Intro: I need to begin with a MAJOR caveat and tell you how/why this “interview” happened. I did not plan to interview Michael Hudson. I was listening to a well known Russian economist, Mikhail Khazin, and I was fascinated by what he was saying. I also understood only some of the points he was making. To put it mildly, I am not an economist, and while listening to Khazin did did not take any notes. What I did do is email Michael and ask him a few question by email, just to clarify my own thoughts and marginally better my (rather dismal) “understanding” of economic and their role in the current standoff. With this typical kindness and generosity, Michael gave me some very interesting answers, and he agreed to allow me to turn this into an interview. So, here are the caveats to keep in mind: I might have misunderstood or forgotten what Khazin actually said. So if the question sounds stupid, please blame me, not Khazin! As they say in the USA, this entire topic is way above my pay grade…
Please think of this as an exchange between a young and ignorant student and a college professor and my apologies to the economists out there 🙂
Having said that, here is my exchange with Michael Hudson:
Andrei: Is it true that the USA cannot raise interest rates to lower the inflation rate as this would trigger a cascading series of bankruptcies and cost the Dems the upcoming elections?
Michael Hudson: The Federal Reserve and Treasury painted the U.S. into a corner with its Quantitative Easing to save the banks and brokerage houses after 2008. The policy succeeded in supporting and even raising real estate prices, and providing arbitrage opportunities to borrow at low rates to buy higher-yielding stocks and bonds, vastly increasing the magnitude of financial wealth. This has been especially the case since the pandemic, creating an estimated trillion dollars in “capital gains” (including short term arbitrage) for the wealthiest One Percent.
What seemed to be the financial death trap was the prospect of rising interest rates ending the free lunch of interest-dividend arbitrage, and easy mortgage money. The threat was to reverse the asset-price run-up. We already are seeing that in recent weeks as stocks plunged to reflect the rise in Treasury bond rates.
But by now, 14 years after the Obama bailouts and QE rescue of insolvent banks, a new condition has emerged: a vast sum of private capital seeking to move out of the financial markets. Many of the most astute One Percent is taking their money and running – into private equity and real estate.
The result is that housing prices are soaring as private capital is out-bidding owner-occupant home buyers. While the latter face rising mortgage-interest rates, private capital finds the likelihood for both current rental income and capital gains to be a much better bet than the stock and bond market. The result will not be a decline in real estate prices, but a decline in home-ownership rates as a shift to rental housing occurs. The financial class is becoming the new absentee landlord class.
Lower stock prices will spur a similar private-capital wave of corporate takeovers, posturing as “rescuers” of the economy. The aim will be short-term asset stripping, of course (that is the business plan of private equity), but it will consolidate ownership in the hands of a financial elite. And to the extent that state and local budgets suffer from the downturn, sell-offs of public land and infrastructure also will transfer property and its rent-extracting opportunities into hands – not with borrowed credit but for all-cash, the cash that QE policy and tax favoritism has brought into being in the past 14 years.
So, to the extent that there are bankruptcies, this will have the usual result: consolidation and concentration of wealth ownership. The non-financial economy’s structure is being transformed – under the slogan of individualistic free markets.
Andrei: Is it true that the two digit industrial inflation in the USA cannot be lowered by means or price control, as that would guarantee even more empty shelves and cost the Dems the upcoming elections?
Michael Hudson: The current inflation is not primarily a monetary phenomenon – except for stock, bond and real-estate prices. Raw materials prices, commodity prices and import prices are rising throughout the world. Domestic price controls have no effect on import prices. In theory, they should be able to reduce monopoly prices, but in today’s world the monopolists may simply let shortages develop and wait out the government.
For meat, eggs and other farm produce, the farmers are not receiving higher prices for their crops and produce. The middlemen are gouging out more fees for themselves, thanks to the monopoly position of Cargill et al.
Andrei: Are those who say that the USA cannot export its inflation to other countries by forcing the latter to deflate their currencies and acquire dollars anymore correct?
Michael Hudson: The inflation is global, not stemming from the United States. The U.S. consumer price inflation reflects its dependence on other countries. Import prices are up, not only because of port congestion and supply shortages, but because of global energy prices and the fracturing of world trade into dollar-using and dollar-avoiding economies.
The most problematic U.S. economic problem is debt deflation, not price inflation. Payments to the FIRE sector for debt service, health insurance and housing are taking a rising bite out of family budgets for the 99 Percent as the economy polarizes between an alliance of creditors, landlords and monopolists at the top, and debtors, renters and hapless consumers at the bottom.
I don’t know what Mr. Khazin means by his idea that the United States is exporting its inflation. What do other countries buy from the United States, besides arms and agricultural output, patent-protected drugs and information-technology?
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