FRA Co-founder Gordon T. Long is joined by Professor Michael Hudson in
discussing his concept of the FIRE economy and its influence on the
production and consumption economy, along with some of his writings.
Michael Hudson is President of The Institute for the Study of Long-Term
Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished
Research Professor of Economics at the University of Missouri, Kansas City
and author of Killing
the Host (2015), The
Bubble and Beyond (2012), Super-Imperialism: The Economic Strategy of
American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992
& 2009) and of The Myth of Aid (1971), amongst many others.
ISLET engages in research regarding domestic and international finance,
national income and balance-sheet accounting with regard to real estate, and
the economic history of the ancient Near East. Michael acts as an economic
advisor to governments worldwide including Iceland, Latvia and China on
finance and tax law.
Fire Economy
FIRE is an acronym to the Finance, Insurance, and Real Estate sector.
Basically that sector is all about assets, not production and consumption.
Most people think of the economy as being producers making goods and services
and paying labor to produce them, and then labor is going to buy the goods
and services. But this production and consumption is rife in the asset
economy of who owns assets and who owns other things.
The Finance, Insurance, and Real Estate sector is dominated by finance.
For instance, 70-80% of bank loans in North America and Europe are mortgage
loans against real estate. The only way of buying a home or commercial real
estate is on credit, so the loan to value ratio goes up steadily, banks lend
more to the real estate sector, and real estate is worth whatever banks are
willing to lend against it.
As banks loosen credit terms, lower interest rates, take lower down
payments and basically lower amortization rates, interest only loans, they're
going to lend more hand more against property.
"Property's bid up on price, but all of this rise in price is debt
leverage."
A financialized economy is a debt leveraged economy, whether it's real
estate or insurance or just living, and debt leveraging means a larger
portion of assets are represented by debt, raising debt-equity ratios, but
also that more and more of people's incomes and tax revenue is paid to
creditors. So there's a flow of revenue from the production and consumption
economy into the financial sector.
We're Still in Capitalism, Not Creditism
There's a huge amount of gross savings, about 18-19% of the US economy,
coded in part in debt. The savings that are lent out to borrowers are debt.
So you have the 1% lending out their savings to the 99%, but the gross
savings are higher.
"Every economy is a credit economy."
"The IMF has this Austrian theory that pretends money began as barter
and capitalism operates on barter, and this is a disinformation campaign.
This is a very modern theory that is basically used to say "oh, debt is
bad", an what they really mean is that public debt is bad, the
government shouldn't create money or deficit, and you should leave it all to
the banks who should somehow run off debt and in-debt the economy".
"You can usually ignore just about everything the IMF says, and if
you understand money you're not going to be hired by the IMF.
They impose austerity programs that they call "stabilization
programs" that are actually destabilization programs, almost wherever
they're imposed.
"When you have an error repeated year after year, decade after
decade, it's not really insanity doing the same thing thinking it'll be
different. It's sanity. It's doing the same thing thinking the result will be
the same again and again."
The result will be austerity programs making the budget deficit even
worse. The successful era of monetarism is to force countries to have self-defeating
policies that end up having to privatize their natural resources, public
domain, public enterprise, their communications and transportation, and sell
it off.
Everything that the classical economists saw and argued for - public
investment, bringing costs in line with the actual cost of production -
that's all rejected in favor of a rentier class evolving into an oligarchy.
Financiers in the 1% are going to pry away the public domain from the
government and privatize it so that they get all of the revenue for
themselves. It's all sucked up to the top of the pyramid, impoverishing the
99%.
"As long as you can avoid studying economics, you know what's
happened. Once you take an economics course you step into the brainwashing of
an Orwellian world."
Killing the Host
Finance has taken over the industrial economy. Instead of banks evolving
from usurious organizations that leant to governments, finance was going to
be industrialized. They were going to mobilize savings and flow it back into
financing the means of production, starting with heavy industry. In Germany
in the late 19th century, banks worked with government and industry in a kind
of triangular process. But that's not what's happening now. After WW1 and
especially after WW2, finance reverted to its pre-industrial form and instead
of allying themselves with industry, they allied with real estate and
monopolies because they realized they can make more money off real estate.
You had David Ricardo arguing against the landed interest in 1817. Now the
banks are all in favor of supporting land rent, knowing that today people can
buy and sell property, renters are paying interests, and they're going to get
all of the rent.
"You have the banks merge with real estate against industry, against
the economy as a whole, and the result is that they're a part of the overhead
process, not part of the production process."
The Wall Street Economy
"The Wall Street economy has taken over the economy and is draining
it."
Instead of the circular flow between producers and consumers, you have
more and more of this flow being diverted to pay interest and insurance and
rent. In other words, to pay the FIRE sector, most of which is owned by the
1%. The agency is active politicking by the financial interests and the
lobbyists on Wall Street to obtain all of the growth of income and wealth for
themselves, and that's what happened in America and Canada since the late
1970s.
Investment Strategies for Today
What all the billionaires and heavy investors do is they're simply trying
to preserve their wealth. They're not trying to make money, they're not
trying to speculate, and if you're an investor you're not going to outsmart
the billionaires because the markets are basically fixed. It's the George
Soros principle.
"If you have so much money, billions of dollars, you can break the
Bank of England. You don't follow the market, you don't anticipate it, you
actually make the market and push the market up."
You have to be able to control the prices and you have the insiders making
money but the investors are not going to make money.
The Canadians don't buy stocks until they're up at the very top and then
they lose all the money, and finally when the market's all the way at the
bottom the Canadians begin selling because they can see a trend, and then
they miss the upswing.
"J" is for Junk Economics
"It begins as a dictionary of terms just so I can provide people with
a vocabulary. The vocabulary that is taught to students today, used by the mass
media and government spokesmen, is basically a set of euphemisms. Almost all
the words we get are kind of euphemisms to conceal the actual dynamics that's
happening. For instance, "business cycles". Nobody in the 19th
century used "business cycle". They spoke about
"crashes". They know that things go up slowly and then plunge very
quickly. It was a crash, not the sine curve you have in Josef Schachter's
business cycle. A cycle is something that is automatic, and if it's a cycle
then you'd think "oh, okay, everything that goes up will come down and
everything that goes down will come up, just wait your turn." And that
means you should be passive. That is the opposite of everything that's said
in classical economics in the progressive era, when they realized that
economies don't recover by themselves".
"You need the government to step in, you need something exogenous, as
the economists say. You need something from outside the system to revive
it."
This idea of the business cycle analysis is, somehow you leave out the
whole role of government. If you look at neoliberal and Austrian theory,
there's no role of government spending or public investment. And the whole
argument of privatization, for instance, is the opposite of what was taught
in American business schools in the 19th century.
The first professor of economics at the Wharton School of Business, Simon
Patten, said public infrastructure is a fourth factor of production but its
role isn't to make a profit. It's to lower the cost of public services and basic
inputs to lower the cost of living and cost of doing business to make the
economy more competitive.
"The privatization of this adds in interest payments, dividends,
managerial payments, stock buybacks, and merges and acquisitions, and
obviously bills all of these financialized charges into the price system and
raises the cost of living and doing business."
More on Fire Economics
We're going into a debt deflation and the key is to look at debt. If the
economy has to spend more and more money, then the reason he economy isn't
recovering isn't simply because this is a normal cycle.
"It's not because labour is paid too much, it's because people are
diverting more and more of their income to paying their debts, so they can't
afford to buy goods."
Markets are shrinking, so real estate rents are shrinking, and profits are
shrinking. Instead of using earnings to reinvest, hire more labor to increase
production, companies are using their earnings for stock buybacks and
dividend payouts to raise the share price so that the managers can take their
revenue in the form of bonuses and stocks and live in the short run.
"They're all setting up to take the money and run, leaving the
companies are bankrupt shells, which is pretty much what hedge funds do when
they take over companies."
The financialization of companies is the reverse of everything classical
economists were saying. They can get wrap themselves in this cloak of
classical economics by dropping history of economic thought from the
curriculum. Following the banks and the Austrian school of the banks'
philosophy, that's the road to serfdom. That's the road to debt serfdom.
"It lets universities and its government be run by the neoliberals,
and they're a travesty of what real economics is all about."
Abstract by: Annie Zhou
