The Game is Over

Michael Hudson (his website here) 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).

How serious is the current crisis in the financial markets and housing and what steps do you think Obama or McCain should take to stabilize the markets, reduce the deficits, strengthen the dollar, increase employment, and put the economy on solid footing? Is it possible to have a strong economy without policies that distribute the nation’s wealth more equitably? As chief economic adviser to Rep Dennis Kucinich, what one bit of advice would you give to Obama to restore America’s economic vitality and put the country on the right path again?

His answer to the question above;

In economic terms America today is in as optimum a position as it is can be. That’s actually bad news because an optimum position is, mathematically speaking, one in which you can’t move without making your situation worse. This is the position we’re in now, and it’s already as good as it can get. There’s nowhere to move, at least within the existing structure. The market can’t be stabilized, because it was based on fictitious prices to begin with. It’s hard to impose fiction on reality for very long. The rest of the world has woken up although not Congress, it seems. In times past, bankruptcy would have wiped out the bad debts. The problem with such write-offs is that bad the savings that have been steered into bad loans must follow suit and go by the boards. But today, the very wealthy hold most of the savings, so the government doesn’t want to let 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 U.S. can¹t reduce its balance-of-payments deficit without scaling back its military spending. Meanwhile, Congress is refusing to let foreign governments invest in much besides overpriced junk here, so central banks are treating the dollar like a hot potato, trying to buy foreign assets that can play a role in their own future economic development. At a point these actions threaten to leave the United States economically isolated as foreign economies protect themselves from U.S. credit creation out of thin air to buy their exports and companies. The question is, will Obama and other politicians be willing to tell the public the bad news that restoring vitality will take radical measures? The way to do this is to present it as good news. There ARE reforms that can help matters, and they are reforms that Americans have endorsed for a century, ever since the Progressive Era. One problem is that lobbyists for the vested interests are so powerful that they probably can get Congress to water down any real so much that the economic situation will to keep on getting worse and worse before the needed reforms can be enacted. On the other hand, only in such a situation CAN they be enacted. I think that Mr. Obama would be wise to explain this before taking office. As president, he will have to do what FDR did, and challenge the financial oligarchy with new regulatory agencies, staffed with real regulators, not deregulators as under the Bush-Clinton-Bush regime. His political hope to avoid being blamed for the economic problems in which 16years of Clinton and Bush policies have pushed the United States is to come out in the fall probably after the election and blame the Republicans for their regressive tax policies. This would help bring pressure on the new Democratic Congress to back a return to progressive taxation and serious financial restructuring. For starters, Mr. Obama should repeal the Clinton repeal of Glass-Steagall. And he should make large depositors and savers take the losses on their bad bets. Most of all, he will have to make the tax system back progressive again if the domestic market is to recover. Also, a good tax code should encourage equity financing instead of debt pyramiding as is now the case, thanks to the banking lobby. This winding down of U.S. debt can best be achieved by removing 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 accrue to real estate speculators, not to industrial entrepreneurs. Mr. Obama can help revive the middle class by paying Social Security and medical care out of the general budget, not as user fees borne by the lowest wealth brackets as at present. Until this change is made, FICA withholding should be levied on total income, without any upper cut-off point. If there is a cut-off point, it should be to exempt people who earn LESS than $60,000 a year. This would end up being fairly revenue-neutral. Pres. Obama should explain that his policy is not to soak the rich. It is to make them pay their way once again, by favoring a strong middle class as the tax code was meant to do prior to the 1980s.Unless Mr. Obama does this, what used to be a democracy will be turned into an oligarchy. The problem with oligarchies is that historically they are so shortsighted that they stifle the domestic economy, driving enterprise and emigration abroad. This threatens to reverse America’s long-term affluence. The word 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 since the 1980s. Industry and savings already have begun to flow abroad. Skilled labor and technology is next, while domestic infrastructure is sold off to foreigners. Free roads will be turned into toll-roads, and the fees, interest and profits sent abroad. If this trend cannot be reversed in the present economic squeeze, U.S. living standards and the domestic market will be subject to IMF-style austerity and shrink.

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It is not so much that oil prices are going up however. It is actually the slumping American dollar which has dropped in value internationally by 18% in the last year against other major currencies.

The American dollar is becoming worthless, and unlike a normal recession the US economy is still growing in GDP. In 2007 the American Gross Domestic Product grew 2.2% to $13.8 trillion, but since the American dollar is worth 18% less than last year in reality the American economy actually took a huge hit. So when you think about it the US economy actually shrunk by roughly 16% in 2007 compared to the rest of the world.

The US now has a trade deficit with every part of the world. In 2006 (the latest annual data), the US had a trade deficit totaling $838,271,000,000.

The US trade deficit with Europe was $142,538,000,000. With Canada the deficit was $75,085,000,000. With Latin America it was $112,579,000,000 (of which $67,303,000,000 was with Mexico). The deficit with Asia and Pacific was $409,765,000,000 (of which $233,087,000,000 was with China and $90,966,000,000 was with Japan). With the Middle East the deficit was $36,112,000,000, and with Africa the US trade deficit was $62,192,000,000.

Public worry for three decades about the US oil deficit has created a false impression among Americans that a self-sufficient America is impaired only by dependence on Middle East oil. The fact of the matter is that the total US deficit with OPEC, an organization that includes as many countries outside the Middle East as within it, is $106,260,000,000, or about one-eighth of the annual US trade deficit.

Moreover, the US gets most of its oil from outside the Middle East, and the US trade deficit reflects this fact. The US deficit with Nigeria, Mexico, and Venezuela is 3.3 times larger than the US trade deficit with the Middle East despite the fact that the US sells more to Venezuela and 18 times more to Mexico than it does to Saudi Arabia.

What is striking about US dependency on imports is that it is practically across the board. Americans are dependent on imports of foreign foods, feeds, and beverages in the amount of $8,975,000,000.

Americans are dependent on imports of foreign Industrial supplies and materials in the amount of $326,459,000,000 -- more than three times US dependency on OPEC.

Americans can no longer provide their own transportation. They are dependent on imports of automotive vehicles, parts, and engines in the amount of $149,499,000,000, or 1.5 times greater than the US dependency on OPEC.

In addition to the automobile dependency, Americans are 3.4 times more dependent on imports of manufactured consumer durable and nondurable goods than they are on OPEC. Americans no longer can produce their own clothes, shoes, or household appliances and have a trade deficit in consumer manufactured goods in the amount of $336,118,000,000.

The US “superpower” even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers, and telecommunications equipment.

What does it mean that the US has a $800 billion trade deficit?

It means that Americans are consuming $800 billion more than they are producing.

How do Americans pay for it?

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