Deflation is a leakage from this circular flow, to pay banks and the real estate, called the FIRE sector – finance, insurance and real estate. These transfer payments leave less and less of the paycheck to be spent on goods and services, so markets shrink.
MICHAEL HUDSONMost people think of the economy as producing goods and services and paying labor to buy what it produces.
More Michael Hudson Quotes
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You could say that the vote to withdraw from Europe is, it’s really a vote of the British middle class, the working class, to withdraw from the U.S. neoliberalism that has been running Europe for the last ten years.
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So we are in for years of debt deflation. That means that people have to pay so much debt service for mortgages, credit cards, student loans, bank loans and other obligations that they have less to spend on goods and services. So markets shrink.
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There are two definitions of deflation. Most people think of it simply as prices going down. But debt deflation is what happens when people have to spend more and more of their income to carry the debts that they’ve run up – to pay their mortgage debt, to pay the credit card debt, to pay student loans.
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It thought that if it could subsidize banks lending homeowners enough money to buy houses from people who are defaulting, then the bank balance sheets would end up okay.
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This is not really currency that circulates. It’s like the old joke about expensive vintage wine. Wine prices will go up and once in a while somebody will buy a 50-year-old bottle of wine and say, “Wait a minute. This has gone bad.” The answer is, “Well, that wine isn’t for drinking; that’s for trading.”
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The aim of promoting low down payments is to push prices back up so that fewer houses are going to be in negative equity and fewer people are going to walk away from the mortgages. That will save the from taking a loss on their junk mortgage loans.
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The United States Government has fought against creation of an international court to adjudicate the ability of national economies to pay debts.
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Now, suppose that a homeowner puts down only 3% of their own money or 3.5% for the FHA. That means if prices go down by only 3%, the house will be in negative equity and it would pay the homeowner just to walk away and say, “The house now is worth less than the mortgage I owe.
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I think I’m just going to move out and buy a cheaper house.” So it’s very risky when you have only a 3% or 3.5% equity for the loan. The bank really isn’t left with much cushion as collateral.
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To save the banks, you would have to turn the entire Eurozone into Greece.
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Normally, if someone goes bankrupt, you wipe out the debt and get a fresh start. But that’s not permitted with student loans. So the effect is to impoverish many graduates with very high debts.
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When you say “paying the banks,” what they really mean is paying the bank bondholders. They are basically the One Percent.
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Europe is sort of like the Soviet Union in the ’30s and ’40s. There was an argument, is it reformable or not? There is a feeling, and I think it’s correct, that the European Union, the eurozone, and the euro, is not reformable, as a result of the Lisbon treaties and the other treaties that have created the euro.
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Economists often define their discipline as “the allocation of scarce resources among competing ends.” But when resources or money really become scarce, economists call it a crisis and say that it’s a question for politicians, not their own department.
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The only way people can repay the debt is by cutting their living standards very drastically. It means agreeing to shift their pension plans from defined benefit plans.
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The ideological foundation of today’s business schools is that economic control should be shifted out of government hands into those of financial managers – that is, Wall Street.
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If the economy is growing, people want to employ more workers. If you hire more labor, wages go up.
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When people are running up more and more debt for housing, they call that “real wealth.” It exposes what’s wrong in the mainstream economics and why most of the economics that justifies austerity programs and economic shrinkage is in the textbooks is not scientific.
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If you have to pay about forty to forty-three percent of your income for housing, you also have to pay fifteen percent of your paycheck for the FICA for Social Security wage withholding.
MICHAEL HUDSON -
America needs an ineffective president. That’s much better than an effective president that’s going to go to war with Russia, that’s going to push for the Trans-Pacific Partnership, that’s going to protect Wall Street, and that’s going to oppose neoliberal austerity.
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Most of these charges that people pay are economically unnecessary. There’s no real cost behind them. There’s no real value behind them. So, they’re what the classical economist called empty pricing. Prices with no real cost value.
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We’ve turned the post-war economy that made America prosperous and rich inside out.
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Money is not a factor of production. But in order to have access to credit, in order to get money, in order to get an education, you have to pay the banks.
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When I say the economy is shrinking, it’s the economy of the 99%, the people who have to work for a living and depend on earning money for what they can spend.
MICHAEL HUDSON -
The bankers are the people running these banks. They’re the chief officers, and they push the loans because they don’t care if they go bad. For one thing, they may package these bad loans and sell them off to gullible institutional investors.
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If the bank goes under, they get to keep all of these salaries and options – and the government will bail out the bank. These guys will take their money and run, which is pretty much what they’re doing now.
MICHAEL HUDSON