Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy

by Michael Hudson

Nobody is more “liquid” or “hot” than drug dealers and public officials embezzling their country’s export earnings. The U.S. Treasury and State Department sought to provide a safe haven for their takings, as a desperate means of offsetting the balance-of-payments cost of U.S. military spending.

of all the subdisciplines of economics, international trade theory was the silliest. Gunboats and military spending make no appearance in this

theorizing, nor do the all-important “errors and omissions,” capital flight, smuggling, or fictitious transfer pricing for tax avoidance. These elisions are needed to steer trade theory toward the perverse and destructive conclusion that any country can pay any amount of debt, simply by lowering wages enough to pay creditors. All that seems to be needed is sufficient devaluation (what mainly is devalued is the cost of local labor), or lowering wages by labor market “reforms” and austerity programs. This theory has been proved false everywhere it has been applied, but it remains the essence of IMF orthodoxy.

what was sacred was the regular cancellation of agrarian debts and freeing of bondservants in order to preserve social balance. Such amnesties were not destabilizing, but were essential to preserving social and economic stability.

I presented my basic financial model in Kansas City in 2004, with a chart that I repeated in my May 2006 cover story for Harper’s. The Financial Times reproduced the chart in crediting me as being one of the eight economists to forecast the 2008 crash. But my aim was not merely to predict it. Everyone except economists saw it coming. My chart explained the exponential financial dynamics that make crashes inevitable.

The disabling force of debt was recognized more clearly in the 18th and 19th centuries (not to mention four thousand years ago in the Bronze Age). This has led pro-creditor economists to exclude the history of economic thought from the curriculum. Mainstream economics has become censorially pro-creditor, pro-austerity (that is, anti-labor) and anti-government (except for insisting on the need for taxpayer bailouts of the largest banks and savers). Yet it has captured Congressional policy, universities and the mass media to broadcast a false map of how economies work. So most people see reality as it is written – and distorted – by the One Percent. It is a travesty of reality.

Please understand this and teach it to anyone you care about.

This pattern of debt is what classical economists defined as unproductive, favoring unearned income (economic rent) and speculative gains over profits earned by employing labor to produce goods and services.

These accounts have no category for what classical economists called economic rent — a free lunch in the form of income siphoned off without a corresponding cost of labor or enterprise. Yet a rising proportion of what the NIPA report as “earnings” actually derive from such rents.

The pro-creditor doctrine views interest as reflecting a choice by “impatient” individuals to pay a premium to “patient” savers in order to consume in the present rather than in the future.

This free-choice approach remains mute about the need to take on rising levels of personal debt to obtain home ownership, an education and simply to cover basic break-even expenses. It also neglects the fact that debt service to bankers leaves less to spend on goods and services.

The classical concept of economic rent has been censored by calling finance, real estate and monopolies “industries.” The result is that about half of what the media report as “industrial profits” are FIRE-sector rents, that is, finance, insurance and real estate rents – and most of the remaining “profits” are monopoly rents for patents (headed by pharmaceuticals and information technology) and other legal privileges. Rents are conflated with profit. This is the terminology of financial intruders and rentiers seeking to erase the language and concepts of Adam Smith, Ricardo and their contemporaries depicting rents as parasitic.

Extractive finance leaves economies emaciated by monopolizing their income growth and then using its takings in predatory ways to intensify the degree of exploitation, not to pull the economy out of debt deflation. The financial aim is simply to extract income in the form of interest, fees and amortization on debts and unpaid bills. If this financial

income is predatory, and if capital gains are not earned by one’s own labor and enterprise, then the One Percent should not be credited with having created the 95 percent of added income they have obtained since 2008. They have taken it from the 99 Percent.

If income reflects productivity, why have wages stagnated since the 1970s while productivity has soared and the gains

extracted by banks and financiers, not labor? Why do today’s National Income and Product Accounts exclude the concept of unearned income (economic rent) that was the main focus of classical value and price theory? If economics is really an exercise in free choice, why have proselytizers for the rentier interests found it necessary to exclude the history of classical economic thought from the curriculum?

Where hereditary rental and financial revenue supported the richest aristocracies, the tax burden was shifted most heavily onto labor and industry, in addition to their rent and debt burden.

The Magna Carta (1215) and Revolt of the Barons were largely moves by the landed aristocracy to avoid taxes and keep the rent for

themselves, shift the fiscal burden onto labor and the towns.

Today’s vested interests fight viciously to suppress their concept of economic rent and the associated distinction between earned and unearned income. It would save today’s reformers from having to reinvent the methodology of what constitutes fair value. Censoring or rewriting the history of economic thought aims at thwarting the logic for taxing rent-yielding assets.

The logic Ricardo outlined for why land rents would rise as populations grow applies much better to the rent of location for urban sites. The desirability of sites in good neighborhoods is enhanced by public infrastructure investment in transportation and other improvements, combined with the general level of prosperity – and most of all in recent times, by bank credit on easier (that is, more debt-leveraged) lending terms. Owners enjoy a price rise without having to invest more of their own money – the situation Ricardo described with regard to agricultural landowners.

From rent deflation to debt deflation Ricardo’s labor theory of value sought only to isolate land rent, not the payment of interest. As Parliamentary spokesman for his fellow financiers, he accused only landlords of draining income out of the economy, not creditors. So his blind spot reflects his profession and that of his banking family. (The Ricardo Brothers handled Greece’s first Independence Loan of 1824, for instance, on quite ruinous terms for Greece.) Seeing no parallel between paying interest to bankers and paying rents to landlords, Ricardo sidestepped Adam Smith’s warning about how excise taxes levied on food and other necessities to pay bondholders on Britain’s war debt drove up the nation’s subsistence wage level. His one-sided focus on land rent diverted attention from how rising debt service – the financial analogue to land rent – increases break-even costs while leaving less income available for spending on goods and services. Treating money merely as a veil – as if debt and its carrying charges were not relevant to cost and price levels – Ricardo insisted that payment of foreign debts would be entirely recycled into purchases of the paying-nation’s exports. There was no recognition of how paying debt service put downward pressure on exchange rates or led to domestic austerity.

In Parliament, Ricardo backed a policy of monetary deflation to roll back the price of gold (and other commodities) to their prewar level in 1798. The reality is that keeping debts on the books while prices decline enhances the value of creditor claims for payment. This polarization between creditors and debtors is what happened after the Napoleonic Wars, and also after America’s Civil War, crucifying indebted farmers and the rest of the economy “on a cross of gold,” as William Jennings Bryan characterized price deflation. The financial sector now occupies the dominant position that landlords did in times past. Debt service plays the extractive role that land rent did in Ricardo’s day. Unlike the rental income that landlords were assumed to inject into the economy for luxuries and new capital investment, creditors recycle most of their receipt of interest into new loans. This increases the debt burden without raising output or living standards. Ricardo’s critique of rent extraction was used first to oppose tariff subsidies for Britain’s landlords, and then by “Ricardian socialists,” such as John Stuart Mill, to advocate taxing away their land rent. But rentiers have always fought back, rejecting any analysis depicting their income as imposing an unearned, parasitic overhead charge on labor and industry (not to mention leading to austerity and depression). Today, banking has found its major market in lending to real estate and monopolies, adding financial charges to land an...

this whole part is great as a note

The inability of productive investment opportunities to keep pace with the expansion of credit is the Achilles heel of finance-based growth.

12. Cancelling debts was politically easiest when governments or public institutions (temples, palaces or civic authorities) were the major creditors, because they were cancelling debts owed to themselves. This is an argument for why governments should be the main suppliers of money and credit as a public utility.

The threat of interest-bearing claims growing so exponentially as to subvert industrial progress was analyzed mainly by critics from outside

Two of the earliest books warning that financial dynamics threatened an economic crisis were published by the Chicago co-operative Charles H. Kerr, best known for publishing Marx’s Capital and Gustavus Myers’ History of the Great American Fortunes.

In 1895, J. W. Bennett warned of a rentier caste drawing the world’s wealth into its hands as the inventive powers of industry were outrun by the mathematics of compound interest, “the principle which asserts that a dollar will grow into two dollars in a number of years, ...

Although not much noticed at the time, Bennett was one of the first to recognize that financial recycling of interest receipts into new lending was the driving force of the business cycle. Despite the rising role of industry, “financial systems are founded on rent and interest-taking,” and “interest-bearing wealth increases in a ratio which is ever growing more and more rapid,” leaving few assets unattached by debt. The exponential growth of debt makes business conditions more risky, because “there are not available assets to meet [creditor] demands and at the same time keep bus...

The mathematics of compound interest explain “the extremely rapid accumulation of wealth in the hands of a comparatively few non-producers,” as well as “the abject poverty of a large percentage of the producing masses.” Non-producers receive “much the largest salaries,” despite the fact that their “income is often in inverse ratio to the service which [they do for their] fellow men.” As a result, Bennett concluded: “The financial group becomes rich more rapidly than the nation at large; and national increase in wealth may not mean prosperity of the producing masses.” All...

Bennett’s contemporary John Brown (not the abolitionist) argued that compound interest “is the subtle principle which makes wealth parasitic in the body of industry – the potent influence which takes from the weak and gives to the strong; which makes the rich richer and the poor poorer; which builds palaces for the idle and hovels for the diligent.” Only the wealthy are able to save up significant amounts and let sums simply accumulate and accrue interest over time. Small save...

This rosy scenario assumes that the increase in debt does not dry up the growth in markets, investment and employment in much the way that Ricardo imagined landlords and their rent would stifle industrial capitalism.

J. P. Morgan and John D. Rockefeller are said to have called the principle of compound interest the Eighth Wonder of the World. For them it meant concentrating financial fortunes in the hands of an emerging oligarchy indebting the economy to itself at an exponential rate. This has been the key factor in polarizing the distribution of wealth and political power in societies that do not take steps to cope with this dynamic.

Politicians thus face a choice of whether to save banks and bondholders or the economy. Do they simply reward their major campaign contributors by giving banks enough central bank or taxpayer money to compensate losses on bad loans? Or do they restructure debts downward, imposing losses on large bank depositors, bondholders and other creditors by writing down bad debts so as to keep debt-strapped families solvent and in possession of their homes?

Across the board, the U.S. and European economies were “loaned up” and could not sustain living standards and public spending programs simply by borrowing more. Repayment time had arrived. That meant foreclosures and distress sales. That is the grim condition that the financial sector historically has sought as its backup plan. For creditors, debt produces not only interest, but property ownership as well, by indebting their prey.

Financial wealth – what the economy owes bankers and bondholders – increases the volume of debt claims from one business cycle to the next. Each business recovery since World War II has started with a higher debt level. Adding one cyclical buildup on top of another is the financial equivalent of driving a car with the brake pedal pressed tighter and tighter to the floor, slowing the speed – or like carrying an increasingly heavy burden uphill. The economic brake or burden is debt service. The more this debt service rises, the slower markets can grow, as debtors are left with less to spend on goods and services because they must pay a rising portion of income to banks and bondholders.

By the mid-1970s entire countries were reaching this point. New York City nearly went bankrupt. Other cities could not raise their traditional source of tax revenue, the property tax, without forcing mortgage defaults. Even the U.S. Government had to raise interest rates to stabilize the dollar’s exchange rate and slow the economy in the face of foreign military spending and the inflationary pressures it was fueling at home.

Until recently most U.S. pension funds assumed that they could make returns of 8.5 percent annually, doubling in less than seven years, quadrupling in 13 years and so forth. This happy assumption suggested that state and local pension funds, corporate pension funds and labor union pension funds would be able to pay retirees with only minimal new contributions. The projected rates of return were much faster than the economy’s growth. Pension funds imagined that they could grow simply by increasing the value of financial claims on a shrinking economy by extracting a rise in interest, dividends and amortization. This theory simply wrapped Richard Price’s “sinking fund” idea in a new guise. It is as if savings can keep accruing interest and make capital gains without shrinking the economy. But a rate of financial growth that exceeds the economy’s ability to produce a surplus must be predatory over time.

To the extent that new bank loans find their counterpart in debtors’ ability to pay in today’s bubble economies, they do so by inflating asset prices. Gains are not made by producing or earning more, but by borrowing to buy assets whose prices are rising, being inflated by credit created on looser, less responsible terms.

The problem is that the pond’s overgrowth of vegetation is not productive growth. It is weeds, choking off the oxygen needed by the fish and other life below the surface. This situation is analogous to debt siphoning off the economic surplus and even the basic needs of an economy for investment to replenish its capital and to maintain basic needs. Financial rentiers float on top of the economy, stifling life below.

Even though U.S. Treasury bills yield less than 1 percent, the government can always simply print the money. The tragedy of our times is that it is willing to do so only to preserve the value of assets, not to revive employment or restore real economic growth.

Today’s creditors are using their gains not to lend to increase production, but to “cash out” their financial gains and buy more assets. The most lucrative assets are land and rent-yielding opportunities in natural resources and infrastructure monopolies to extract land rent, natural resource rent and monopoly rent. The inability of economies to sustain compound interest and a rising rentier overhead for any prolonged time is at the root of today’s political fight. At issue is whose interests must be sacrificed in the face of the incompatibility between financial and “real” economic expansion paths. Finance has converted its economic power into the political power to reverse the classical drive to tax away property rent, monopoly rent and financial income, and to keep potential rent-extracting infrastructure in the public domain. Today’s financial dynamics are leading back to shift the tax burden onto labor and industry while banks and bondholders have obtained bailouts instead of debts being written down. This is the political dimension of the mathematics of compound interest. It is the pro-rentier policy that the French Physiocrats and British liberals sought to reverse by clearing away the legacy of European feudalism.

the policy aim of Adam Smith and other classical economists: preventing “unearned” income from being obtained in the first place. As Chapter 3 has described, they recognized not only that rentier revenue (and capital gains) is earned in a predatory and unproductive way, but also that land rent, monopoly rent and financial charges are mainly responsible for the rising wealth of the One Percent as compared to that held by the rest of society.

The turn of the 20th century saw wages rising, but most of the increase was paid to landlords via higher housing costs, and to monopolists, bankers and financiers. These rentier charges prevented wage earners from benefiting from wage gains that flowed through their hands to the Finance, Insurance and Real Estate (FIRE) sector. What ultimately is important is how much remains for discretionary spending after meeting payments for real estate, debt service and other basic needs. What is most unequal is the share in the economic surplus net of break-even subsistence costs. To the extent that labor or businesses only break even while income is concentrated in the hands of the FIRE sector and monopolies, the degree of inequality is much more pronounced than gross statistics indicate. Instead of treating rentier overhead as a charge against production and consumption, today’s NIPA depict rent-extracting activities as producing a “product.” FIRE sector revenue appears as a cost of producing an equivalent amount to Gross Domestic Product (GDP), not as unearned income or “empty” pricing.

That is what makes classical concerns with the economics of national development different from the financialized investor’s-eye view of the world. At issue was what constitutes the cost of production in terms of real value, as distinct from extractive rentier charges.

Patten observed elsewhere, but “if the doctrine of physical valuation is once introduced the public will soon be educated to the evils of watered land values” and railroad rates. By “doctrine of physical valuation” he meant the classical analysis of real costs of production, in contrast to what his contemporaries called “fictitious” costs such as land rent, watered stocks and other political or institutional charges unnecessary for production to take place.

The idea of unearned income as a subtraction from the circular flow of income available for labor and industry as wages and profits has vanished from today’s post-classical NIPA. Now, whatever is paid to rentiers is considered a bona fide cost of doing business as if it embodies intrinsic value for a product.

To depict an economy bifurcated between earned and unearned income, it is necessary to distinguish interest and economic rent from wages and profit, to trace the flow of payments from production and consumption to the FIRE sector and other rentier sectors. This discussion recently has been revived as it applies to banking.

But buying a property, stock or bond does not involve hiring labor or financing production. Neither Say’s Law nor national income accounts distinguish between spending on current production and asset markets, or between productive and unproductive labor, earned and unearned income. Today’s NIPA thus fail to address how financial and allied rentier overhead imposes austerity. Say’s Law simply states the precondition for economies to operate without business cycles or debt deflation draining income to pay a rentier class. The reality is that debt service and rent payments rise, extracting income from markets and preventing them from buying what they produce. Most economics professors discuss Say’s Law simply to explain why it doesn’t work to maintain full employment.

Failure to isolate the FIRE sector and rentier overhead has led national income accounting into a quandary. Instead of estimating economic rent, the NIPA counts it as “earnings” for making a contribution to Gross Domestic Product (GDP). Rentier appear to earn their income by producing a “product” equal in value to the rents they collect. If landlords charge more rent, real estate product rises correspondingly. If Goldman Sachs and other bankers charge their clients more for financial services, or make money by winning arbitrage bond trades against them or other counterparties so as to pay themselves more, their financial “product” is counted as rising accordingly. The assumption is that people only receive income for what they produce. This assumption rests on a tunnel vision that reflects the ideological victory that landlords and vested financial interests achieved in the late 19th century against the classical drive to tax economic rent. The effect of excluding land rent, natural resource rent and monopoly rent – the drain of income from producers and consumers to pay landlords, privatizers, monopolists and their bankers – is to deter measurement of what I call rent deflation. That is the analogue to debt deflation

There also is no measure of criminal income, smuggling or fictitious accounting for tax avoidance. No category of spending is counted as overhead, not even pollution cleanup costs or crime prevention, not to mention financial bailouts. Economists dismiss these as “externalities,” meaning external to the statistics deemed relevant. Yet despite the rising proportion of spending that takes the form of rent extraction, environmental pollution cleanup costs, debt pollution and its bailout costs, GDP is treated as a an accurate measure of economic welfare. The result confuses healthy growth with that of a tumor on the body politic. Taken together, these omissions deter the kind of systemic analysis that would have alerted policy makers and voters to the distortions leading up to the 2008 crash.