic infrastructure to creditor-nation buyers. The effect was to drive austerity-ridden economies even deeper into debt – to foreign bankers and their own domestic oligarchies.

This is the treadmill on which Eurozone social democracies are now being placed. Under the political umbrella of financial emergency, wages and living standards are to be scaled back and political power shifted from elected government to technocrats governing on behalf of large banks and financial institutions. Public-sector labor is to be privatized – and de-unionized, while Social Security, pension plans and health insurance are scaled back.

This is the basic playbook that corporate raiders follow when they empty out corporate pension plans to pay their financial backers in leveraged buyouts. It also is how the former Soviet Union’s economy was privatized after 1991, transferring public assets into the hands of kleptocrats, who worked with Western investment bankers to make the Russian and other stock exchanges the darlings of the global financial markets. Property taxes were scaled back while flat taxes were imposed on wages (a cumulative 59 percent in Latvia). Industry was dismantled as land and mineral rights were transferred to foreigners, economies driven into debt and skilled and unskilled labor alike was obliged to emigrate to find work.

Pretending to be committed to price stability and free markets, bankers inflated a real estate bubble on credit. Rental income was capitalized into bank loans and paid out as interest. This was enormously profitable for bankers, but it left the Baltics and much of Central Europe debt strapped and in negative equity by 2008. Neoliberals applaud their plunging wage levels and shrinking GDP as a success story, because these countries shifted the tax burden onto employment rather than property or finance. Governments bailed out banks at taxpayer expense.

It is axiomatic that the solution to any major social problem tends to create even larger problems – not always unintended! From the financial sector’s vantage point, the “solution” to the Eurozone crisis is to reverse the aims of the Progressive Era a century ago – what John Maynard Keynes gently termed “euthanasia of the rentier” in 1936. The idea was to subordinate the banking system to serve the economy rather than the other way around. Instead, finance has become the new mode of warfare – less ostensibly bloody, but with the same objectives as the Viking invasions over a thousand years ago, and Europe’s subsequent colonial conquests: appropriation of land and natural resources, infrastructure and whatever other assets can provide a revenue stream. It was to capitalize and estimate such values, for instance, that William the Conqueror compiled the Domesday Book after 1066, a model of ECB and IMF-style calculations today.

This appropriation of the economic surplus to pay bankers is turning the traditional values of most Europeans upside down. Imposition of economic austerity, dismantling social spending, sell-offs of public assets, de-unionization of labor, falling wage levels, scaled-back pension plans and health care in countries subject to democratic rules requires convincing voters that there is no alternative. It is claimed that without a profitable banking sector (no matter how predatory) the economy will break down as bank losses on bad loans and gambles pull down the payments system. No regulatory agencies can help, no better tax policy, nothing except to turn over control to lobbyists to save banks from losing the financial claims they have built up.

What banks want is for the economic surplus to be paid out as interest, not used for rising living standards, public social spending or even for new capital investment. Research and development takes too long. Finance lives in the short run. This short-termism is self-defeating, yet it is presented as science. The alternative, voters are told, is the road to serfdom: interfering with the “free market” by financial regulation and even progressive taxation.

There is an alternative, of course. It is what European civilization from the 13th-century Schoolmen through the Enlightenment and the flowering of classical political economy sought to create: an economy free of unearned income, free of vested interests using special privileges for “rent extraction.” At the hands of the neoliberals, by contrast, a free market is one free for a tax-favored rentier class to extract interest, economic rent and monopoly prices.

Rentier interests present their behavior as efficient “wealth creation.” Business schools teach privatizers how to arrange bank loans and bond financing by pledging whatever they can charge for the public infrastructure services being sold by governments. The idea is to pay this revenue to banks and bondholders as interest, and then make a capital gain by raising access fees for roads and ports, water and sewer usage and other basic services. Governments are told that economies can be run more efficiently by dismantling public programs and selling off assets.

Never has the gap between pretended aim and actual effect been more hypocritical. Making interest payments (and even capital gains) tax-exempt deprives governments of revenue from the user fees they are relinquishing, increasing their budget deficits. And instead of promoting price stability (the ECB’s ostensible priority), privatization increases prices for infrastructure, housing and other costs of living and doing business by building in interest charges and other financial overhead – and much higher salaries for management. So it is merely a knee-jerk ideological claim that this policy is more efficient simply because privatizers do the borrowing rather than government.

There is no technological or economic need for Europe’s financial managers to impose depression on much of its population. But there is a great opportunity to gain for the banks that have gained control of ECB economic policy. Since the 1960s, balance-of-payments crises have provided opportunities for bankers and liquid investors to seize control of fiscal policy – to shift the tax burden onto labor and dismantle social spending in favor of subsidizing foreign investors and the financial sector. They gain from austerity policies that lower living standards and scale back social spending. A debt crisis enables the domestic financial elite and foreign bankers to indebt the rest of society, using their privilege of credit (or savings built up as a result of less progressive tax policies) as a lever to grab assets and reduce populations to a state of debt dependency.

The kind of warfare now engulfing Europe is thus more than just economic in scope. It threatens to become a historic dividing line between the past half-century’s epoch of hope and technological potential to a new era of polarization as a financial oligarchy replaces democratic governments and reduces populations to debt peonage.

For so bold an asset and power grab to succeed, it needs a crisis to suspend the normal political and democratic legislative processes that would oppose it. Political panic and anarchy create a vacuum into which grabbers can move quickly, using the rhetoric of financial deception and a junk economics to rationalize self-serving solutions by a false view of economic history – and in the case of today’s ECB, German history in particular.

A central bank that is blocked from acing like one

Governments do not need to borrow from commercial bankers or other lenders. Ever since the Bank of England was founded in 1694, central banks have printed money to finance public spending. Bankers also create credit freely – when they make a loan and credit the customer’s account, in exchange for a promissory note bearing interest. Today, these banks can borrow reserves from the government central bank at a low annual interest rate (0.25% in the United States) and lend it out at a higher rate. So banks are glad to see the government’s central bank create credit to lend to them. But when it comes to governments creating money to finance their budget deficits for spending in the rest of the economy, banks would prefer to have this market and its interest return for themselves.

European commercial banks are especially adamant that the European Central Bank should not finance government budget deficits. But private credit creation is not necessarily less inflationary than governments monetizing their deficits (simply by printing the money needed). Most commercial bank loans are made against real estate, stocks and bonds – providing credit that is used to bid up housing prices, and prices for financial securities (as in loans for leveraged buyouts).

It is mainly government that spends credit on the “real” economy, to the extent that public budget deficits employ labor or are spent on goods and services. If governments avoid paying interest by having their central banks printing money on their own computer keyboards rather than borrowing from banks that do the same thing on their own keyboards. (Abraham Lincoln simply printed currency when he financed the U.S. Civil War with “greenbacks.”)

Banks would like to use their credit-creating privilege to obtain interest for lending to governments to finance public budget deficits. So they have a self-interest in limiting the government’s “public option” to monetize its budget deficits. To secure a monopoly on their credit-creating privilege, banks have mounted a vast character assassination on government spending, and indeed on government authority in general – which happens to be the only authority with sufficient power to control their power or provide an alternative public financial option, as Post Office savings banks do in Japan, Russia and other countries. This competition between banks and government explains the false accusations made that government credit creation is more inflationary than when commercial banks do it.

The reality is made clear by comparing the ways in which the United States, Britain and Europe handle their public financing. The U.S. Treasury is by far the world’s largest debtor, and its largest banks seem to be in negative equity, liable to their depositors and to other financial institutions for much larger sums that can be paid by their portfolio of loans, investments and assorted financial gambles. Yet as global financial turmoil escalates, institutional investors are putting their money into U.S. Treasury bonds – so much that these bonds now yield less than 1%. By contrast, a quarter of U.S. real estate is in negative equity, American states and cities are facing insolvency and must scale back spending. Large companies are going bankrupt, pension plans are falling deeper into arrears, yet the U.S. economy remains a magnet for global savings.

Britain’s economy also is staggering, yet its government is paying just 2% interest. But European governments are now paying over 7%. The reason for this disparity is that they lack a “public option” in money creation. Having a Federal Reserve Bank or Bank of England that can print the money to pay interest or roll over existing debts is what makes the United States and Britain different from Europe. Nobody expects these two nations to be forced to sell off their public lands and other assets to raise the money to pay (although they may do this as a policy choice). Given that the U.S. Treasury and Federal Reserve can create new money, it follows that as long as government debts are denominated in dollars, they can print enough IOUs on their computer keyboards so that the only risk that holders of Treasury bonds bear is the dollar’s exchange rate vis-à-vis other currencies.

By contrast, the Eurozone has a central bank, but Article 123 of the Lisbon treaty forbids the ECB from doing what central banks were created to do: create the money to finance government budget deficits or roll over their debt falling due. Future historians no doubt will find it remarkable that there actually is a rationale behind this policy – or at least the pretense of a cover story. It is so flimsy that any student of history can see how distorted it is. The claim is that if a central bank creates credit, this threatens price stability. Only government spending is deemed to be inflationary, not private credit!

The Clinton Administration balanced the U.S. Government budget in the late 1990s, yet the Bubble Economy was exploding. On the other hand, the Federal Reserve and Treasury flooded the economy with $13 trillion in credit to the banking system credit after September 2008, and $800 billion more last summer in the Federal Reserve’s Quantitative Easing program (QE2). Yet consumer and commodity prices are not rising. Not even real estate or stock market prices are being bid up. So the idea that more money will bid up prices (MV=PT) is not operating today.

Commercial banks create debt. That is their product. This debt leveraging was used for more than a decade to bid up prices – making housing and buying a retirement income more expensive for Americans – but today’s economy is suffering from debt deflation as personal income, business and tax revenue is diverted to pay debt service rather than to spend on goods or invest or hire labor.

Much more striking is the travesty of German history that is being repeated again and again, as if repetition somehow will stop people from remembering what actually happened in the 20th century. To hear ECB officials tell the story, it would be reckless for a central bank to lend to government, because of the danger of hyperinflation. Memories are conjured up of the Weimar inflation in Germany in the 1920s. But upon examination, this turns out to be what psychiatrists call an implanted memory – a condition in which a patient is convinced that they have suffered a trauma that seems real, but which did not exist in reality.

What happened back in 1921 was not a case of governments borrowing from central banks to finance domestic spending such as social programs, pensions or health care as today. Rather, Germany’s obligation to pay reparations led the Reichsbank to flood the foreign exchange markets with deutsche marks to obtain the currency to buy pounds sterling, French francs and other currency to pay the Allies – which used the money to pay their Inter-Ally arms debts to the United States. The nation’s hyperinflation stemmed from its obligation to pay reparations in foreign currency. No amount of domestic taxation could have raised the foreign exchange that was scheduled to be paid.

By the 1930s this was a well-understood phenomenon, explained by Keynes and others who analyzed the structural limits on the ability to pay foreign debt imposed without regard for the ability to pay out of current domestic-currency budgets. From Salomon Flink’s The Reichsbank and Economic Germany (1931) to studies of the Chilean and other Third World hyperinflations, economists have found a common causality at work, based on the balance of payments. First comes a fall in the exchange rate. This raises the price of imports, and hence the domestic price level. More money is then needed to transact purchases at the higher price level. The statistical sequence and line of causation leads from balance-of-payments deficits to currency depreciation raising import costs, and from these price increases to the money supply, not the other way around.

Today’s “free marketers” writing in the Chicago monetarist tradition (basically that of David Ricardo) leaves the foreign and domestic debt dimensions out of account. It is as if “money” and “credit” are assets to be bartered against goods. But a bank account or other form of credit means debt on the opposite side of the balance sheet. One party’s debt is another party’s saving – and most savings today are lent out at interest, absorbing money from the non-financial sectors of the economy. The discussion is stripped down to a simplistic relationship between the money supply and price level – and indeed, only consumer prices, not asset prices. In their eagerness to oppose government spending – and indeed to dismantle government and replace it with financial planners – neoliberal monetarists neglect the debt burden being imposed today from Latvia and Iceland to Ireland and Greece, Italy, Spain and Portugal.

If the euro breaks up, it is because of the obligation of governments to pay bankers in money that must be borrowed rather than created through their own central bank. Unlike the United States and Britain which can create central bank credit on their own computer keyboards to keep their economy from shrinking or becoming insolvent, the German constitution and the Lisbon Treaty prevent the central bank from doing this.

The effect is to oblige governments to borrow from commercial banks at interest. This gives bankers the ability to create a crisis – threatening to drive economies out of the Eurozone if they do not submit to “conditionalities” being imposed in what quickly is becoming a new class war of finance against labor.

Disabling Europe’s central bank to deprive governments of the power to create money

One of the three defining characteristics of a nation-state is the power to create money. A second characteristic is the power to levy taxes. Both of these powers are being transferred out of the hands of democratically elected representatives to the financial sector, as a result of tying the hands of government.

The third characteristic of a nation-state is the power to declare war. What is happening today is the equivalent of warfare – but against the power of government! It is above all a financial mode of warfare – and the aims of this financial appropriation are the same as those of military conquest: first, the land and subsoil riches on which to charge rents as tribute; second, public infrastructure to extract rent as access fees; and third, any other enterprises or assets in the public domain.

In this new financialized warfare, governments are being directed to act as enforcement agents on behalf of the financial conquerors against their own domestic populations. This is not new, to be sure. We have seen the IMF and World Bank impose austerity on Latin American dictatorships, African military chiefdoms and other client oligarchies from the 1960s through the 1980s. Ireland and Greece, Spain and Portugal are now to be subjected to similar asset stripping as public policy making is shifted into the hands of supra-governmental financial agencies acting on behalf of bankers – and thereby for the top 1% of the population.

When debts cannot be paid or rolled over, foreclosure time arrives. For governments, this means privatization selloffs to pay creditors. In addition to being a property grab, privatization aims at replacing public sector labor with a non-union work force having fewer pension rights, health care or voice in working conditions. The old class war is thus back in business – with a financial twist. By shrinking the economy, debt deflation helps break the power of labor to resist.

It also gives creditors control of fiscal policy. In the absence of a pan-European Parliament empowered to set tax rules, fiscal policy passes to the ECB. Acting on behalf of banks, the ECB seems to favor reversing the 20th century’s drive for progressive taxation. And as U.S. financial lobbyists have made clear, the creditor demand is for governments to re-classify public social obligations as “user fees,” to be financed by wage withholding turned over to banks to manage (or mismanage, as the case may be). Shifting the tax burden off real estate and finance onto labor and the “real” economy thus threatens to become a fiscal grab coming on top of the privatization grab.

This is self-destructive short-termism. The irony is that the PIIGS budget deficits stem largely from un-taxing property, and a further tax shift will worsen rather than help stabilize government budgets. But bankers are looking only at what they can take in the short run. They know that whatever revenue the tax collector relinquishes from real estate and business is “free” for buyers to pledge to the banks as interest. So Greece and other oligarchic economies are told to “pay their way” by slashing government social spending (but not military spending for the purchase of German and French arms) and shifting taxes onto labor and industry, and onto consumers in the form of higher user fees for public services not yet privatized.

In Britain, Prime Minister Cameron claims that scaling back government even more along Thatcherite-Blairite lines will leave more labor and resources available for private business to hire. Fiscal cutbacks will indeed throw labor out of work, or at least oblige it to find lower-paid jobs with fewer rights. But cutting back public spending will shrink the business sector as well, worsening the fiscal and debt problems by pushing economies deeper into recession.

If governments cut back their spending to reduce the size of their budget deficits – or if they raise taxes on the economy at large, to run a surplus – then these surpluses will suck money out of the economy, leaving less to be spent on goods and services. The result can only be unemployment, further debt defaults and bankruptcies. We may look to Iceland and Latvia as canaries in this financial coalmine. Their recent experience shows that debt deflation leads to emigration, shortening life spans, lower birth rates, marriages and family formation – but provides great opportunities for vulture funds to suck wealth upward to the top of the financial pyramid.

Today’s economic crisis is a matter of policy choice, not necessity. As President Obama’s chief of staff Rahm Emanuel quipped: “A crisis is too good an opportunity to let go to waste.” In such cases the most logical explanation is that some special interest must be benefiting. Depressions increase unemployment, helping to break the power of unionized as well as non-union labor. The United States is seeing a state and local budget squeeze (as bankruptcies begin to be announced), with the first cutbacks coming in the sphere of pension defaults. High finance is being paid – by not paying the working population for savings and promises made as part of labor contracts and employee retirement plans.

Big fish are eating little fish.

This seems to be the financial sector’s idea of good economic planning. But it is worse than a zero-sum plan, in which one party’s gain is another’s loss. Economies as a whole will shrink – and change their shape, polarizing between creditors and debtors. Economic democracy will give way to financial oligarchy, reversing the trend of the past few centuries.

Is Europe really ready to take this step? Do its voters recognize that stripping the government of the public option of money creation will hand the privilege over to banks as a monopoly? How many observers have traced the almost inevitable result: shifting economic planning and credit allocation to the banks?

Even if governments provide a “public option,” creating their own money to finance their budget deficits and supplying the economy with productive credit to rebuild infrastructure, a serious problem remains: how to dispose of the existing debt overhead now acts as a deadweight on the economy. Bankers and the politicians they back are refusing to write down debts to reflect the ability to pay. Lawmakers have not prepared society with a legal procedure for debt write-downs – except for New York State’s Fraudulent Conveyance Law, calling for debts to be annulled if lenders made loans without first assuring themselves of the debtor’s ability to pay.

Bankers do not want to take responsibility for bad loans. This poses the financial problem of just what policy-makers should do when banks have been so irresponsible in allocating credit. But somebody has to take a loss. Should it be society at large, or the bankers?

It is not a problem that bankers are prepared to solve. They want to turn the problem over to governments – and define the problem as how governments can “make them whole.” What they call a “solution” to the bad-debt problem is for the government to give them good bonds for bad loans (“cash for trash”) – to be paid in full by taxpayers. Having engineered an enormous increase in wealth for themselves, bankers now want to take the money and run – leaving economies debt ridden. The revenue that debtors cannot pay will now be spread over the entire economy to pay – vastly increasing everyone’s cost of living and doing business.

Why should they be “made whole,” at the cost of shrinking the rest of the economy? The bankers’ answer is that debts are owed to labor’s pension funds, to consumers with bank deposits, and the whole system will come crashing down if governments miss a bond payment. When pressed, bankers admit that they have taken out risk insurance – collateralized debt obligations and other risk swaps. But the insurers are largely U.S. banks, and the American Government is pressuring Europe not to default and thereby hurt the U.S. banking system. So the debt tangle has become politicized internationally.

So for bankers, the line of least resistance is to foster an illusion that there is no need for them to accept defaults on the unpayably high debts they have encouraged. Creditors always insist that the debt overhead can be maintained – if governments simply will reduce other expenditures, while raising taxes on individuals and non-financial business.

The reason why this won’t work is that trying to collect today’s magnitude of debt will injure the underlying “real” economy, making it even less able to pay its debts. What started as a financial problem (bad debts) will now be turned into a fiscal problem (bad taxes). Taxes are a cost of doing business just as paying debt service is a cost. Both costs must be reflected in product prices. When taxpayers are saddled with taxes and debts, they have less revenue free to spend on consumption. So markets shrink, putting further pressure on the profitability of domestic enterprises. The combination makes any country following such policy a high-cost producer and hence less competitive in global markets.

This kind of financial planning – and its parallel fiscal tax shift – leads toward de-industrialization. Creating ECB or IMF inter-government fiat money leaves the debts in place, while preserving wealth and economic control in the hands of the financial sector. Banks can receive debt payments on overly mortgaged properties only if debtors are relieved of some real estate taxes. Debt-strapped industrial companies can pay their debts only by scaling back pension obligations, health care and wages to their employees – or tax payments to the government. In practice, “honoring debts” turns out to mean debt deflation and general economic shrinkage.

This is the financiers’ business plan. But to leave tax policy and centralized planning in the hands of bankers turns out to be the opposite of what the past few centuries of free market economics have been all about. The classical objective was to minimize the debt overhead, to tax land and natural resource rents, and to keep monopoly prices in line with actual costs of production (“value”). Bankers have lent increasingly against the same revenues that free market economists believed should be the natural tax base.

So something has to give. Will it be the past few centuries of liberal free-market economic philosophy, relinquishing planning the economic surplus to bankers? Or will society re-assert classical economic philosophy and Progressive Era principles, and re-assert social shaping of financial markets to promote long-term growth with minimum costs of living and doing business?

At least in the most badly indebted countries, European voters are waking up to an oligarchic coup in which taxation and government budgetary planning and control is passing into the hands of executives nominated by the international bankers’ cartel. This result is the opposite of what the past few centuries of free market economics has been all about.

Debt and Democracy – Has the Link Been Broken?

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College, for Naked Capitalism

A longer version of this article in German was published in the Frankfurter Algemeine Zeitung on December 5, 2011

Book V of Aristotle’s Politics describes the eternal transition of oligarchies making themselves into hereditary aristocracies – which end up being overthrown by tyrants or develop internal rivalries as some families decide to “take the multitude into their camp” and usher in democracy, within which an oligarchy emerges once again, followed by aristocracy, democracy, and so on throughout history.

Debt has been the main dynamic driving these shifts – always with new twists and turns. It polarizes wealth to create a creditor class, whose oligarchic rule is ended as new leaders (“tyrants” to Aristotle) win popular support by cancelling the debts and redistributing property or taking its usufruct for the state.
 

Since the Renaissance, however, bankers have shifted their political support to democracies. This did not reflect egalitarian or liberal political convictions as such, but rather a desire for better security for their loans. As James Steuart explained in 1767, royal borrowings remained private affairs rather than truly public debts. For a sovereign’s debts to become binding upon the entire nation, elected representatives had to enact the taxes to pay their interest charges.

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.

This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

Near Eastern Rulers Proclaimed Clean Slates to Preserve Economic Balance

Charging interest on advances of goods or money was not originally intended to polarize economies. First administered early in the third millennium BC as a contractual arrangement by Sumer’s temples and palaces with merchants and entrepreneurs who typically worked in the royal bureaucracy, interest at 20% (doubling the principal in five years) was supposed to approximate a fair share of the returns from long-distance trade or leasing land and other public assets such as workshops, boats and ale houses.

As the practice was privatized by royal collectors of user fees and rents, “divine kingship” protected agrarian debtors. Hammurabi’s laws (c. 1750 BC) cancelled their debts in times of flood or drought. All the rulers of his Babylonian dynasty began their first full year on the throne by cancelling agrarian debts so as to clear out payment arrears by proclaiming a clean slate. Bondservants, land or crop rights and other pledges were returned to the debtors to “restore order” in an idealized “original” condition of balance. This practice survived in the Jubilee Year of Mosaic Law in Leviticus 25.

The logic was clear enough. Ancient societies needed to field armies to defend their land, and this required liberating indebted citizens from bondage. Hammurabi’s laws protected charioteers and other fighters from being reduced to debt bondage, and blocked creditors from taking the crops of tenants on royal and other public lands and on communal land that owed manpower and military service to the palace.

In Egypt, the pharaoh Bakenranef (c. 720-715 BC, “Bocchoris” in Greek) proclaimed a debt amnesty and abolished debt-servitude when faced with a military threat from Ethiopia. According to Diodorus of Sicily (I, 79, writing in 40-30 BC), he ruled that if a debtor contested the claim, the debt was nullified if the creditor could not back up his claim by producing a written contract. (It seems that creditors always have been prone to exaggerate the balances due.) The pharaoh reasoned that “the bodies of citizens should belong to the state, to the end that it might avail itself of the services which its citizens owed it, in times of both war and peace. For he felt that it would be absurd for a soldier … to be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all.”

The fact that the main Near Eastern creditors were the palace, temples and their collectors made it politically easy to cancel the debts. It always is easy to annul debts owed to oneself. Even Roman emperors burned the tax records to prevent a crisis. But it was much harder to cancel debts owed to private creditors as the practice of charging interest spread westward to Mediterranean chiefdoms after about 750 BC. Instead of enabling families to bridge gaps between income and outgo, debt became the major lever of land expropriation, polarizing communities between creditor oligarchies and indebted clients. In Judah, the prophet Isaiah (5:8-9) decried foreclosing creditors who “add house to house and join field to field till no space is left and you live alone in the land.”

Creditor power and stable growth rarely have gone together. Most personal debts in this classical period were the product of small amounts of money lent to individuals living on the edge of subsistence and who could not make ends meet. Forfeiture of land and assets – and personal liberty – forced debtors into bondage that became irreversible. By the 7th century BC, “tyrants” (popular leaders) emerged to overthrow the aristocracies in Corinth and other wealthy Greek cities, gaining support by cancelling the debts. In a less tyrannical manner, Solon founded the Athenian democracy in 594 BC by banning debt bondage.

But oligarchies re-emerged and called in Rome when Sparta’s kings Agis, Cleomenes and their successor Nabis sought to cancel debts late in the third century BC. They were killed and their supporters driven out. It has been a political constant of history since antiquity that creditor interests opposed both popular democracy and royal power able to limit the financial conquest of society and an almost autonomous dynamic turning the economic surplus into interest-bearing debt claims for payment.

When the Gracchi brothers and their followers tried to reform the credit laws in 133 BC, the dominant Senatorial class acted with violence, killing them and inaugurating a century of Social War, resolved by the ascension of Augustus as emperor in 29 BC.

Rome’s Creditor Oligarchy Wins the Social War, Enserfs the Population and Brings on a Dark Age

Matters were more bloody abroad. Aristotle did not mention empire building as part of his political schema, but foreign conquest always has been a major factor in imposing debts, and war debts have been the major cause of public debt in modern times. Antiquity’s harshest debt levy was by Rome, whose creditors spread out to plague Asia Minor, its most prosperous province. The rule of law all but disappeared when publican creditors arrived. Mithridates of Pontus led three popular revolts, and local populations in Ephesus and other cities rose up and killed a reported 80,000 Romans in 88 BC. The Roman army retaliated, and Sulla imposed war tribute of 20,000 talents in 84 BC. Charges for back interest multiplied this sum six-fold by 70 BC.

Among Rome’s leading historians, Livy, Plutarch and Diodorus blamed the fall of the Republic on creditor intransigence in waging the century-long Social War marked by political murder from 133 to 29 BC. Populist leaders sought to gain a following by advocating debt cancellations (e.g., the Catiline conspiracy in 63-62 BC). They were killed. By the second century AD about a quarter of the population was reduced to bondage. By the fifth century Rome’s economy collapsed, stripped of money. Subsistence life reverted to the countryside as a Dark Age descended.

Creditors Find a Legalistic Reason to Support Parliamentary Democracy

When banking recovered after the Crusades looted Byzantium and infused silver and gold to review Western European commerce, Christian opposition to charging interest was overcome by the combination of prestigious lenders (the Knights Templars and Hospitallers providing credit during the Crusades) and their major clients – kings, at first to pay the Church and increasingly to wage war. But royal debts went bad when kings died. The Bardi and Peruzzi went bankrupt in 1345 when Edward III repudiated his war debts. Banking families lost more on loans to the Habsburg and Bourbon despots on the thrones of Spain, Austria and France.

Matters changed with the Dutch democracy, seeking to win and secure its liberty from Habsburg Spain. The fact that their parliament was to contract permanent public debts on behalf of the state enabled the Low Countries to raise loans to employ mercenaries in an epoch when money and credit were the sinews of war. Access to credit “was accordingly their most powerful weapon in the struggle for their freedom,” notes Ehrenberg: “Anyone who gave credit to a prince knew that the repayment of the debt depended only on his debtor’s capacity and will to pay. The case was very different for the cities, which had power as overlords, but were also corporations, associations of individuals held in common bond. According to the generally accepted law each individual burgher was liable for the debts of the city both with his person and his property.”

The financial achievement of parliamentary government was thus to establish debts that were not merely the personal obligations of princes, but were truly public and binding regardless of who occupied the throne. This is why the first two democratic nations, the Netherlands and Britain after its 1688 revolution, developed the most active capital markets and proceeded to become leading military powers. What is ironic is that it was the need for war financing that promoted democracy, forming a symbiotic trinity between war making, credit and parliamentary democracy in an epoch when money was still the sinews of war.

At this time “the legal position of the King qua borrower was obscure, and it was still doubtful whether his creditors had any remedy against him in case of default.” The more despotic Spain, Austria and France became, the greater the difficulty they found in financing their military adventures. By the end of the eighteenth century Austria was left “without credit, and consequently without much debt” the least credit-worthy and worst armed country in Europe (as Steuart 1767:373 noted), fully dependent on British subsidies and loan guarantees by the time of the Napoleonic Wars.

Finance Accommodates Itself to Democracy, but Then Pushes for Oligarchy

While the nineteenth century’s democratic reforms reduced the power of landed aristocracies to control parliaments, bankers moved flexibly to achieve a symbiotic relationship with nearly every form of government. In France, followers of Saint-Simon promoted the idea of banks acting like mutual funds, extending credit against equity shares in profit. The German state made an alliance with large banking and heavy industry. Marx wrote optimistically about how socialism would make finance productive rather than parasitic. In the United States, regulation of public utilities went hand in hand with guaranteed returns. In China, Sun-Yat-Sen wrote in 1922: “I intend to make all the national industries of China into a Great Trust owned by the Chinese people, and financed with international capital for mutual benefit.”

World War I saw the United States replace Britain as the major creditor nation, and by the end of World War II it had cornered some 80 percent of the world’s monetary gold. Its diplomats shaped the IMF and World Bank along creditor-oriented lines that financed trade dependency, mainly on the United States. Loans to finance trade and payments deficits were subject to “conditionalities” that shifted economic planning to client oligarchies and military dictatorships. The democratic response to resulting austerity plans squeezing out debt service was unable to go much beyond “IMF riots,” until Argentina rejected its foreign debt.

A similar creditor-oriented austerity is now being imposed on Europe by the European Central Bank (ECB) and EU bureaucracy. Ostensibly social democratic governments have been directed to save the banks rather than reviving economic growth and employment. Losses on bad bank loans and speculations are taken onto the public balance sheet while scaling back public spending and even selling off infrastructure. The response of taxpayers stuck with the resulting debt has been to mount popular protests starting in Iceland and Latvia in January 2009, and more widespread demonstrations in Greece and Spain this autumn to protest their governments’ refusal to hold referendums on these fateful bailouts of foreign bondholders.

Shifting Planning Away From Elected Public Representatives To Bankers

Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.

This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

Finance vs. Government; Oligarchy vs. Democracy

Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.

The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.

The resulting conflict is pitting financial interests against national self-determination. The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations. The same is true for America’s $13 trillion added since September 2008 (including $5.3 trillion in Fannie Mae and Freddie Mac bad mortgages taken onto the government’s balance sheet, and $2 trillion of Federal Reserve “cash-for-trash” swaps).

This is being dictated by financial proxies euphemized as technocrats. Designated by creditor lobbyists, their role is to calculate just how much unemployment and depression is needed to squeeze out a surplus to pay creditors for debts now on the books. What makes this calculation self-defeating is the fact that economic shrinkage – debt deflation – makes the debt burden even more unpayable.

Neither banks nor public authorities (or mainstream academics, for that matter) calculated the economy’s realistic ability to pay – that is, to pay without shrinking the economy. Through their media and think tanks, they have convinced populations that the way to get rich most rapidly is to borrow money to buy real estate, stocks and bonds rising in price – being inflated by bank credit – and to reverse the past century’s progressive taxation of wealth.

To put matters bluntly, the result has been junk economics. Its aim is to disable public checks and balances, shifting planning power into the hands of high finance on the claim that this is more efficient than public regulation. Government planning and taxation is accused of being “the road to serfdom,” as if “free markets” controlled by bankers given leeway to act recklessly is not planned by special interests in ways that are oligarchic, not democratic. Governments are told to pay bailout debts taken on not to defend countries in military warfare as in times past, but to benefit the wealthiest layer of the population by shifting its losses onto taxpayers.

The failure to take the wishes of voters into consideration leaves the resulting national debts on shaky ground politically and even legally. Debts imposed by fiat, by governments or foreign financial agencies in the face of strong popular opposition may be as tenuous as those of the Habsburgs and other despots in past epochs. Lacking popular validation, they may die with the regime that contracted them. New governments may act democratically to subordinate the banking and financial sector to serve the economy, not the other way around.

At the very least, they may seek to pay by re-introducing progressive taxation of wealth and income, shifting the fiscal burden onto rentier wealth and property. Re-regulation of banking and providing a public option for credit and banking services would renew the social democratic program that seemed well underway a century ago.

Iceland and Argentina are most recent examples, but one may look back to the moratorium on Inter-Ally arms debts and German reparations in 1931.A basic mathematical as well as political principle is at work: Debts that can’t be paid, won’t be.

Notes:

1.James Steuart, Principles of Political Oeconomy (1767), p. 353.
2. Richard Ehrenberg, Capital and Finance in the Age of the Renaissance (1928):44f., 33.
3. Charles Wilson, England’s Apprenticeship: 1603-1763 (London: 1965):89.
4. Sun Yat-Sen, The International Development of China (1922):231ff.

Ruling on Behalf of Wall Street's "Super Rich": The Financial End Time has Arrived

by Prof. Michael Hudson for Global Research

Now that President Obama is almost celebrating his bipartisan willingness to renew the tax cuts for the super-rich enacted under George Bush ten years ago, it is time for Democrats to ask themselves how strongly they are willing to oppose an administration that looks like Bush-Cheney III. Is this what they expected by Mr. Obama’s promise to rise above partisan politics – by ruling on behalf of Wall Street, now that it is the major campaign backer of both parties?

It is a reflection of how one-sided today’s class war has become that Warren Buffet has quipped that “his” side is winning without a real fight being waged. No gauntlet has been thrown down over the trial balloon that the president and his advisor David Axelrod have sent up over the past two weeks to extend the Bush tax cuts for the wealthiest 2% for “just” two more years. For all practical purposes the euphemism “two years” means forever – at least, long enough to let the super-rich siphon off enough more money to bankroll enough more Republicans to be elected to make the tax cuts permanent.

Mr. Obama seems to be campaigning for his own defeat! Thanks largely to the $13 trillion Wall Street bailout – while keeping the debt overhead in place for America’s “bottom 98%” – this happy 2% of the population now receives an estimated three quarters (~75%) of the returns to wealth (interest, dividends, rent and capital gains). This is nearly double what it received a generation ago. The rest of the population is being squeezed, and foreclosures are rising.

Charles Baudelaire quipped that the devil wins at the point where he manages to convince the world that he doesn’t exist. Today’s financial elites will win the class war at the point where voters believe it doesn’t exist – and believe that Mr. Obama is trying to help them rather than shepherd them into debt peonage as the economy settles into debt deflation.

We are dealing with shameless demagogy. The financial End Time has arrived, but Mr. Obama’s happy-talk pretends that “two years” will get us through the current debt-induced depression. The Republican plan is to make more Congressional and Senate gains in 2012 as Mr. Obama’s former supporters “vote with their backsides” and stay home, as they did earlier this month. So “two years” means forever in politician-talk. Why vote for a politician who promises “change” but is merely an exclamation mark for the Bush-Cheney policies from Afghanistan and Iraq to Wall Street’s Democratic Leadership Council on the party’s right wing? One of its leaders, after all, was Mr. Obama’s Senate mentor, Joe Lieberman.

The second pretense is that cutting taxes for the super-rich is necessary to win Republican support for including the middle class in the tax cuts. It is as if the Democrats never won a plurality in Congress. (One remembers George W. Bush with his mere 50+%, pushing forward his extremist policies on the logic that: “I’ve got capital, and I’m using it.” What he had, of course, was Democratic Leadership Committee support.) The pretense is “to create jobs,” evidently to be headed by employment of shipyard workers to build yachts for the nouveau riches and sheriff’s deputies to foreclose on the ten million Americans whose mortgage payments have fallen into arrears. It sounds Keynesian, but is more reminiscent of Thomas Robert Malthus’s lugubrious claim (speaking for Britain’s landed aristocracy) that landlords would keep the economy going by using their rental income (to be protected by high agricultural tariffs) to hire footmen and butlers, tailors and carriage-makers.

It gets worse. Mr. Obama’s “Bush” tax cut is only Part I of a one-two punch to shift taxes onto wage earners. Congressional economists estimate that extending the tax cuts to the top 2% will cost $700 to $750 billion over the next decade or so. “How are we going to go out and borrow $700 billion?” Mr. Obama asked Steve Croft on his Sixty Minutes interview on CBS last week.

It was a rhetorical question. The President has appointed a bipartisan commission (right-wingers on both sides of the aisle) to “cure” the federal budget deficit by cutting back social spending – to pay yet more bailouts to the economy’s financial wreckers. The National Commission on Fiscal Responsibility and Reform might better be called the New Class War Commission to Scale Back Social Security and Medicare Payments to Labor in Order to Leave more Tax Revenue Available to Give Away to the Super-Rich. A longer title than the Deficit-Reduction Commission used by media friendlies, but sometimes it takes more words to get to the heart of matters.

The political axiom at work is “Big fish eat little fish.” There’s not enough tax money to continue swelling the fortunes of the super-rich pretending to save enough to pay the pensions and related social support that North American and European employees have been promised. Something must give – and the rich have shown themselves sufficiently foresighted to seize the initiative. For a preview of what’s in line for the United States, watch neoliberal Europe’s fight against the middle and working class in Greece, Ireland and Latvia; or better yet, Pinochet’s Chile, whose privatized Social Security accounts were quickly wiped out in the late 1970s by the kleptocracy advised by the Chicago Boys, to whose monetarist double-think Mr. Obama’s appointee Ben Bernanke has just re-pledged his loyalty.

What is needed to put Mr. Obama’s sell-out in perspective is the pro-Wall Street advisors he has chosen – not only Larry Summers, Tim Geithner and Ben Bernanke (who last week reaffirmed his loyalty to Milton Friedman’s Chicago School monetarism), but by stacking his Deficit Reduction Commission with outspoken advocates of cutting back Social Security, Medicare and other social spending. Their ploy is to frighten the public with a nightmare of $1 trillion deficit to pay retirement income over the next half century – as if the Treasury and Fed have not just given Wall Street $13 trillion in bailouts without blinking an eye. President Obama’s $750 billion tax giveaway to the wealthiest 2% is mere icing on the cake that the rich will be eating when the bread lines get too long.

To put matters in perspective, bear in mind that interest on the public debt (that Reagan-Bush quadrupled and Bush-Obama redoubled) soon will amount to $1 trillion annually. This is tribute levied on labor – increasing the economy’s cost of living and doing business – paid for losing the fight for economic reform and replacing progressive taxation with regressive neoliberal tax policy. As for military spending in the Near East, Asia and other regions responsible for much of the U.S. balance-of-payments deficit, Congress will always rise to the occasion and defer to whatever foreign threat is conjured up requiring new armed force.

It’s all junk economics. Running a budget deficit is how modern governments inject the credit and purchasing power needed by economies to grow. When governments run surpluses, as they did under Bill Clinton (1993-2000), credit must be created by banks. And the problem with bank credit is that most is lent, at interest, against collateral already in place. The effect is to inflate real estate and stock market prices. This creates capital gains – which the “original” 1913 U.S. income tax treated as normal income, but which today are taxed at only 15% (when they are collected at all, which is rarely in the case of commercial real estate). So today’s tax system subsidizes the inflation of debt-leveraged financial and real estate bubbles.

The giveaway: the Commission’s position on tax deductibility for mortgage interest

The Obama “Regressive Tax” commission spills the beans with its proposal to remove the tax subsidy for high housing prices financed by mortgage debt. The proposal moves only against homeowners – “the middle class” – not absentee owners, commercial real estate investors, corporate raiders or other prime bank customers.

The IRS permits mortgage interest to be tax-deductible on the pretense that it is a necessary cost of doing business. In reality it is a subsidy for debt leveraging. This tax bias for debt rather than equity investment (using one’s own money) is largely responsible for loading down the U.S. economy with debt. It encourages corporate raiding with junk bonds, thereby adding interest to the cost of doing business. This subsidy for debt leveraging also is the government’s largest giveaway to the banks, while causing the debt deflation that is locking the economy into depression – violating every precept of the classical drive for “free markets” in the 19th-century. (A “free market” meant freedom from extractive rentier income, leading toward what Keynes gently called “euthanasia of the rentier.” The Obama Commission endows rentiers atop the economy with a tax system to bolster their power, not check it – while shrinking the economy below them.)

Table 7.11 of the National Income and Product Accounts (NIPA) reports that total monetary interest paid in the U.S. economy amounted to $3,240 billion in 2009. Homeowners paid just under a sixth of this amount ($572 billion) on the homes they occupied. Mr. Obama’s commission estimates that removing the tax credit on this interest would yield the Treasury $131 billion in 2012.

There is in fact a good logic for stopping this tax credit. The mortgage-interest tax deduction does not really save homeowners money. It is a shortsighted illusion. What the government gives to “the homeowner” on one hand is passed on to the mortgage banker by “the market” process that leads bidders for property to pledge the net available rental value to the banks in order to obtain a loan to buy the home (or an office building, or an entire industrial company, for that matter.) “Equilibrium” is achieved at the point where whatever rental value the tax collector relinquishes becomes available to be capitalized into bank loans.

This means that what appears at first as “helping homeowner” afford to pay mortgages turns out merely to enable them to afford to pay more interest to their bankers. The tax giveaway uses homebuyers as “throughputs” to transfer tax favoritism to the banks.

It gets worse. By removing the traditional tax on real estate, state, local and federal governments need to tax labor and industry more, by transforming the property tax onto income and sales taxes. For banks, this is transmuting tax revenue into gold – into interest. And as for the home-owning middle class, it now has to pay the former property tax to the banker as interest, and also to pay the new taxes on income and sales that are levied to make up for the tax shift.

I support removing the tax favoritism for debt leveraging. The problem with the Deficit Commission is that it does not extend this reform to the rest of the economy – to the commercial real estate sector, and to the corporate sector.

The argument is made that “The rich create jobs.” After all, somebody has to build the yachts. What is missing is the more general principle: Wealth and income inequality destroy job creation. This is because beyond the wealthy soon reach a limit on how much they can consume. They spend their money buying financial securities – mainly bonds, which end up indebting the economy. And the debt overhead is what is pushing today’s economy into deepening depression.

Since the 1980s, corporate raiders have borrowed high-interest “junk bond” credit to take over companies and make money by stripping assets, cutting back long-term investment, research and development, and paying out depreciation credit to their financiers. Financially parasitized companies use corporate income to buy back their stock to support its price – and hence, the value of stock options that financial managers give themselves – and borrow yet more money for stock buybacks or simply to pay out as dividends. When the process has run its course, they threaten their work force with bankruptcy that will wipe out its pension benefits if employees do not agree to “downsize” their claims and replace defined-benefit plans with defined-contribution plans (in which all that employees know is how much they pay in each month, not what they will get in the end). By the time this point has been reached, the financial managers have paid themselves outsized salaries and bonuses, and cashed in their stock options – all subsidized by the government’s favorable tax treatment of debt leveraging.

The attempted raids on McDonalds and other companies in recent years provide object lessons in this destructive financial policy of “shareholder activists.” Yet Mr. Obama’s Deficit Reduction Commission is restricting its removal of tax favoritism for debt leveraging only for middle class homeowners, not for the financial sector across the board. What makes this particularly absurd is that two thirds of homeowners do not even itemize their deductions. The fiscal loss resulting from tax deductibility of interest stems mainly from commercial investors.

If the argument is correct (and I think it is) that permitting interest to be tax deductible merely “frees” more revenue to pay interest to banks – to capitalize into yet higher loans – then why isn’t this principle even more applicable to the Donald Trumps and other absentee owners who seek always to use “other peoples’ money” rather than their own? In practice, the “money” turns out to be bank credit whose cost to the banks is now under 1%. The financial-fiscal system is siphoning off rental value from commercial real estate investment, increasing the price of rental properties, commercial real estate, and indeed, industry and agriculture.

Alas, the Obama administration has backed the Geithner-Bernanke policy that “the economy” cannot recover without saving the debt overhead. The reality is that it is the debt overhead that is destroying the economy. So we are dealing with the irreconcilable fact that the Obama position threatens to lower living standards from 10% to 20% over the coming few years – making the United States look more like Greece, Ireland and Latvia than what was promised in the last presidential election.

Something has to give politically if the economy is to change course. More to the point, what has to give is favoritism for Wall Street at the expense of the economy at large. What has made the U.S. economy uncompetitive is primarily the degree to which debt service has been built into the cost of living and doing business. Post-classical “junk economics” treats interest and fees as payment for the “service” for providing credit. But interest (like economic rent and monopoly price extraction) is a transfer payment to bankers with the privilege of credit creation. The beneficiaries of providing tax favoritism for debt are the super-rich at the top of the economic pyramid – the 2% whom Mr. Obama’s tax giveaway will benefit by over $700 billion.

If the present direction of tax “reform” is not reversed, Mr. Obama will shed crocodile tears for the middle class as he sponsors the Deficit Reduction Commission’s program of cutting back Social Security and revenue sharing to save states and cities from defaulting on their pensions. One third of U.S. real estate already is reported to have sunk into negative equity, squeezing state and local tax collection, forcing a choice to be made between bankruptcy, debt default, or shifting the losses onto the shoulders of labor, off those of the wealthy creditor layer of the economy responsible for loading it down with debt.

Critics of the Obama-Bush agenda recall how America’s Gilded Age of the late 19th century was an era of economic polarization and class war. At that time the Democratic leader William Jennings Bryan accused Wall Street and Eastern creditors of crucifying the American economy on a cross of gold. Restoration of gold at its pre-Civil War price led to a financial war in the form of debt deflation as falling prices and incomes received by farmers and wage labor made the burden of paying their mortgage debts heavier. The Income Tax law of 1913 sought to rectify this by only falling on the wealthiest 1% of the population – the only ones obliged to file tax returns. Capital gains were taxed at normal rates. Most of the tax burden therefore fell on finance, insurance and real estate (FIRE) sector.

The vested interests have spent a century fighting back. They now see victory within reach, by perpetuating the Bush tax cuts for the wealthiest 2%, phasing out of the estate tax on wealth, the tax shift off property onto labor income and consumer sales, and slashing public spending on anything except more bailouts and subsidies for the emerging financial oligarchy that has become Mr. Obama’s “bipartisan” constituency.

What we need is a Futures Commission to forecast just what will the rich do with the victory they have won. As administered by President Obama and his designated appointees Tim Geithner and Ben Bernanke, their policy is financially and fiscally unsustainable. Providing tax incentives for debt leveraging – for most of the population to go into debt to the rich, whose taxes are all but abolished – is shrinking the economy. This will lead to even deeper financial crises, employer defaults and fiscal insolvency at the state, local and federal levels. Future presidents will call for new bailouts, using a strategy much like going to military war. A financial war requires an emergency to rush through Congress, as occurred in 2008-09. Mr. Obama’s appointees are turning the U.S. economy into a Permanent Emergency, a Perpetual Ponzi Scheme requiring injections of more and more Quantitative Easing to to rescue “the economy” (Mr. Obama’s euphemism for creditors at the top of the economic pyramid) from being pushed into insolvency. Mr. Bernanke’s helicopter flies only over Wall Street. It does not drop monetary relief on the population at large.

“The Wurst of Obama: He’s Carving the Middle Class into Sausage Filler as a Super-Meal for the Rich.”

Michael Hudson is a frequent contributor to Global Research.

Michael Hudson explains why Federal Reserve will pump $600 billion more into the US economy and keep interest rates at historical low levels

This guy is, IMHO, the single best economist out there.  Highly, highly recommended!

According to the BBC:

German Finance Minister Wolfgang Schaeuble said the US policy was "clueless" and would create "extra problems for the world".

South Africa's finance minister Pravin Gordhan warned that "developing countries, including South Africa, would bear the brunt of the US decision to open its flood gates without due consideration of the consequences for other nations." The US policy "undermines the spirit of multilateral co-operation that G20 leaders have fought so hard to maintain during the current crisis," he said.

"If the domestic policy is optimal policy for the United States alone, but at the same time it is not an optimal policy for the world, it may bring a lot of negative impact to the world," said Mr Zhou (China's Central Bank head Zhou Xiaochuan)

"There is a spill over."

China's Vice Foreign Minister Cui Tiankai said the Federal Reserve had the right to take steps without consulting other countries beforehand, but added: "They owe us some explanation."

Germany's finance minister Wolfgang Schaeuble said on German television that "with all due respect, US policy is clueless."

"It is not that the Americans have not pumped enough liquidity into the market and now to say let's pump more into the market is not going to solve their problems."

On Thursday, Brazil's finance minister Guido Mantega had warned that the Fed's move would hurt Brazil and other exporters.

The latest move by the Fed has been dubbed QE2 as it follows the central bank's decision to pump $1.75tn into the economy during the downturn in its first round of quantitative easing.

Pepe Escobar, Michael Hudson, and Webster Tarpley discuss China