Monday, September 20, 2010

Latest Michael Hudson: How Brazil Can Defend Against Financialization

The article can be found here.

About the only thing I disagree with is his conclusion that the United States has not lost its national sovereignty. I'd argue that it has because our government is no longer beholden to American citizens but to transnational banks.  The sovereignty of the United States springs from its citizens, who no longer have a voice.

Hudson establishes how the rentier (or speculator or finance) competes against productive investment to capture economic surplus.  This is what I've been trying to get at in urging considering the rentier/speculator/finance as something distinct from capital and labor.  I'd prefer not to go down the path of explaining things in Marxist terms (e.g., M-M' and M-C-M') and try to understand the rentier/speculator/finance with its own "aggregate" in macro to stand along side aggregate demand and aggregate supply.  I don't think you can euthanize the rentier unless and until you can measure how much life is left in it.

The natural history of debt and financialization

Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy. This financial conquest is achieved peacefully and even voluntarily rather than militarily. But the aim is the same: to make subject populations pay – as debtors and as dependent junior trade partners. Indebted “host economies” are in a similar position to that of defeated countries. They lose sovereignty over their own financial, economic and tax policy as their surplus is transferred abroad. Public infrastructure is sold to foreigners who buy on credit, on which they pay interest and fees that are expensed as tax-deductible, despite being paid to foreigners.

The Washington Consensus applauds this pro-rentier policy. Its neoliberal ideology holds that the most efficient path to wealth is to shift economic planning out of the hands of government into those of the bankers and money managers in charge of privatizing and financializing the economy. Almost without anyone noticing, this view is replacing the classical law of nations based on the idea of sovereignty over debt and financial policy, tariff and tax policy. Ideology itself has become an economic weapon. Indebted governments have been told since 1980 to sell off their public infrastructure to foreign investors. Extractive “tollbooth” charges (a.k.a. economic rent) replace moderate or subsidized public user fees, making economies less competitive and painting them even more into a debt corner as the surplus is transferred abroad, largely tax-free.

What the world is experiencing in the face of today’s globalism is a crisis in the character of nationhood and economic sovereignty. Bankers in the North look upon any economic surplus – real estate rent, corporate cash flow or even the government’s taxing power or ability to sell off public enterprises – as a source of revenue to pay interest on debts. The result is a more debt-leveraged economy in every country. Foreign investment, bank lending, the privatization of public infrastructure and currency speculation is now managed from this bankers’-eye perspective.

There is one great exception to relinquishing national policy to foreign control: the United States itself is by far the world’s largest debtor economy. While mobilizing creditor power to force other debtors to privatize their public sectors and acquiesce in a one-sided U.S. trade protectionism, the United States is the only nation able to issue its own currency (Treasury debt) and international bank credit without limit, at a lower interest rate than any other country, and even without any foreseeable means to pay.
. . .

Little bank credit has gone to finance tangible capital investment. Most such investment has been paid for out of retained business earnings, not bank loans. And as banks and brokerage houses have financed corporate takeovers, the new buyers or raiders have had to divert corporate cash flow to paying back their creditors rather than expanding production. This is how the U.S. and other economies have become financialized and post-industrialized. Their experience should serve as an object lesson for what Brazil and other countries need to avoid.

. . .

It is not widely recognized that most commercial bank loans merely attach debt to existing assets (above all, real estate and infrastructure) rather than being invested in creating new means of production, or to employ labor, or even to earn a profit. Banks prefer to lend against assets already in place – real estate, or entire companies. So most bank loans are used to bid up of prices for assets, especially those whose prices are expected to rise by enough to pay the interest on the loan.

. . .

It is an object lesson for Brazil to avoid. Your nation today is receiving balance-of-payments inflows as foreign banks and investors create credit to lend against your real estate, natural resources and industry. Their aim is to obtain your economic surplus in the form of interest payments and remitted earnings, turning you into a rentier tollbooth economy.

Why would you need these “capital inflows” that extract interest, rents and profits as a return for electronic “computer keyboard credit” that you can create yourself? In today’s world, no nation needs credit from abroad for domestic-currency spending at home. Brazil should avoid letting foreign creditors capitalize its economic surplus into debt service and other payments.

The way to avoid this fate has already been outlined from the French Physiocrats and Adam Smith through John Stuart Mill and Progressive Era reformers. They recommended that by ending the special privileges bequeathed by Europe’s military conquests (privatization of land rent), and by collecting “free lunch” rentier income as the tax base, this revenue could be saved from being privatized and capitalized into bank loans. Taxing land and resource rent lowers the cost of living and doing business not only by removing the tax burden on labor and industry, but by holding down housing and real estate prices.

. . .

The bankers’-eye view of economies

The business plan of bank marketing departments is to capitalize any economic surplus into debt service. Loan officers see any net flow of income as potentially available to be captured as interest payments. Their dream of growth and financial success is to see the entire surplus capitalized into debt service to carry loans. Net real estate rent, corporate cash flow (ebitda: earnings before interest, taxes, depreciation and amortization), personal income above basic spending needs, and net government tax revenues thus can be capitalized into as much as banks will lend. And the more credit they lend, the higher prices are bid up for real estate, stocks and bonds.

So bank lending is applauded for making economies richer, even as families and businesses are loaded down with more and more debt. The easier debt leveraging becomes, the more asset prices rise. Lower interest rates, lower down payments, more stretched-out amortization periods, and even fraudulent “devil may care” lending thus increases the “capitalization rate” of real estate and business revenue. This is applauded as “wealth creation” – which turns out to be debt-leveraged asset-price inflation that can infect an entire economy. It is a far cry from what Adam Smith wrote about in The Wealth of Nations.

The limit of this policy is reached when the entire surplus is turned into debt service. At this point the economy is fully financialized. Income spent to pay debts is not available for new investment or consumption spending, so the “real” economy is debt-shackled and must shrink.

This is why the recent financial takeoff ended in a crash. This is what much the world is witnessing today outside of Brazil and its fellow BRIC countries that have not gone so far down along the neoliberal financialization path toward its culmination in debt deflation and austerity.

. . .