Two years before the 2008 Wall Street crash that toppled the global economy into deep recession, Harper’s Magazine published a dark prophecy of what was to come. In “The New Road to Serfdom,” economist Michael Hudson laid out how millions of Americans had taken on huge debts to buy houses on the presumption that they could later sell them at a profit. “Most everyone involved in the real estate bubble so far has made at least a few dollars,” he wrote. “But that is about to change. The bubble will burst, and when it does the people who thought they would be living the easy life of a landlord will soon find out that what they really signed up for is the hard servitude of debt serfdom.” As the twenty million people who lost their homes discovered, Hudson got it entirely right.
Today, unemployment is at record lows, and the stock market is at record highs. Allegedly, we have recovered from the disaster. I talked to Hudson, Distinguished Professor of Economics at the University of Missouri-Kansas City and the author, most recently, of J is For Junk Economics, A Guide to Reality in an Age of Deception, about his pre-crash prediction, and what he now sees in our future. (...)
by Andrew Cockburn, Harper's | Read more:
Today, unemployment is at record lows, and the stock market is at record highs. Allegedly, we have recovered from the disaster. I talked to Hudson, Distinguished Professor of Economics at the University of Missouri-Kansas City and the author, most recently, of J is For Junk Economics, A Guide to Reality in an Age of Deception, about his pre-crash prediction, and what he now sees in our future. (...)
So are we heading for another explosion comparable to 2008?
I’m not sure it’ll be an explosion. It’s more like a slow crash. It’s more like people are getting desperate. They’re having to live off their credit cards, not to buy luxuries but just simply to break even. They’re falling further and further behind, and as they fall behind the interest rate rises, the penalties rise, so people are getting more and more squeezed.
That’s why where I live in New York City, on all the big shopping streets there are more and more storefronts for rent. The stores are going out of business, especially the stores that are either mom and pops, or small well-known stores like art supply stores that have been there for a generation. Only the big chains are surviving, and even the chains are closing down, Sears and others. Entire shopping malls are going into default.
But we keep being told that this is because people are shifting to online shopping. Is that not the case?
Certainly many people are shopping online, but that’s not the real cause. The real cause is that overall retail sales are going down, because the average wage earner is only able to spend between a quarter and a third of their income on goods and services, after what’s left over from housing and taxes. The Federal Housing Authority now guarantees government mortgages up to 42 percent of your income. In New York City it’s normal to pay 40 percent of your income for rent.
Assume that 40 percent of your income goes for housing. Maybe 15 percent of your income is taken right off the paycheck by the FICA [Federal Insurance Contributions Act] for Social Security and essentially pre-saving for Social Security medical care (which provides the government with enough money to cut taxes on the higher brackets.) There’s another 10 percent to 15 percent in income taxes, local income taxes, and sales taxes. In addition to paying the mortgage debt, people have to pay bank debt, auto debt, and credit card debt. That’s about 10 percent. When you add all of these up, there’s only about maybe 30 percent of the income that they can spend on goods and services.
Economic textbooks talk about a circular flow, where the workers will get paid wages and they buy what they produce. That’s why Henry Ford paid his workers $5.00 a day, so that they could afford to buy cars. Now they only have a little bit to buy what they produce, and the rest of their money goes to the banks and to the government to give tax cuts for the top 10 percent. You’re having a slow squeeze on the middle class and the working class in this country, and it’s stifling the domestic market.
How do you explain what are billed as record low unemployment figures?
People are desperate to go to work. But if you look at where the jobs are, these are minimum wage jobs. Most of the jobs are in retail, trade, or in other low-paying jobs. Yes, employment is going up, but at very low wages that don’t enable families to save. You can see this particularly every two years when the Federal Reserve publishes a survey of consumer finances. You can see for instance that blacks and Hispanics have almost no savings at all, and 50 percent of the American population as a whole doesn’t have any savings because if you’re earning a low salary, then almost all of what you do earn has to go to pay for rent and for bank credit and for taxes.
You say the most likely prospect for the future is a “slow crash” but when your Road to Serfdom piece ran in Harper’s, the Case-Schiller national home price index stood at 184.38. As of February this year it stood at 185.56. Why shouldn’t there be a similar blow-up?
Nowadays nearly all residential mortgages are guaranteed by the government’s Federal Housing Agency (and have been since 2008), so banks are not threatened. The government is on the hook to guarantee American mortgage loans as well as student loans.
A large portion of the millions of homes that were foreclosed have been bought by hedge funds, often for all cash – because they can make more money renting them out than they can make in the financial markets. So this real estate is not debt leveraged.
Wall Street’s investment banks and bondholders were rescued, not the economy. The debts were left in place, and continue to grow not only by compound interest but by arrears and penalties compounding. The proportion of national income paid as interest, insurance fees and economic rent is rising faster than the economy is growing.
Banks lend mainly to other financial institutions. They don’t lend to factories that are creating jobs. They don’t lend out for goods and services. They lend to other financial institutions. The whole economy has turned into trying to make money on speculation and arbitrage, not on producing goods and services, not on hiring people to actually do work. The economy therefore is very fragile.
The whole economy at the end of the road is going to look like Greece or Spain or Portugal or Italy. All of these economies are shrinking by what’s called debt deflation. In other words, people have to pay either so much debt or they have to have forced saving, like pension fund saving, that the economy is shrunk for financial reasons, for putting more and more of its money out of the real economy of goods and services into the financial sector.
Is that your prediction for our future here in the United States? Greece?
Yes, a slow crash as more and more money is drained from the economy to pay the FIRE sector—finance, insurance, and real estate—not the goods and service producing sector.
I’m not sure it’ll be an explosion. It’s more like a slow crash. It’s more like people are getting desperate. They’re having to live off their credit cards, not to buy luxuries but just simply to break even. They’re falling further and further behind, and as they fall behind the interest rate rises, the penalties rise, so people are getting more and more squeezed.
That’s why where I live in New York City, on all the big shopping streets there are more and more storefronts for rent. The stores are going out of business, especially the stores that are either mom and pops, or small well-known stores like art supply stores that have been there for a generation. Only the big chains are surviving, and even the chains are closing down, Sears and others. Entire shopping malls are going into default.
But we keep being told that this is because people are shifting to online shopping. Is that not the case?
Certainly many people are shopping online, but that’s not the real cause. The real cause is that overall retail sales are going down, because the average wage earner is only able to spend between a quarter and a third of their income on goods and services, after what’s left over from housing and taxes. The Federal Housing Authority now guarantees government mortgages up to 42 percent of your income. In New York City it’s normal to pay 40 percent of your income for rent.
Assume that 40 percent of your income goes for housing. Maybe 15 percent of your income is taken right off the paycheck by the FICA [Federal Insurance Contributions Act] for Social Security and essentially pre-saving for Social Security medical care (which provides the government with enough money to cut taxes on the higher brackets.) There’s another 10 percent to 15 percent in income taxes, local income taxes, and sales taxes. In addition to paying the mortgage debt, people have to pay bank debt, auto debt, and credit card debt. That’s about 10 percent. When you add all of these up, there’s only about maybe 30 percent of the income that they can spend on goods and services.
Economic textbooks talk about a circular flow, where the workers will get paid wages and they buy what they produce. That’s why Henry Ford paid his workers $5.00 a day, so that they could afford to buy cars. Now they only have a little bit to buy what they produce, and the rest of their money goes to the banks and to the government to give tax cuts for the top 10 percent. You’re having a slow squeeze on the middle class and the working class in this country, and it’s stifling the domestic market.
How do you explain what are billed as record low unemployment figures?
People are desperate to go to work. But if you look at where the jobs are, these are minimum wage jobs. Most of the jobs are in retail, trade, or in other low-paying jobs. Yes, employment is going up, but at very low wages that don’t enable families to save. You can see this particularly every two years when the Federal Reserve publishes a survey of consumer finances. You can see for instance that blacks and Hispanics have almost no savings at all, and 50 percent of the American population as a whole doesn’t have any savings because if you’re earning a low salary, then almost all of what you do earn has to go to pay for rent and for bank credit and for taxes.
You say the most likely prospect for the future is a “slow crash” but when your Road to Serfdom piece ran in Harper’s, the Case-Schiller national home price index stood at 184.38. As of February this year it stood at 185.56. Why shouldn’t there be a similar blow-up?
Nowadays nearly all residential mortgages are guaranteed by the government’s Federal Housing Agency (and have been since 2008), so banks are not threatened. The government is on the hook to guarantee American mortgage loans as well as student loans.
A large portion of the millions of homes that were foreclosed have been bought by hedge funds, often for all cash – because they can make more money renting them out than they can make in the financial markets. So this real estate is not debt leveraged.
Wall Street’s investment banks and bondholders were rescued, not the economy. The debts were left in place, and continue to grow not only by compound interest but by arrears and penalties compounding. The proportion of national income paid as interest, insurance fees and economic rent is rising faster than the economy is growing.
Banks lend mainly to other financial institutions. They don’t lend to factories that are creating jobs. They don’t lend out for goods and services. They lend to other financial institutions. The whole economy has turned into trying to make money on speculation and arbitrage, not on producing goods and services, not on hiring people to actually do work. The economy therefore is very fragile.
The whole economy at the end of the road is going to look like Greece or Spain or Portugal or Italy. All of these economies are shrinking by what’s called debt deflation. In other words, people have to pay either so much debt or they have to have forced saving, like pension fund saving, that the economy is shrunk for financial reasons, for putting more and more of its money out of the real economy of goods and services into the financial sector.
Is that your prediction for our future here in the United States? Greece?
Yes, a slow crash as more and more money is drained from the economy to pay the FIRE sector—finance, insurance, and real estate—not the goods and service producing sector.
