In a healthy economy, there is a symbiotic relationship between companies and people. People want to buy product, and companies make the product that the people want to buy. The companies hire people to make the product, and the salaries paid to their employees results in more money being available to buy even more product. That results in more profits for the company, the company hires even more people to make even more product and the cycle continues.
Everyone does well in such an economy, the people have jobs, they spend money, companies make money from people buying their stuff, and so on. But that is the “old” version of our economy.
In the new version, the economy is split into two economies: the economy for the super rich and the economy for the rest of us. The economy for the rest of us has gone nowhere in the past 40 years, but the economy for the super rich is BOOMING!
That is why we keep hearing that the “powers that be don’t seem to care about the people these days.” With companies shipping their jobs over to (a dictatorship country) China in order to save on the cost of labor, the rest of us back home have seen our salaries stagnate since the late 1070s. While corporate profits have gone through the roof since then, all we’ve seen is our credit card debt go through the roof.
But this is capitalism at work. After the war companies began to prosper and hire more and more people. Salaries rose as company profits rose. From the 50s until the 70s, a single father could afford buy a house, a car, feed his two children and his wife could stay home to raise the family. Life was good and capitalism was great! There was a symbiotic relationship between companies and their employees. As companies did well, their employees did well. It was almost as if companies existed to employ people rather than to just sell the, stuff. Company owners made lots of money too, so this relationship worked and worked well.
But all that changed when an economist by the name of Milton Friedmam came up with the idea that companies don’t exist to employ people, but that companies exist ONLY to increase shareholder value. This meant that rather than increase the salary of an employee when a company’s profits went up, that profit needed to go to the share holder. When a CEO took a bit of a company’s profit and donated it to charity for underprivileged kids, in Milton Friedman’s eyes that CEO was stealing from the shareholders.
Everything a CEO did from then on needed to ONLY be done with the idea of increasing shareholder value, and that meant that a company’s profits had to go up every 3 months. Period. Thus the idea of Quarterly Profits was born. The world’s dumbest idea, as Forbes Magazine recently called it, was put into place and life in America, and the world, was changed forever. Friedman went on to win a Noble Prize in economics and life started becoming miserable for the rest of us.
The first thing to change was salaries stopped going up immediately. Since that time in the mid 70s, sphousehold incomes have not budged. Adjusted for inflation, household incomes are the same today as they we’re as in the mid 70s. Yet corporate profits are through the roof!
Then the cost of goods were cut, lesser quality parts were used to make the products. In the mad quest for making sure that a company makes more profits every 3 months than the previous 3 months, that meant that costs had to be cut across the board and constantly!
Sure, they could try to sell more stuff, but with no extra money going into the work force, that workforce didn’t have the extra money to spend. So it was cut, cut, cut. But speaking of workforce, that workforce is costing the company on average 25% of their expenses. But wait, we can hire 25 Chinese people for the price of 1 American! Sure, it’s a communist country where they murder people that complain about living in poverty, but, remember, a CEOs job is to increase shareholder value only, so screw it, lets fire the people here and hire Chinese people to do the labor! We’ll tell people here that we can make the product cheaper for them as a result, and because they all have less money anyway, they’ll quickly forget that we’re using slave labor to make the stuff.
You can see how this simple change in perception can have a profound effect on society as a whole. Suddenly, a single father could no longer support his family alone, and women were forced to join the work force. No, it wasn’t women’s lib that drove that, it was the need to survive. Now households had 2 full-time workers and raising a family became even more difficult.
Remember how household incomes have stayed the same since the 70s? But households had one earner back then, and now they have two earners, so in real terms, that means that salaries have actually gone down by half!
But the stock market continues to explode!
Now raising a family, having to buy 2 cars, and a house become increasingly difficult. But the markets come up with a plan for that, and the real-estate boom kicks in. With all the increased corporate profits, the wealthy start buying real-estate, and price start going up. Regular people are encouraged to also buy real-estate as well. Can’t really afford it? Don’t worry. We’ll sell you this house and make the variable interest rate initially LESS than what the U.S. Government would pay (a sub prime mortgage) and that means that you can buy this $300,000 house for only a few hundred dollars a month!
But what happens when the variable interest rate moves up next year and my payments go to a $1,000 which I can’t afford? Don’t worry, your house will have doubled in value by then and you can borrow against it as the Chairman of the Federal Reserve says you should do!
You can see where this is all going right?
Suddenly raising a family became tougher with both parents having to work to survive, buying that house became tougher, and remember,
When that started to top out, our
supposed to be able to make money and buy their product? And if people cannot buy more and more of their product, how are the companies supposed to show increased profits and have their stock prices continue to go up?
Well, fortunately, there is ANOTHER way that CEOs can make stock prices go up.
Companies can make their stock prices go up by buying their own stock on the stock market.
Enter, the financial economy.
In a “financial economy” money is made on top of money.
to people if
cannot see that if they pay their employees good wages the employees will be able to buy more stuff, which in turn translates into more profits for the companies. And those profits turn into more people employed and so on and so on.
, and with those profits the companies can hire even more workers who, in turn, buy even more of the company’s stuff.
But that is not how our economy is operating currently. As is pointed out by Michael in this interview, we are operating in a “financial economy.”
Leading up to the bubble of 2008, banks took HOME loans, bundled them up, and resold them as “Mortgaged Backed Securities.’ This meant that something they were ALREADY making money on (home loan interest payments) – they were able to RESELL them AGAIN and make even more MONEY ON TOP OF THE ORIGINAL MONEY. And they were able to do it again and again and again.
AMY GOODMAN: “Black Monday.” That’s how economists are describing yesterday’s market turmoil, which saw stock prices tumble across the globe, from China to Europe to the United States. China’s stock indexes fell over 8 percent Monday and another 7 percent today. On Wall Street, the Dow Jones Industrial Average initially fell a record 1,100 points before closing down nearly 600 points. The decline also caused oil prices to plunge to their lowest levels in almost six years.
Joining us now to try to make sense of what’s really behind the fluctuations in the market is economist Michael Hudson, president of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst and distinguished research professor of economics at the University of Missouri, Kansas City. His latest book, Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.
Welcome to Democracy Now! It’s great to have you with us.
MICHAEL HUDSON: Thanks for having me again.
AMY GOODMAN: Professor Hudson, talk about what happened in China and what happened here in the United States.
MICHAEL HUDSON: Well, what happened in China doesn’t have very much to do at all with what happened in the United States. Wall Street would love to blame China, and the Obama administration would love to blame China, and Europe would love to blame China. But most of the Chinese stocks went down because small Chinese investors were borrowing from, let’s say, the equivalent of payday loan lenders to buy stocks. There was a lot of small speculation in Chinese stocks pushing it up. But this was an internal Chinese phenomenon. And China, as a whole, doesn’t really have problems.
The real problem is that we’re still in the aftermath of when the bubble burst in 2008, that all of the growth in the economy has only been in the financial sector, in the monopolies—only for the 1 percent. It’s as if there are two economies, and that of the 99 percent has not grown. The American economy is still in a debt deflation. So the real problem is, stocks have doubled in price since 2008, but the economy, for most people, certainly who listen to your show, hasn’t grown at all.
Stock prices were inflated really by the central bank, by the Fed creating an enormous amount of money, $4.5 trillion, essentially to drop over Wall Street to buy bonds that have pushed the yields down so low, to about 0.1 percent for government bonds, that pension funds and investors say, “How can we make money?” So they buy stocks. And they borrowed at 1 percent to buy up stocks that yield maybe 4 percent.
But the largest group that has bought stocks are companies themselves, with stock buyback programs. The managers of companies have used their earnings, essentially, to push up stock prices so that they get more bonuses. Ninety percent of all the earnings of the biggest companies in America in the last five years have gone for stock buybacks and dividends. It’s not being invested. It’s not building new factories. It’s not employing more people.
So, the real problem is that we’re in a nonrecovery in America, and Europe is in an absolute class war of austerity. That’s what the eurozone is, an austerity zone. So that’s not growing. And that’s really what’s happening. What you saw on Monday was like a shift, a tectonic shift, people realizing, “Well, the game is up, it’s time to get out.” And once a few people want to get out, everybody sees the game’s up.
AMY GOODMAN: And China?
MICHAEL HUDSON: In China, it’s largely small borrowers who borrowed from intermediate lenders, who have borrowed from the big banks. So a lot of individuals in China that tried to get rich fast by riding the stockmarket, and all of a sudden find out that they have a lot of debt to intermediate, you know, non-bank lenders, insiders, people who banks will lend to. It’s like the British banks lending to real estate speculators to lend out to homebuyers. So this is essentially the attempt to get rich by riding the stock market in China, which went way overboard. Chinese stocks are still above what they were at the beginning of the year. This is not a crisis. This is not very much. It’s just that the artificial increase in the market has now ended some of the artificial push-up. It’s still artificial, and it will still go down some more.
AMY GOODMAN: I’m surprised you say that what happened in China and what happened in the United States are not related.
MICHAEL HUDSON: They are related in a way, but the U.S. funds have not invested very much in the Chinese stocks. Most of the China fund stocks are in HSBC, which lends to China—the bank. The break first happened in China, but the break itself was within China. And this showed investors—this is a symptom—that what happened in China is going to happen in Europe, and it’s going to happen in the United States.
AMY GOODMAN: Talk about China as the world’s second largest economy, and what you think would be the healthiest relationship between China and the United States.
MICHAEL HUDSON: Well, the economy is not the stock market. China’s economy had to accumulate a large amount of foreign reserves just to withstand the kind of American financial war that brought the Asia crisis of 1997. So China acted defensively. It exported a lot, developed huge international reserves to make itself independent of the West. And now it’s in the middle of shifting away from an export economy to begin to produce for its own people. I mean, why should Chinese workers spend all their lives making goods for Wal-Mart to sell in the United States and Europe? Why don’t they make goods for themselves to raise their own standard of living? That was what China’s doing, and that means that China doesn’t have to export more, and there’s really nowhere to export to, if Europe isn’t growing and the U.S. consumers aren’t spending. Obviously, the attempt is to make China itself grow. But the Chinese took the money; instead of consumer goods, they bought stocks.
AMY GOODMAN: As markets in China plunged Monday, former U.S. treasury secretary and president emeritus of Harvard University, Larry Summers, tweeted this dire prediction: “As in August 1997, 1998, 2007 and 2008 we could be in the [early] stage of a very serious situation.” Is he overstating what’s going on?
MICHAEL HUDSON: The question is: What does he mean by “situation”? When he says “situation,” he means his constituency, the 1 percent. He doesn’t mean the economy as a whole, the 99 percent. He’s been wrong on almost everything that he’s called. What he’s calling for now is: You have to cut taxes on the 1 percent more; you have to give the 1 percent more money, and it will all trickle down. This is part of his patter talk, trying to support his usual right-wing position. But you have to be very careful when you listen to Larry Summers.
AMY GOODMAN: Michael Hudson, your book is titled Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. Explain what you mean.
MICHAEL HUDSON: Well, most people think of parasites as sort of just taking, taking money from the economy, and the 1 percent is sort of sucking up all the income from the 99 percent. But in nature, what parasites do, they don’t simply take. In order to take, they have to take over the brain of the host. And economists have a word, “host economy.” It’s for a foreign country that lets American investors in. Smart parasites help the host grow. But the parasite, first of all, has to make the host believe that the intruder is actually part of the body, to be nurtured and taken care of. And that’s what’s happened in national income accounting in America and in other countries. The newspapers and the media—not your show, but most of the media—treat the financial sector as if that’s really the economy, and when the stock market goes up, the economy is going up. But the economy isn’t going up at all.
And the financial sector somehow depicts itself as the brains of the economy, and it would like to replace government. What Larry Summers said is that governments have to pay their debts by privatizing more, essentially, by doing what Margaret Thatcher did in England. That’s his solution to the crisis: All the governments have to do is balance the budget, sell everything to Wall Street on credit, and we won’t have any more problem.
Basically, the financial sector is almost at war, not only against labor, as most of the socialists talk about, but against governments and against industry. It’s cannibalizing industry. So now most of the corporations in America are using their income not to do what industrial capitalism did a century ago, not to build more factories and employ more people and make more profits; they’re just using it, as I said, to push it to pay dividends and to buy back their shares and to somehow manipulate the financial sector in the stock prices, not the economy as a whole. So there’s been a divergence between the real economy and what economists call the FIRE sector—finance, insurance and real estate. And they’re going in separate directions.
AMY GOODMAN: You are—you have been an adviser to the Syriza party in Greece. You’re a friend of the former finance minister, Yanis Varoufakis. Can you talk about what’s happening there now and what that bodes for the economy, not only in Greece, but in Europe, maybe even here?
MICHAEL HUDSON: Well, the story begins, actually, about four years ago, when Greece had a very large foreign debt, taken on basically by the military government and what followed. And it was obvious that as soon as the PASOK, the socialist party, came in, they said, “Look, the debt’s much larger than we thought. We can’t pay it.” They were going to write it down. The IMF staff looked and said, “Greece can’t pay the debts. We’ve got to write them down.” Its board looked in, said they can’t pay the debts. But then the European central banks came in and said, “Look, our job as central bankers is to support the banks. Greece owes the debt to the, essentially, French banks and German banks, and we’ve got to support them.” So, despite the fact that the IMF was pushing for a debt write-down four years ago—the head of the IMF at that time, Dominique Strauss-Kahn, wanted to run for president of France, and he was told by French President Sarkozy, “Well, wait a minute, if French banks hold most of Greek debts, you can’t, at the IMF, say that we’re going to write down the debts.” So they didn’t. And meanwhile, the eurozone said, “We won’t let you, the IMF, be part of our program, the troika, if you don’t pretend that Greece can pay the debt.”
So Greece was left with a huge debt. It was pushed into depression. The GDP fell worse than it did in the 1930s. Finally, the Syriza party came in, in January, and Varoufakis and Tsipras thought, “Well, then, OK, we can explain to the finance ministers of Europe that you can’t expect to push Greece into a depression, push more austerity, and somehow austerity will enable us to repay the debt. That’s crazy.” He thought that he could reason with them. And the Europeans, whom he was reasoning with, the central bankers, said, “We’re not here to talk about economics. We’re lawyers. We’re here to collect money. It doesn’t matter that you’re going to go into a depression. It doesn’t matter that you’re going to have to have another 20 percent of your population emigrate. We’re only here to collect the payments. And if you don’t pay, then we’re going to pull the plug.”
And they pulled the plug on the Greek banks a few months ago and said, “We’re not going to accept any of the bank transfers, payments with Greek banks here. So, if you’re exporting and you want credit for exports, we’re not going to give it to you. We’re going to treat Greece like America treated Cuba and America treated North Korea. You’re going to be the North Korea of Europe if you don’t succumb, surrender and pay.”
That’s why Tsipras said, “Oh, my—we don’t want to bring an absolute, you know, total breakdown, because that would bring the right wing to power.” Varoufakis said, well, he agrees that there’s no alternative but to sort of surrender for the present and try to join hands with Italy, Spain and Portugal, but he wasn’t going to be the administrator of the depression. So you had the referendum, and the Greeks now say, “Well, no matter what, we’re not going to pay.” And the eurozone says, “Then we’re going to just wreck you, or smash and grab.”
AMY GOODMAN: I want to ask you very quickly about presidential politics, about two of the Republican presidential candidates, Jeb Bush and John Kasich. Both worked for Lehman Brothers, Kasich after he ran for—after he was a congressman; Jeb Bush, according to The Wall Street Journal, Bush signed on with Lehman after leaving the Florida Governor’s Mansion, making it clear he wanted to work as a hands-on investment banker. I believe he made something like $14 million working for Lehman and then Barclays.
MICHAEL HUDSON: Well, both parties are basically run by Wall Street. The Democratic Party, ever since Bill Clinton, was run by Robert Rubin. And all of the secretaries of the treasury, the officials, have basically come from Goldman Sachs, especially Tim Geithner. One of the problems in Greece, by the way, was that Obama and Geithner, coming from the Rubin group, met at the Group of Eight meetings and told—were told, basically, Greece, “You have to pay, because the American banks have made so many big bets on Greek bonds that if Greece doesn’t repay”—this is back in 2011—”then the American banks will go under, and if we go under, we’re going to pull Europe down.” So, the American banks basically—we’re talking about Wall Street investment firms. They don’t—they’re called investment bankers, but they don’t invest. They gamble. And we’re really much more in casino capitalism than finance capitalism.
So you have Wall Street people basically running politics, whether they’re the actual politicians—Obama didn’t work on Wall Street, but he worked with the real estate families. No matter who the president is, they’re going to appoint Treasury heads and Fed, Federal Reserve, heads from Wall Street. Wall Street has a veto power on all the major Cabinet positions, and so, essentially, the economy is being run by the financial sector for the financial sector. That’s the problem with politics in America today.
AMY GOODMAN: Michael Hudson, thank you very much for being with us, president of the Institute for the Study of Long-Term Economic Trends, a Wall Street financial analyst, distinguished research professor of economics at the University of Missouri, Kansas City. His latest book, Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.
Source: <em><a href=”http://www.democracynow.org/2015/8/25/casino_capitalism_economist_michael_hudson_on”>”Casino Capitalism”: Economist Michael Hudson on What’s Behind the Stock Market’s Rollercoaster Ride | Democracy Now!</a></em>