JH: Welcome back to Legitimate Targets, everybody. I hope you’re all having a great day. We have got a very special guest. I think probably the guest that I’ve been most excited to ever talk to on this show. Michael Hudson, the famed economist, is joining us today. Of course, many of you probably know his amazing book, Super Imperialism. He’s got many others that I suggest you check out if you want to learn about how the U.S. operates as a global hegemon and how they arrived at this position, and also the history of the global banking cartels, finance capital, the power of debt and how debt has been used. As well as the cancellation of debt as a form of liberation for people throughout history and much more. Michael Hudson, if you are not familiar with him, is a distinguished research professor at the University of Missouri, Kansas City, and a researcher at the Levy Economics Institute at Bard College. He’s got a very, very long and interesting career you can read about. Michael has a relatively short autobiography you can read about on his website, he’s done private sector, consulting, economics, worked as a professor throughout his career, and even written skits for Saturday Night Live. So he’s a man of many talents, and I’m happy to have him here with me today. So without further adieu, Michael Hudson, thank you so much for joining me today.
MH: Well, thanks for having me.
JH: Yes. To start off with just to go big picture, who do you believe controls the world today? Do you think it is private capitalists or do you think it’s the United States, specifically the state apparatus itself?
MH: If only there was some central control over the market, it would be so easy to go to them and explain what to do.
But there are many, many different layers at work here. For instance, it used to be for almost a century that the role of the stock market, which you asked about, is to finance new companies. Banks don’t lend money to build factories or create capital. That’s supposed to be the job of the stock market issuing stocks. Well, for the last few decades, the number of stocks have shrunk because private capital has taken them over.
In other words, very wealthy firms have made so much money by un-taxing themselves and money in the stock market and real estate and capital gains, that they’ve said, well, we’re going to use our own money, and we’re going to borrow money from the banks to bail out firms. In other words, we’ll offer to buy out all of the stockholders.
We’ll make a tender offer. This began in the 1980’s and private capital firms, beginning with the junk bond movement of the 1980’s, have begun to buy out firms. So there are fewer and fewer stocks every year. Well, you have pension funds that are required by their articles of agreement that they have to buy stocks. So all of this money is sort of a carved out thing.
So there is one group of firms on Wall Street that manage buyers, that manage the stock market buying, especially now that you have indexed stocks. So you go to a firm and you say, I want to buy a stock – Vanguard, for instance, or any of the others. You say, “just give me an index for
the Standard & Poor’s 500, or for the Dow Jones Industrial Average.” And they don’t really pick. When I went to work on Wall Street in the 1960s, the whole idea of stock analysis was you pick the stocks that are going up. And of course, most people pick the military stocks because of the Vietnam War. And there’s one thing that you can make enormous profits on for the last 50 years: military stocks. So, they would go up. Aerodynamic stocks, technology stocks, you’d have a boom, then you’d have the smaller companies on Wall Street, they’re the pump and dump companies. They’d make new issues on, you know, very small offerings. They’d organize a kind of mafia, very much like what Trump organized a few months ago when he started his cryptocurrencies, Trump Currency and Melania currency.
They whole group of financial gangsters, would put up their money, bid up the stock. Then, people would think, “oh, whoa, some of this stock is going up!” They’d buy it, bid it up. And then the operators, the manipulators, would dump the stock and it would collapse. And all of the people who bought on the way up would collapse. So that’s one layer.
So, you have private capital, borrowing to buy firms, and they have done so with borrowed money from the banks. You have the investment banks that are deciding who to lend money to for who can make the most money in the financial markets. You have the stock brokerage firms. You can see there are many layers here and they’ve all sort of got together with the Federal Reserve.
And ever since the Obama junk mortgage crisis, the Federal Reserve says, “well, our loyalty is to the banking system.” The banks, in 2009, when Obama took the presidency, most of the big investment banks on Wall Street were broke because they’d made junk mortgages that all turned out to be junk. That’s why they were called junk mortgages. And the Federal Reserve spent the next few decades lowering interest rates in order to enable new speculators to buy stocks, buy companies and take them over at almost a 0.1% interest.
And if a company was paying dividends to 4%, 5%, you could borrow at 0.1% and make a huge profit. So you’ve had the most active people in the stock market, in the last decade or so, be the private capital companies that have gone deeply into debt to buy these firms with such high debt leverage that if the sales of these firms go down even a little bit, then all of a sudden they wiped out their equity and they don’t have any equity.
And they do what real estate owners did when the price of their property fell. Like what Trump did: you walk away from it and you leave the banks with the loss. So the banks are big players in this because the banks have been putting up the money for speculators to buy stocks. And the stocks prices have gone so far above the historic rates.
In other words, there’s a certain capitalization of earnings. It’s called the price to earnings ratio. You look at the earnings for a firm, and what is the price earnings ratio. Is it eight? nine? It’s gone way off the charts in the last year. So just at the point that Trump announced his tariffs last week, you had a vastly over-priced stock market.
And a lot of people like Warren Buffett said he’d sold out stocks completely. A lot of conspicuous big private investors with their own funds and companies sold out. They said, well, if there’s any kind of an economic downturn like a depression, then these companies are going to go broke. And if the companies are going to go broke, what’s going to happen to the banks that have lent these companies the money to buy stocks that now, no longer are worth enough to cover the amount of money they owe?
It’s called negative equity, this is the new word that you’re going to be hearing for firms. So you’re having this interaction of firms and at the center of it all, if there’s anyone who’s controlling it, it’s the Federal Reserve. And they’re allies, very big stock companies called the “Plunge Protection Team.” In other words, you remember W.C. Fields playing poker, and somebody would join the card game and keep losing. And he said, “is this a game of chance?” And Fields said, “not the way we play it.” Well, the same thing is with the stock market. It’s a manipulated market. And if you’re an investor, and if any of your listeners have less than $10 billion each, they shouldn’t be in the game because they’re not one of the players.
They’re one of the watchers. They’re one of the people who the players make money off of. So a lot of people that are not part of the billionaire’s club of insiders are going to be losing their shirts as today, as they did last week, not only with their own money, but their pension funds, because the pension funds are big players in the stock market.
That’s one of the problems of finance capitalism, is what was called pension fund capitalism. And the idea is let’s make workers feel that they’re capitalists in miniature. Let’s say, “hey, you’re owners of the firm. Just like the real owners of the firm, if you have stocks, you’re a stockholder.” Well, ownership usually gives you some kind of control, but not the kind of pension fund capitalists.
So they said instead of playing doing what Germany does, for instance, and looking at pensions as a public need, a public utility, it should be paid on a pay as you go basis. You have workers save in advance to pay their pensions. But how do they save? They put it in the stock market. And the result has been the pension funds are a big factor pushing up the stock market.
And the other problem is that the pension fund liabilities, what they have to pay their members, now that they’re retiring and get pensions, is more than they have in the stock market. So they’ve turned their money over to the private capital firms, companies like CalPERS, the California pension fund system, or the Kentucky pension fund system are way, way over-leveraged by giving their money to private capital people who really take all of the money that they make in the stock market for management fees and paying dividends to themselves and only giving some of what’s left over to the actual pension funds or other institutional investors that have bought into the stock market.
So you have a situation where I guess you could say the stock market is predators and victims. You’re asking who is in control, not the victims who hold a lot of the stock, not the stock owners. It’s the organizers. It’s the private capital funds. It’s the banks. It’s the Federal Reserve that
decides what companies and what investment firms and what financial firms are we going to bail out? Who are we going to give the money to? Well, when you have an administration like Donald Trump, it’s going to be well, you give it to your loyalists and it’s usually given to the loyalists. And that’s the situation today you’re having. Somebody has to lose a lot of money when the stock market goes down. Well, there are many ways of losing money.
For instance, when I turned on the Dow Jones Futures yesterday afternoon, they were down 5%. That’s enormous, I think of 2000 points, an enormous amount. And I thought, well, there’s going to be a lot of losses. Well, what many of the speculators in the stock market, including small day traders, middle class people who think they can outsmart the market and buy a stock during the day and sell it later and make a quick gain.
They’ve done what is called selling a stock short. In other words, you promise to buy a stock at a low price. You pay money to a firm for the right to buy a stock at a low price. And they say, well, if the stock goes down, we can make money. So a lot of people borrowed money. They sold short and they guessed, right, the stocks went down. But then the big players, the manipulators came in and said, “aha! A lot of small investors thought they’d outsmart the market by selling the stock short. Let’s all, come in and buy the stocks. And all of a sudden, the big losses of Sunday afternoon, New York time, were pushed up and now the losses are only half as much as yesterday.
So all of a sudden, these people, small investors and also some big firms, that thought there’s going to be a big crash, who thought they were going to make a killing. They thought they’d get to sell the stocks at a higher price than they’ve plunged to and make a quick profit. Well, all of a sudden they find out the stock price is going up and we’ve promised to deliver these stocks.
Well, on Wall Street, there used to be a phrase: “He Who Sells What Isn’t His’n Must Buy it Back or Go to Pris’n.” In other words, they made a promise to buy stocks. It’s called a short squeeze. The short sellers are being squeezed and that’s what you’re seeing today. So sometimes when the market goes up with a recovery, it’s not because of the newspapers saying, “oh, don’t worry, everything is getting to be normal, the stocks are going back up.” It means that the short sellers are losing their shirts. Now, a lot of these short sellers, maybe small investment companies, may go broke. There are going to be a lot of bankruptcies of people who’ve made the wrong bets in all of these.
So all of this is what’s happening. But of course, the stock market isn’t the economy. Remember, you have 10% of the American population owning 80% of the stocks. So when people talk about the stock market, they’re really talking about “how are the richest billionaires doing?” Well, who really gives a damn? What people care about is how is the economy doing? How are wage earners doing? How are people have to work for a living doing? How is the middle class doing? They’re not really the main owners of the stock. So all of this talk about the stock is wringing your hands over how the wealthiest 10% of the population that owned the stocks & the bonds really doing. Just to put it in perspective, the stock market’s not really the economy. But because it’s the economy that’s owned by that 10%, the Federal Reserve and the government in both the
Democratic and political parties are very careful to help make sure that there is not a break in the chain of payments. People don’t lose money because they’re the donor class, the political donor class. So, you can say, “who is in the stock market?” Well, the politicians, Congress – deciding how do they make sure that their constituents that are the 10%, the main donors to our political parties are able to keep on making money like they’ve been making?
JH: How would you describe the power dynamic between Wall Street and the City of London today? Do you feel as though the City of London still holds the mantle as the supreme power in the global hegemon?
MH: No, it never did. It was always a satellite of Wall Street. Largely the part of the City of London was created by the Soviet Union in the 1960s, when I was on Wall Street.
They wanted to keep a lot of dollars in their reserves, but they didn’t want to keep it in America because America would have grabbed them. And so they kept their dollars in London and this is called the Eurodollar market. So a whole market for dollars developed in London.
I was working for Chase Manhattan Bank at the time. And the single largest department sending deposits into New York City was London. And I really think there was a kid in his twenties – of course I was in my twenties at the time – the kid in his twenties was just sort of forwarding everything that they could borrow. And not only Russia, other countries got into the Eurodollar market and London became an intermediary to deal with the United States.
And so, for instance, in 2008, when AIG, the great insurance company, went broke, what happened was that the American financial companies, AIG and others did all of their speculation activities through London in separate affiliates. Well, when AIG made a bad bet on stocks that went down in the junk mortgage crisis, they could have said, “well, thank heavens that isn’t AIG’s head office. That’s just London. Let’s let the London office go under. But for some reason, they thought, well, this’ll break the whole system up. So London was where most of the derivatives trade developed. So it was always a where the large American banks and large American investment companies, insurance companies and other financial institutions would transact many of their gambles because it was much less regulated than was the case in the United States, especially under the Labor Party. Not only under Tony Blair, but his successor.
“Light Touch,” it was called. You had a center of activity that really wouldn’t have been looked upon very positively in the United States, which took place in London. Well, obviously, once Britain withdrew from the European community, it didn’t have the connections with the other countries right now. So London is sort of left by itself and doesn’t have anywhere near the power that it had as an American intermediary.
And there’s been so much deregulation in the United States that the big banks don’t need to use London anymore as a vehicle for their gambling.
JH: Do you think that the United States is nearing a breaking point in being able to extract tribute from the global economy through their balance of payments deficits?
MH: I don’t think so. They are doing everything they can to maintain it by threats, by military power. But here’s what’s happened. Trump has imposed tariffs that are so heavy that right now firms simply have stopped trading. They don’t want to pay the high tariffs until they may go down. These tariffs, obviously no country has enough money to really pay them. But Trump is saying, what are you going to give us if we don’t hurt you, we’re going to hurt you with the tariffs. That’s why we did. But if you give us special favoritism, if such and such a country will sell us their public utilities, if China will agree to sell us TikTok or the Panama Canal development, then we can talk about lowering the tariffs on you. Well, he’s made similar promises to all sorts of countries.
Let’s get together. What can you give us so that we won’t wreck your export industry. Let’s make a deal! Well, as long as companies in the United States and abroad think, “well, these tariffs, we don’t know what’s going to happen if we send our exports to the United States now, they’re going to have to pay anywhere between 10%, 20%, 40% tariffs.
The parent companies are not going to take a huge loss or the exporters will take a loss. What people don’t realize is that an enormous proportion of American imports are from their own foreign affiliates, for instance, almost all of the oil trade in America.
It’s said that we’re running a big trade deficit for oil. But all this oil comes from affiliates or branches of the United States oil firms. And only a portion of this payment actually is paid not in dollars, but local currency. What is paid to the oil producing countries, is recycled in the form of the Saudi Arabians purchase of stocks and bonds.
So take Amazon, for instance, Amazon has been making its telephones and computers in China. Well, is Amazon going to pay 40% tariffs or 60%? Or is it going to wait until it’s safe? Well, maybe there is going to be a deal and Amazon won’t have to pay this.
Same thing with the auto companies. General Motors imports an enormous amount from its affiliates in Mexico and Canada. Well, if it pays 25% from its own affiliates, then obviously it’s going to have to either take a loss of its profits or it will have to raise the price of the cars, just as Amazon will say, well, if we really have to pay high tariffs, there is no way that we could quickly build our own factories here in America to put them all together. It’s going to take years and years. We have no choice but to pay the tariffs. Amazon, the car companies, all across the board are saying, “let’s just not do anything until we know what the tariffs are going to be and we know how low they’re going to be. So no trade is going to be taking place for a while.
This is going to mean a break in the chain of payments. You need all sorts of parts to make a machine or a consumer good. There are all sorts of different elements and different countries that go into it. And if you are missing one key part then the product can’t be made. That’s the problem with the cars.
You have the German car companies, BMW and Volkswagen, setting up American firms because they’re told if we produce in America, then we’ll be free of the tariffs. But all of a sudden, with Trump’s tariffs on the motors that are sent by BMW and Volkswagen, the motors are a big part of the car. That’s why people buy BMWs and Volkswagens.
All of a sudden, it doesn’t pay for these companies to be in America, to get free of the American barriers because there are new barriers that are put up. So you can imagine the problem that this is causing for foreign countries that tried to do what American policymakers told them to do in the past, to relocate to the United States and produce here for the American market.
So this whole idea that Trump has of bringing foreign companies to the United States turns out to be so problematic that it looks like it’s going to backfire. And companies that have agreed to move to the United States are in trouble. Taiwan has its largest and major chip-making company in the world, building a huge complex, a production facility west of the United States. But Trump has all of a sudden imposed huge tariffs on Taiwan. And obviously there’s going to be a negotiation. These are going to be wound down. But if Taiwan really had to pay these tariffs, all of a sudden this huge hundreds of millions of dollars, I think it costed billions of dollars to build this gigantic complex, all of a sudden cannot operate at a profit.
So that’s going to absolutely screw up things. So we’re in a period of disruption that is much more serious than just the stock market going up and down today. We’re talking about a long term problem that the American economy is becoming almost uninvestable and there is no way that America can re-industrialize as Trump wants and as he has promised is the aim of the tariffs.
And how do we explain this? It was never the plan at all. Trump’s focus on tariffs really didn’t have anything very much to do with bringing in or reviving industry in the United States. A few years ago he was discussing how we can get rid of the income tax. Somebody told him that the wealthiest 10% pay a huge proportion of the income tax, even though they have all the tax breaks. How do we get rid of this?
And somebody told him, you know, there wasn’t an income tax before 1913. America, the whole rise to industrial power of America was without an income tax. And Trump said, how did they function without an income tax? Well, tariff revenues were how America funded the Treasury along with land sales from the land grabbed from the Indians, from the revolution all the way through the eve of World War One.
And Trump said, “oh, tariff revenues, the advantage of tariff revenues is labor pays tariff revenues and the wealthy people pay the income tax. Let’s shift the tax burden off the wealthiest people on to labor. And some of the companies said, well, wait a minute, you know, a lot of the things that we import for tariffs are things that we need to produce.
The oil company and oil industry imports certain kinds of chemicals that it needs for refining. And so when Trump gave his speech last Thursday announcing the tariffs, there was an 11 page appendix listing all of the exemptions from tariffs. And there were all the things that companies had given him saying, don’t put tariffs on this. This is what we need to make our profits.
They ensured that Trump only taxes labor, not industry and not Wall Street, not the businesses. So Trump has said, here’s a way that I can untax the wealthy and shift the tax on to labor. And labor’s living costs are about to go way up and over half of Americans are now since 2008 have had no increase in wealth whatsoever.
All of this increase in wealth has been to the wealthiest parties in the country. And 40% of Americans, according to polls, say that they’re living paycheck to paycheck. Well, if they’re living paycheck to paycheck and have reported that they can’t afford a $400 emergency, if they have to get it, because they’re maxed out on their credit cards, well, imagine what’s going to happen when the tariffs increase the prices that they have to pay in order to break even to keep on living and just covering their cost of living.
There’s going to be further defaults. And already, last week, the government reported that defaults on federal home insurance guaranteed mortgage arrears and defaults are at an all time high. Credit card arrears are rising to new highs. People are unable to pay their debts. Student debt arrears are rising. So you have the wage earners in this country who are unable to pay the debt overhead that they have. And the only way they’ve been able to pay is by going further and further into debt to the credit card companies, to the banks, and just not paying their bills. And so you’re having the whole economy stretched to the breaking point. And what Trump’s actions have done is put, I’d say, half American families, wage earners at the breaking point.
That’s the problem that they’re facing right now. And if the stock market goes down, the 10% will lose some of their money. But if the results of his tariff policy designed to shift the tax burden off business on the labor goes down, that going to mean the banks are going to face a lot of defaults on the credit cards, defaults on their mortgage loans, defaults on their automobile loans.
That’s what’s going to be happening in the next year. And I guess if you’re using the old terminology, the class war is back in business.
JH: Well that’s very good, the class war being back in business that is, I guess I’m all here for that. Professor Hudson. I just have one last question for you, and I hope I can speak to you again sometime in the future, because there’s much more I’d like to speak with you about.
Before the BRICS summit in Kazan last year, I saw an article posted in ZeroHedge. Pepe Escobar wrote it and he had a conversation with you. I believe there was some commentary from Sergei Glazyev in that article as well. And the conversation was about whether or not there could be a new BRICS Bretton Woods at the Kazan summit.
We obviously saw what occurred at the Kazan summit, but I’m curious if you think that BRICS is actually headed in this sort of a direction to act and operate within a new BRICS led financial order to compete with the IMF? Or whether you think BRICS is moving in the direction of operating within the framework of the preexisting hegemony.
MH: The International Monetary Fund was created along with the World Bank at the end of World War Two in order to lock other countries into dependency on the United States. Nobody’s going to compete with it. The part of it is to get free of it. The IMF basically is supporting the international bond holding class. And it follows a vicious anti labor philosophy.
It tells countries if if their currency is threatened by the very wealthy classes moving their money out of Argentina or other highly indebted countries, it says, well, we’ll send you the money, but you’re going to have to follow conditionalities in order to get the loan, you’re going to have to lower wages, because if you lower wages, then this can help you compete. Well, of course it doesn’t help them compete at all. It makes them less able to compete. It destroys the domestic market, low wage labor is less productive than high wage, well-fed, well educated, healthy labor. And so the IMF’s philosophy is basically designed to promote dependency on the US dollar.
Same thing with the World Bank. The World Bank has made loans for countries to put in infrastructure that help American mining investors and oil investors and foreign investors develop export markets, and especially for agriculture, plantation agriculture. The one thing that’s a constant of the World Bank, it’s a constant policy, is do not make loans for other countries to create, to feed themselves, to grow their own crops – instead, make loans for plantations to promote export crops that do not compete with America.
The function of the World Bank is to keep other countries dependent on importing grain and their food from America. Instead of feeding themselves, they will compete with each other to make tropical crops, to essentially keep the prices low, to sell to the United States, Europe and the Western countries. The whole development philosophy of the World Bank and the IMF is geared toward polarizing the world economy and to finance dependency relationships.
That’s what my book Super Imperialism, that you held up, is all about. The Global South countries, global majority countries, have been trying to break away from this for years, but they never had a critical mass of countries before. A small country itself can’t break away. Cuba couldn’t break away. Venezuela couldn’t break away.
But now that you have enough large countries, especially in Asia, with China’s power and other Asian countries, you now have the rest of the world which is able to be economically and commercially independent of the United States and its exports. And for the first time since 1945, they don’t need the United States anymore. That means they don’t need the international organizations that were created to increase American power over these countries.
So they’re trying to figure out a way to break free of them. And that’s usually what Pepe Escobar and I talk about and what I talk about on my website and the various YouTube programs that I go on to like yours to discuss how to break free of this international economic polarization.
JH: Well, maybe in our next conversation we could do that, because every time you answer something, I think about new questions. And you are a walking encyclopedia, you’re a wealth of knowledge. And I thank you so much for joining me today. Where’s the best place for people to follow along with your current work and where’s the best place for them to purchase your books?
MH: Well, I have my own blog, “Michael-Hudson.com” and they can see the articles there, the books, I guess they can get them through Amazon or any other store. That’s the best way to do it.
JH: Beautiful, we’ll be sure to link those in the episode for people to check out. Professor Michael Hudson, thank you so much for joining me today.
MH: Well, thanks for having me. It was a nice discussion. I hope I didn’t move too fast.
JH: Not at all. Thank you.
By Michael Hudson
