20 August 2007

Michael Husdon replies

Dear Gunnar, August 19, 2007
Thank you for sending my Mr. Cook¹s article and your comments.
I¹m told that he is to be joining my team on behalf of Dennis Kucinich. So I
want to make clear how my ideas differ both from yours and his.
I realize that you are not going to agree with me Gunnar. I have
refrained from arguing with you in the past, because I don¹t want to get
into the situation that led both Randy Wray and Stephen Zarlenga to withdraw
from this list. The best thing is that we agree to disagree.
Here is where we disagree. I view ³the economy² as divided into
two sectors. The biggest sector as far as credit is concerned ­ over 99% ­
is the market for financial securities, mainly bonds, stocks and mortgage
loans and other packaged bank loans. Each day more than an entire year¹s GNP
passes through the New York Clearing House and the Chicago Mercantile
The small sector ­ using about 1% of credit ­ is the sector that
you and Mr. Cook focus on: the ³real² economy producing goods and services.
Given the disparity in sizes, most credit inflates asset prices.
In fact, since 1980 the U.S. economy has seen the most rapid inflation in
its history. But the inflation has been considered ³benign² and even ³good²
(Mr. Greenspan called it ³wealth creation²) because it increased the
purchasing power over living labor of property ­ real estate and financial
securities. The dead hand of the past increased its weight over the living.
You cite Cook¹s statement, ³But the peculiar thing is that
because the borrowed money pays for labor, commodities, rent, etc., it [He
means, ³its financing charges²] becomes part of the prices that are
eventually charged for goods and services.²
OR, the borrowed money ­ the great bulk of it ­ is used to bid
up prices for real estate (70% of U.S. and British bank loans are mortgage
loans), stocks (for LBO loans) and bonds (by flooding the economy with
credit to drive interest rates down, producing the greatest bond rally in
history as rates fell from 20% in 1980 to 5% in 2005).

Cook continues:
³However, when the money goes back to the bank to cancel a
loan, that purchasing power disappears.²
It doesn¹t really disappear, of course. It is withdrawn from the
³real² production-and-consumption economy and added to the financial
sector¹s purchasing power. That sector uses its inflow of (re)payments to
lend out to buyers of real estate, stocks and bonds and entire companies to
further inflate asset prices.
As I¹m sure all of us on Gang8 know, banks don¹t lend to invest
in tangible capital formation. That is financed mainly out of retained
earnings. Neither James Watt, Henry Ford or industrialists in between could
borrow from banks to put their capital in place. Banks lend to against
assets already in place, or to finance the sale of goods already produced
and ordered, but not to create ³equity² investment in tangible means of
production. This is what warps the private-sector banking system today, and
I understand that this is Mr. Cook¹s criticism too. (Chris Cook might also
agree here.)

Mr. Cook concludes that ³The economy is thus a treadmill that
borrowers must constantly trudge along in order to have enough money for
I think it is a treadmill that becomes increasingly steep. The
debt repayment burden mounts up at compound interest.

You comment:
³In the circular-flow view of Entrepreneurial Production, newly
created credit/money/purchasing power enters the economy through the market
for Factor Services and exits the economy through the market for Final Goods
and Services.²
Again ³the economy² here is divided into two sectors. This is my
major point. Credit is NOT transformed ³into Final Goods and Services,² but
into asset-price inflation.
You ask, ³Why, then, does Cook assert that "this process
creates a chronic shortage of purchasing power²? My answer is that debt
service mounts up faster than the economic surplus, and ends up absorbing
it. Yours is, ³Because he defines "credit" as synonymous with the economy's
potential productive capacity and takes as given that actual mobilization of
Factor Services must fall short of that potential.² This sounds like the old
Social Credit idea.

You point out his citation that all definitions of credit ³ have
some connotation of the concept of ³value² Š²
I would rather say, ³Price.² Value in the sense the classical
political economists used the term reflects socially necessary costs of
production. Credit and other financing costs are external to the
production-and-consumption sector, being wrapped around it as I have shown
in the diagrams in my Kansas City and Harpers articles. These financial
charges are institutional, not technological. You focus on the ³real²
economy, as does Cook here ­ until he criticizes the fact that today¹s
banking credit is extended largely to finance predatory property

You then cite a sentence that seems to reflect both your views
in common: ³The idea of credit when viewed from a macroeconomic perspective
refers to the ability of an economy to produce goods and services of value
to the members of that community.²
My point is that credit been turned into its opposite ­
increasing the economic power and price of property over labor, as it takes
more and more wages to buy a home, more and more profits or rental income to
buy commercial real estate, or more and more labor income to buy a flow of
retirement income.
Cook writes: ³Without the credit-potential of a producing
economy, money has no meaning.² My point is that it HAS a meaning, but one
that takes the corrosive form of asset-price inflation. This becomes clear
when one looks at the buildup of interest-bearing debt at exponential rates
­ the ³miracle of compound interest.²
Cook points out that ³the ³real² credit of the U.S. economy was
much higher, because our economy is not running at anywhere near its full
To me, the answer is different. The volume of capital ­ and debt
­ far exceeds GNP. Hence, financialized asset prices are expanding much
larger than actual production. Credit is not extended to produce goods and
services, increase national income and GNP, but to buy assets and financial

You now quote from Cook¹s article, WHERE MONEY COMES FROM
I think he makes a good point when he writes that:
³Actually, an economy functions according to the principles
according to which it is designed and regulated. If it is designed to funnel
wealth into the hands of the monetary controllers, then that is what the
³market² and the ³invisible hand² will do. Š Unfortunately, we march today
to the tune of the monetary elite, so they are the ones who reap the profits
and the benefits. They are the ones on whom the ³invisible hand² lavishes
the wealth of the world.²
He continues:
³It is done through the process of bank-created credit. While
during the nineteenth century other forms of money circulated, such as large
quantities of coinage, silver certificates, and government-issued
greenbacks, almost all the money that exists today originates through a loan
by a financial institution to an individual or a business.²
He then proceeds: ³When a loan is made it is issued as a
liability on the bank¹s ledger. When it is repaid, the liability is
But in the interim, the bank receives interest ­ which tends to
accumulate exponentially to reflect the build up of loans. The
³administrative fee² he refers to as ³interest² is indeed an ³administered
price,² and hence a monopoly right ­ and as such, a form of economic rent.

Cook recognizes that ³Some credit is used by businesses or
individuals as investment in order to generate profits over and above the
amount they must repay to the bank with interest.²
Profits are not really the key these days. ³Capital gains² have
become the name of the game in today¹s ³Ponzi² stage of the business cycle,
to use Minsky¹s terminology.
Cook realizes this when he writes that ³Unfortunately, large
amounts of credit are used mainly for speculation, not for any benefit to
the producing economy. This includes securities bought on margin and
borrowing by hedge funds where the fund may make a profit even if the value
of its investments goes down. Bank-created credit in this case is little
more than chips in a casino.²
It actually is more than this. Credit bids up asset prices in
the ³large² finance-and-property sector that is wrapped around the ³real²
production-and-consumption economy. This is the major cause of economic
polarization in today¹s world.
This is why I find M3 an important measure, and why Stephen
Zarlenga has proposed the Monetary Transparency Act so that we are in a
better position to measure the extent to which the banking system is
contributing to asset-price inflation, loading down the economy with debt in
the process.

Cook makes an excellent point in arguing that ³individual
consumers should never have to borrow in the first place. And we never ask
ourselves why, with the abundance that is possible from modern science and
technology, should people have to borrow money at interest for the
necessities of life‹a house, a car, household expenses, an education, etc.
³Thus we realize that the financial system works against what
should be the real purpose of money, which is to serve as a ticket for the
purchase by people of articles they need to survive or otherwise desire to
utilize once the demand for survival has been met.²
Again, I¹m sympathetic to this, and also to his pointing out
something with which we all agree: ³money is being mis-defined as a
commodity. People who believe money is a commodity think it has value
in-and-of-itself.² Unfortunately, he defines money (and credit too?) as
³anything that a willing buyer and a willing seller agree to exchange for
something else.²
From ancient times, anyone could create credit simply by NOT
PAYING. Most debts in ancient Babylonia were arrears of payments for land
rent, consumption, taxes and fees (as the volume from our British Museum
conference edited by Marc Van De Mieroop and myself on ³Debt and Economic
Renewal in the Ancient Near East² has shown).
So to conclude, Cook gets confused by pointing that while ³the
2006 GDP of the United States was $12.98 trillion. But actually, the ³real²
credit of the U.S. economy was much higher, because our economy is not
running at anywhere near its full capacity.²
That¹s not the reason at all. The reason is that credit is used
to finance assets and financial securities, and as such, claims ON wealth
(as Soddy pointed out), not goods and services. Credit is extended NOT for
production, but for property rights and financial claims ON the economy. It
becomes a purely mathematical Ponzi scheme in the end. This is the stage in
which we find ourselves today.

Inasmuch as the right to create interest-bearing debt is the
right to a form of economic rent, I can agree that ³Therefore, credit can
and should be viewed as a communal endowment, a public phenomenon, a part of
what is called ³the commons,² even with the normal and natural fact of the
existence of private property. So the use of credit and its distribution
should be treated as a public utility, like water or electricity. Everyone
should have a right to its use, according to some rational, lawful, and
humane criteria of need or contribution to creating it. Š It is no
exaggeration to say that the existing system is one whereby the financial
elite has confiscated and privatized the most important public resource of
all, more important than water, land, electric power, etc.²
I wish his argument was that this resource has been distorted by
the fact that banks and the financial sector generally has a short-term
³extractive² outlook that has a disconnect with the production and
consumption sector, and actually works against it by inflating asset prices
rather than financing capital formation. His argument reads as if consumers
need more credit to help GNP be fully realized. Producers also need credit,
but instead, corporate raiders are granted credit to take over, downsize and
outsource the labor force, carve up the companies and avoid paying taxes in
the process.

Michael Hudson

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