*** To understand the topic of this discussion, please read Michael's Trade, Development and Foreign Debt.
2025.09.04
KARL FITZGERALD: All right. Welcome everyone, to another Patreon Q&A gathering with Michael Hudson, the Hudson Roundtable, where we're lucky to be joined by Professor Michael Hudson, the world's leading critic of neoliberalism, debt, and the need for a better finance system. So, Michael, welcome to the chat and welcome to all our Patreon supporters.
MICHAEL HUDSON: I like these meetings, and thank you for your support.
KARL FITZGERALD: And when we look at economics, you've been very critical of the fact that the balance of payments theory is barely taught at university. Could you give us an overview on why the balance of payments and a strong understanding of it is so important and perhaps how it's been corrupted?
MICHAEL HUDSON: Well, I never said any such thing, Karl. There's no balance of payments course that's taught in any American university. And there hasn't been since I taught in 1969. There's no discussion of how the statistics are put to work. This discussion today will talk about how the trade statistics that you read about in the paper don't have anything to do with the actual balance of trade as settled in money.
So, I want to tell you how I came to understand what's wrong with the statistics and where it went wrong and why it went wrong. The first balance of payments study I did was with the Chase Manhattan Bank in 1965. And they asked me to look at the balance of payments of Argentina, Brazil, and Chile – and especially Chile – because that was where one of Chase's clients, Anaconda, was nationalizing the copper mine that it had, Chuquicamata. And Citibank was the banker for Kennecott. They were turning their mines over to the Chilean government. And the question I was asked was, how does this affect the balance of payments?
The way to find out was to go to Chile's National Bank and its balance of payments, the Balanzo reports in Spanish. And what I found was something wonderful. They had the nominal dollar volume of exports of copper to the United States. They then divided that into two categories: value retained abroad and what Chile got actually out of these exports. And I found out that what was retained abroad – Anaconda, Kennecott, and Cerro Copper was the third company – [they] would buy the copper from their mines owned and operated by the government, not by themselves. Chile would get the entire payment, presumably at the "producers price" for long-term contracts – the key was that the U.S. companies would be the designated buyers. Chile would not be in charge of WHO bought the copper.
But the [US companies] wouldn't pay when they imported the copper. All of these transactions were held in dollars. And they did not reimburse Chile for the costs of production. These costs of production included the interest rate charges that they had, the exports of U.S. capital equipment to the mines to help them operate, the management fees that they had, and the cost of transportation. And I realized Chile only got a small proportion of the actual copper.
So the figure that was reported in the U.S. balance of payments of imports of copper didn't actually mean that the United States paid in dollars for the copper.
Very shortly thereafter, I was asked to do a study of the balance of payments of the oil industry. I had to design an accounting format for all the major oil companies to send me their classified information about how they filled out the government statistics and to answer a couple of questions. What I found out was that, let's say, for every $100 reported as U.S. oil imports, and this was one of the major features in the American trade deficit, only about 10 cents actually was paid abroad. That's because the companies that were doing the importing, Exxon, Mobile, the usual companies, and all U.S. imports of oil were from U.S. affiliates.
So all of the accounting was done in the head office of these affiliates. And the treasurer for Standard Oil of New Jersey walked me through all of the statistics. He said when we import from Saudi Arabia or other countries, we subtract from the price that they get, our profits. We subtract all of the oil equipment that we send to Aramco, the local oil company. That oil equipment obviously is a charge against what they're paid. We subtract the interest charges on this. We subtract the transportation charges. We subtract the management fees that we charge.
And after all of these fees are taken, including our profits, then there's really not much that Saudi Arabia or the oil-exporting countries actually get because almost all of the oil that's imported, 100%, is from foreign branches of the U.S. oil majors. And I say branches, not affiliates, because Aramco and the oil companies, branches abroad, were consolidated into the parent company's balance sheet. They weren't foreign affiliates. They were just literally consolidated, and it was all done in the accounting.
And I said I've got the statistics that all these companies supply for how much equipment they send abroad. What are their payments to American engineers – that they pay in dollars to the Americans that they send over there to supervise production. I see the interest payments. Where are the profits? And I don't find them in any country. I looked in the Near East and they said the profits are at the very end. Here's Europe, Asia, other countries, Africa. Here's something called "International". And I said, I thought everything is international? And they explained to me, international means it's not really a country. It's just a pretend state like Liberia or Panama. A real state has its own currency and its own taxation, but these are countries that use the dollar.
So we don't have to worry at all about any exchange rate risk. I think, on my website, there's a photocopy of the balance of payments of the U.S. oil industry in detail. And copies of this were put on the desk of every senator and every representative to get them exempt from President Johnson's balance of payments controls that he imposed to help finance the Vietnam War.
Well, from that study, I turned to: let's talk about the Vietnam War. And there were a number of things that I immediately saw in the balance of payments.
First of all, you think of the balance of payments as being the capital account and the trade account. Well, that's not really the whole picture. Where is the government in all of this? I found that when you separated the government sector from the private sector, which you had to do, I was able to actually find out what are the balance of payments costs of military spending abroad and also of foreign aid. And the first study I did was the study of the statistics on foreign aid.
And in my book, Super Imperialism, you'll find my chart on foreign aid. And you may have heard politicians talk about, I think Trump said, ‘we're not going to send any more of our dollars abroad to foreign countries. We're just going to cut that outflow. We're going to stop foreign aid; it's a drain'. And politicians have been saying that for 50 years.
What I found out was in the 1960s and early 70; not a single penny of foreign aid actually was paid in dollars abroad. Zero was paid abroad because Congress had passed a law saying that all foreign aid had to be spent in the United States. Foreign aid is not to aid foreign countries; it's to aid the United States, but using foreign countries as a vehicle.So there will be foreign aid in food, sending food exports. All of this grain is bought in the United States for dollars and then sent to the foreign countries. The government will make foreign aid to countries that owe dollar debts to the United States. It will lend them ostensibly the dollars to be credited to pay interest to the U.S. bankers and bondholders that these countries couldn't otherwise afford. So foreign aid goes to the U.S. banks and the U.S. bondholders.
All of this remains in the United States, probably administered via the New York Federal Reserve. And I went right down the line. Every kind of subscription to the IMF and the World Bank, all of these items in foreign aid were all spent in the U.S. But it's actually worse than that, because when the United States would give foreign aid to Egypt or other Middle Eastern countries, they would have to get a give back. It wasn't Trump who invented this. And the give back was, we've given you dollar credits to meet payments to American suppliers, bankers and farmers.
But you have to give us an equal amount of your own domestic currency so that we can use it to support our spending locally in your country. We can use it for any nefarious purpose we want. And so the United States actually made money on its foreign aid.
Then finally I went to work for Arthur Anderson, and I said, I want to do what I've done for the U.S. oil industry and do a study for the whole U.S. economy. Let's say how much of the U.S. trade and U.S. foreign investment actually involves payments and how much is simply imputed as if it were paid for. There's a basic fiction underlying all of the U.S. balance of payments data and that of every other country and this fiction was to make it dovetail into the GDP statistics. It's divided into the trade balance and the foreign investment balance.
So in the trade balance, you'll have, for instance for oil, the entire cost of foreign nominal cost of the oil that the United States oil companies import from abroad as if this import money were paid to a foreign country. And then you go elsewhere in the balance sheet and you have the offsets for all of this. So the offsets that explain why there's a zero net balance, which economists call a wash transaction. For instance, on the investment account, there will be disinvestment or investment of money in the oil industry.
On the export account, you'll have the exports of machinery used in the mining of oil abroad. You'll have payments to American labor that's a service transaction, foreigners to the U.S. All of these payments that offset 100% of the oil imports are counted as if it was a cost. Same thing with foreign aid. Foreign aid is treated in the government's account as if it were all going out.
And then the government used to publish something called Table 5 in the balance of payments reports that it did annually or quarterly in the survey of current business by the Commerce Department. And they would break out actual money paid abroad. And that's where I got the statistics for how much money was actually spent abroad in foreign aid and how much money stayed in the United States, 100% of all of that.
It took me a year to separate the trade account, and I found out that America didn't spend anywhere near the cost of its imports that it reported, but also the cost of its exports. Of course, most of its grain exports were paid in dollars, but a lot of its grain exports – other countries didn't really pay dollars for them because there was a foreign aid outflow on the government account. That led me to say let's separate the government account and foreign aid as opposed to military spending.
What I found out was on the actual payments involved in exports and imports, the U.S. balance of payments in terms of dollars and foreign currency back and forth was just exactly in balance from 1950 when I began the statistics right through 1964, or maybe could have been 68 when the statistics ended. The entire balance of payments deficit in terms of dollar outflows was on military accounts; not foreign aid, not trade account, not foreign investment abroad, as President Johnson had imagined erroneously.
So we were about to publish this. Arthur Anderson's art department made very nice charts. And then my boss came to my office and he said we just got a very upsetting phone call. I'm afraid we've got to terminate your employment here. And I said, what happened? What did I do wrong?
Well, you didn't do anything wrong, but Mr. McNamara – I think when he was head of the World Bank – he called the head of our company and said, if you publish this report, you will never get another contract from the U.S. government again. And we need the U.S. government contracts.
He said, I feel very bad about that. We'll give you a present, you can take all of the slides, all of the pictures and the charts, and you can do whatever you want with them.
So, I took the chart to the NYU Business School, and they published a regular bulletin. It's an academic publication, and they were overjoyed to get it. They published it as a triple issue of their bulletin, and it got quite a bit of notice in Wall Street financial circles; hardly any notice in the left-wing press or in the popular press, generally.
A few months later, the Federal Reserve Bulletin – there was a major review and I forget what publication it was – the Federal Reserve published a study of – I think it was in the American Economic Journal of American Economic Literature or something like that. It was saying, let's look at all these publications by the NYU Business School. And it reviewed them all, and then it got to my report. It said the fact that Dr. Hudson finds that military spending is the root of the balance of payments deficit does not give confidence in his study.
And I thought, I'm using all the government figures. What happened? I talked to my class – one of my students worked for the Federal Reserve as one of their staff economists. He said let me give you a copy of an internal memo that we got. The internal memo said my figures were all right, but that we must not publicize it because that would spur the anti-war movement and that was against American foreign policy.
So that was yet another reason why I'm the name that must not be spoken in government statistics. It was against the U.S. interest to actually do a financial analysis of what are the actual effects on the dollar's exchange rate in terms of the foreign exchange market, the demand for dollars versus the demand for foreign currencies to cover exports, foreign investment, trade, government transactions, and military.
The government did not want to highlight the fact that the weakness of the dollar and what had forced the dollar off gold, as I describe in Superimperialism, was because of military spending abroad. That was the only drain. There was no drain on the trade account, no drain on foreign investment account, and no drain on foreign aid. The entire downward pressure of the United States; the balance of payments deficit started with the Vietnam War – I'm sorry, with the Korean War – in 1950-1951, and got worse and worse and worse from there.
Later, one of the Wall Street firms asked me whether I could try to redo the study. And I thought, it took me an entire year of my life to do the study of the U.S. balance of payments. That's how I ended up learning about the actual statistics. And if you wouldn't actually do the actual statistics and see how they're put together proverbially, how a sausage is made, you'll see it's not what you would expect. I wouldn't have understood the difference between a financial analysis and an imputed analysis, something as if it were there.
And the idea of separating the trade account and investment account was to dovetail into the gross national product categories that were developed as part of the GDP that won the Nobel Prize. And I can understand the logic of the GDP, but they should have had two measures. Before the GDP, the government actually recorded the specific foreign exchange effect of U.S. exports and imports. All that was changed in order to fit into this hypothetical GDP account. And the problem with the GDP is not only wash transactions like this, there are all sorts of transactions in the national income account that don't involve income at all.
For instance, one of the big contributors to GDP and national income in the United States is imputed homeowners' rent. As many of you have seen rent charges going up and up and up very sharply in the United States, as you've had computerized advice to landlords as to how to raise prices – they all act as a monopoly to really squeeze the renters.
When the Bureau of Labor Statistics will go to the various households that it does as their test study – they're in miniature to sort of blow up these statistics to a national level. And one of the questions they ask the household: if you're a homeowner and if you had to pay rent to yourself, if you were the landlord and had to pay rent to yourself, how much would you rent out your home for? As you can imagine, more and more homeowners say we're sure glad we bought our home, because if we wouldn't have bought our home, we'd be paying this much more and this much more and this much more for rent every month.
The GDP says we're counting rent as actual product. And so the GDP as a product has the increasing rental charge of paying for your home, or presumably a commercial property, as if it's an actual product helping GDP grow instead of stifling GDP growth; deindustrializing the economy by charging so much that the homeowners and renters cannot afford to use their income to buy actual goods and services, as we've talked about before.
KARL FITZGERALD: Let's head back towards balance of payments theory. Maybe we can do a special on GDP sometime because I know you've got a lot to say there. But what you're essentially saying is that it is crucial that developing nations understand the balance of payment theory, particularly when the IMF and World Bank use current account deficits as a pressure point.
MICHAEL HUDSON: If they're a raw materials exporter, then, of course, they understand this. And as I said, the model report that I found of all of the central banks that I looked at, and I'd walk the 50 feet to Chase Manhattan's library, where they had the central bank reports of every country for every year, and, of course, Chile had to calculate for itself ‘what is our balance of payments actual situation?' How much money do we actually get from our copper exports and our guano exports?
Gold exports were a result of copper refining; electrolytically, the gold falls to the bottom and you have the anode electrically collecting all of the copper. So countries that export raw materials have to make this calculation. They know about it. I don't know whether the financial people who actually compile the balance of payments try to interact with the GDP people and say, wait a minute, how do we dovetail what we're doing with a reality-based payments account for actual payments instead of imputed payments?
But they certainly know what they're doing and they know that they don't get all of the money from the raw materials that they make. So the problem is really in the industrialized nations, and especially the United States, which is on the opposite end of the spectrum, that doesn't want to make it clear to foreign countries that you think that you're getting rich exporting your copper and your cocoa and your oil and other raw materials.
But you're not anywhere near as rich as you think you're getting because you only get a little bit of this money for you, thanks to the fact that American companies own your natural resources, or English and Dutch and other European countries own your natural resources and you're really not getting as rich as you think. If the United States actually published, or sponsored the publication, of a realistic financial analysis, this would show how many of the Global South countries are not developing.
The aim of the World Bank and the IMF is to prevent them from developing. You could say they're malstructured or stifled, but certainly not developing. The purpose is to show that you can't afford to pay your existing foreign debt to bondholders and bankers – unless you borrow the money to pay your debts.
In other words the foreign debt – Global south foreign debt scheme – is a Ponzi scheme. The United States and other governments, especially the IMF, will lend them the money. The International Monetary Fund just lent Argentina an enormous amount of money to pay its foreign bondholders because they said, you're a Fascist country, you're a Zionist country, of course, we'll give you the money to pay the bondholders.
And by the way, tell your bondholders that we can't do this forever. Let them use this money we're lending you to get out of the Argentine economy and put their money in dollars or gold or hard currency. Our job is to subsidize capital flight by the client oligarchies in Argentina or other countries. To get their money out and to empty out their countries so that once Milei's right-wing government is replaced by, presumably, a left-wing government, the left-wing government will be absolutely strapped for cash and will have to prevent devaluation by going to the IMF and say, if we devalue, then we're going to have to lower the standard of living of our labor because our workers are going to have to pay much more for all of their imports, just like in the United States.
And the IMF will say if you, left-wing government, will act as a right-wing client dictatorship, of course we'll lend you the money. That's the international financial game. And that's what you see if you do an actual financial analysis instead of the as-if hypothetical analysis. Wouldn't it be nice if they actually earned all the money that they report on their export accounts?
KARL FITZGERALD: Danny Wheel writes in the comments: ‘We see the same thing here in Ecuador. Rubio got here last night, but the mines are being subsidized by the state, while people have to bring their own medicines to filthy public hospitals left to rot for privatization between the IMF and export economy, meaning we have no industry except extraction. Poverty is beyond comprehension, and violence is the biggest in the world. This is real. The things Michael is talking about affect real people. It's a casino scam backed by the military of the U.S., but this is predominant all around the world, isn't it? And nations need to understand what is happening.'
FRANK MOELLER: [I've been] listening [to] and read several books by Professor Hudson. He talked about surplus balance of payments in a recent podcast and I was wondering about surplus balance of payments and how they use that for housing, education, human capital development, healthcare. And if so, can we put a dollar value on that, per person or per capita, over there and how that's distributed for those utilizations?
MICHAEL HUDSON: Well, you wouldn't get that material from the balance of payments accounts. If you talk about medicine, I guess there would be medical supplies to foreign countries as an outflow of government foreign aid. And on the export credit side, you'd have exports of U.S. pharmaceuticals and also on transfer payments, payments to U.S. doctors or U.S. embassy personnel, or State Department personnel, or other individuals doing all these payments that are defrayed in the United States.
But they certainly don't give these other countries dollars to spend. They only give dollars to Ukraine or Argentina or client dictatorships. They have a very tight-fisted control to make sure that other countries don't actually receive dollars from the United States, but only U.S. firms and suppliers and creditors get these dollars. You can do the per capita, but that's something else. It's not something I've got into. That's all domestic statistics you'd have to use.
KARL FITZGERALD: And Danny Wheel has a few questions coming through as well. Danny, do you want to come on screen and ask Michael some questions? It's great to see some of our transcription team here; Ced and Kimberly do a great job for Michael.
And they're there, don't you worry. So Danny's microphone is down. He's asking about Social Security payments here somewhere. During the 60s, Social Security funds, we were told could never be touched for anything but Social Security. These funds were used for the war, as far as I know, and want to know if Michael can verify.
MICHAEL HUDSON: Of course, the fact is there are no funds there. As George W. Bush said, there's no money there. All there is, is a promise by the United States government to pay for the Social Security contracts that they've signed. Social Security has run a surplus for many years.
The role of this surplus was to finance military spending and to finance the budget deficit. The budget deficit was financed not only by tax payments by the U.S., but by using Social Security as a tax. That money was paid to the government and the government used it for operations. And against this government's use of it for operations, the government had a future liability, the liability to be paid to the Social Security recipients.
So, right now, the talk of the Republicans in Congress, which was really initiated by President Obama; Obama set out to work with the Republicans to mobilize the Democratic Party to abolish Social Security and have the Social Security funds available to be invested in the stock market. I think, in 2007, I wrote a cover story for Harper's magazine tracing this. This was the plan that Obama had when he was trying to work with the Republicans to do just that. There's zero money in the Social Security account. There is a liability of the U.S. government to pay Social Security.
But what the Republicans say was: if we pay Social Security, we can't cut the taxes on the rich. Our economies run – industry and employment are just an overhead. The purpose of the U.S. economy is to generate money for the rentier 10%. It's to generate money for the banks and the landlord. Forget the people. Let's just take all the money away from them and give all to the 10%. Let's just speed up where the whole economy is going over the long-term trend.
Obviously, I'm very annoyed at this, as you can tell, but the Republicans and Democrat leadership have agreed: let's not pay American labor as much, this is the problem. Because the Americans are doing something that is very unpatriotic; they're living longer. And the government says you're living longer than we'd calculated. You're supposed to die when you're 75 years old, maybe 78 years old, and you're not dying on schedule. And that means that we have to pay much more money. And if we pay you, we can't pay our campaign contributors; the banks, the financial sector, the landlords, the monopolists, and the rentiers.
And that's not good for the stock and bond market, which is really what the U.S. produces. You can see the hypocrisy here. And there's so little discussion of the monetary and fiscal policy in this country, because once you look at it, you realize how totally biased and unfair the whole system is constructed to benefit the wealthiest; the creditors and rentier interests, not the actual wage earners. It's terrible.
KARL FITZGERALD: Is there such a thing as a good current account deficit, where it's funding something productive?
MICHAEL HUDSON: No, there's no attempt at all to make any such calculation. I mean, what is productive? And even what is the current account? The current account surplus or deficit is, in principle, if you study trade theory, is supposed to be balanced by the capital account. So if you're running an export surplus, that enables you to, on investment accounts and capital accounts, invest money abroad. Or if you invest money abroad, that provides dollars for foreign countries to run a trade deficit with you.
There's this hypothetical balance between current and capital account. But where are the gunboats? Where does the military fit into all this? Is it a current account? Is it a capital account? This is fictitious to oversimplify and assume that the capital and the current accounts simply offset each other and the result is zero. It does work that way for the private sector, I found. That's what my statistics showed. But the wildcard is the government military spending abroad.
KARL FITZGERALD: Diana DiRienzo asks, ‘does social security add to the deficit? When government spends domestically, they get more back in tax revenue than originally spent within a short time, don't they? Also, can we see the data on how Social Security is running out of money? Reagan doubled the FECA to cover the baby boom requirements. And why can't the government just pay Social Security without requiring FECA payments?'
MICHAEL HUDSON: Well, it's not running out of money at all because there's zero money there to begin with. There is no money there. And again, George W. Bush recognized that fact when he said it's really just all hypothetical. When people say Social Security is running out of money, they say, we're not able to give the tax cuts if we also pay social Security and health care to American workers.
Something has to give, and what's going to give is Social Security so that we can cut the taxes. How are you going to use the government revenues compared to the government spending? And as we, MMTers have pointed out, and Stephanie Kelton has written about in a recent book, what's left out of the account is not just government revenues and expenditure, it's government money creation.
The Federal Reserve only creates money to give to banks to lend out to invest in stocks and bonds and real estate and gambling – such as derivatives. The Federal Reserve does not create money to be spent into the economy. That's what the Treasury could do and what the Treasury did in the Civil War with greenbacks and other times. It's how governments finance war.
But all of this is a pretense of seeming to come up with a plausible way of thinking to create a narrative that makes you think, according to that narrative, gee, the government doesn't have enough money to pay Social Security if it cuts the taxes on the rich, if it goes to war and spends its money on the military. You're seeing this very clearly in Europe right now. That's what the whole political fight is with Merz and Germany and the others. They say we're limited by the rules of the Euro and the European Union as to how much of a deficit we can run. The U.S. is not subject to any limit on the deficit; the Europeans can't.
And so if the Europeans – the entire growth in European GDP is spent on military spending that's now promised, as a contractual promise by the German and other European governments – if all of the equivalent of the growth of GDP is paid on the military, they say we're going to have to cut back the subsidies we're giving for consumers.
And this is what's causing so many political problems in Britain for Starmer, for instance, saying, now the government says, since we're spending so much money, giving to the Ukrainians to fight Russia, we're not going to be able to give you the electricity subsidies that we were giving you before because we're not any longer getting gas. We have to pay much more for our gas and oil than we had to before we broke off relations with Russia. You're having Europe cut back social spending in order to become a militarized economy to sort of try to re-fight World War II, hoping for a different outcome this time around.
KARL FITZGERALD: It seems that over the arc of time since we've moved into the dollar hegemony era, the post-gold standard, that balance of payment theory and understanding has become even less understood, less important. Would you like to describe how that has played out?
MICHAEL HUDSON: Well, I think I just did.
The problem began with trying to dovetail it into GDP. Nobody really expected government military spending to play such a major role in the balance of payments and to create such a deficit. But certainly, I think, as I've mentioned many times before, including in this group, in the 1960s, every day around noon, we'd get together, the Federal Reserve would report on the Treasury's holding of gold, and we'd watch how far the gold has gone down.
Every U.S. paper currency, the dollar bills you have in your pocket, and all the denominations had to be backed 25% by gold. And as the currency went up, as the economy expanded or inflated, the gold supply was going down. And we could see that, at some point, the government was going to run out of gold.
And the newspapers would be denouncing General de Gaulle for making a big thing about saying, we don't like American military spending. We're going to cash in all these dollars that America spends in Vietnam and Cambodia and Laos and Southeast Asia. These are French territories, and the French banks there send their dollars to Paris, and we cash them in for gold right away.
Well, Germany actually was cashing in even more dollars for gold than France was. If you talk about economic reality, it's going to be different from the reality that people are told in the mainstream press. And it's very difficult to maintain this fictitious narrative that people are being taught.
KARL FITZGERALD: So what about the classic twin deficits periods in the 1980s and how that contributed to sustained deficits?
MICHAEL HUDSON: What in the 1980s?
KARL FITZGERALD: The twin deficits period, the large fiscal gaps plus the strong dollar. How did that influence U.S. fiscal policy?
MICHAEL HUDSON: Well, once countries no longer could cash in the dollars that were being pumped into the economy for gold, the only choice that they had was to buy U.S. government securities. They had to; these were safe. This was before the government began to grab Russian money and Venezuelan money and any money of countries that it didn't like.
It was the deficit spending from the military in the 1980s that pumped dollars into the economy that ended up in the hands of foreign central banks that invested this money in U.S. Treasury bonds and bills and notes to finance the budget deficit. So Americans didn't have to – the government didn't have to tax Americans. They just had to spend more military money abroad and let the foreign central banks buy the securities. Circular flow.
KARL FITZGERALD: Goodness me, it makes it so simple when you say it like that.
MICHAEL HUDSON: That's why people don't discuss it. It is simple. But how do you really make it so complicated that nobody's going to discuss it? You get a whole different set of unrealistic categories. That's what economics and the role of economists is for.
KARL FITZGERALD: And so Bernanke's global saving glut view was built on that play that occurred through the 90s. Is it the same thing there?
MICHAEL HUDSON: Sure. The global savings glut was neoliberalism. They stopped regulating economies. They permitted monopolization. The savings, you could say it was a money creation glut. What were these savings? The banks would lend money to their major customers, homeowners and real estate sector, 80%. So the more money that the banks would create, it would push up real estate prices or corporate bond and stock prices.
You had the economy flooded with Federal Reserve money, and that created the biggest bond rally in history from the time of Paul Volcker in 1979 that brought down the Carter administration right down to just a few years ago with the zero interest rate policy. So it's not a saving. The pretense, and this has gone back to the fictions of the late 19th century.
The idea that if you're a billionaire, you've saved up your money. And the way that Böhm-Bawerk, Eugen von Bawerk, and the Austrian school said was, we have to realize that there's a reason that interest charges are really a product, and the creditors play a very productive role in the economy. They make a sacrifice. Their sacrifice is abstinence. And by not spending their money on consumer goods and gratification, they defer their gratification to later. And that's how you measure the interest rates.
And so all this money that the billionaires have is saved up by not consuming. Well, that led Marx to quip, gee, ‘I guess the Rothschilds must be the most abstinent family in Europe'. And do you think Donald Trump got his additional $5 billion that he made in the last few weeks through junk crypto currency? He didn't save that money. That money was just sort of – it's all created.
So the very idea of referring to savings, the vocabulary is all a euphemistic vocabulary to make it appear as if creditors and landlords and monopolists pay a productive role instead of the rent that they get being in the character of transfer payments, zero sum. What the landlords and bankers and monopolists get is a transfer of income from the consumers or the renters or the debtors to the creditors with no quid pro quo. And as John Stuart Mill said, and I've repeated often enough, landlords make their rent in their sleep. There's nothing they do in providing a productive service.
So of course, you want to create an economic vocabulary that makes it appear as if the wealthy people get their fortunes by being productive instead of being parasitic. That's what my book, J is for Junk Economics, is all about. Going over the vocabulary and that's used, trying to demystify it.
KARL FITZGERALD: What about the U.S.'s exorbitant privilege? It's almost as if a nation state has set up a system to create money in their sleep. And over the decades, the U.S. has earned higher returns on its foreign assets than it pays on its liabilities, as you spelled out in Super Imperialism. So is that really what this whole balance of payments interplay is all about with the dollar exchange?
MICHAEL HUDSON: Yes, in one word. You've expressed it very concisely, Karl.
KARL FITZGERALD: Okay. Well, I thought you'd have a rant to go on that one for us.
MICHAEL HUDSON: Well, you said it clearly; you don't have to rant when it's all so clear.
KARL FITZGERALD: Okay, can we get anyone to come on screen and ask some questions? I know this is all complicated material, but often it helps as we are all trying to grasp it.
MICHAEL HUDSON: Anything.
MICHAEL HUDSON: You know, we have a half hour to go.
MATT CONNORS: I have a question if no one else does.
KARL FITZGERALD: Go on, come on through.
MATT CONNORS: I'll start by just expressing gratitude to Professor Hudson for his work. Immensely, immensely thankful. He has a way of pointing us in a direction that we're not looking. I remember reading an essay shortly after the beginning of the recent Russia-Ukraine conflict, where he called it the third war against Germany by the U.S. And I thought I was so confused until I wasn't. And you know, that's extremely helpful.
Similarly, when people started getting so excited about the emergence of BRICS a couple years back, Professor Hudson was consistent in also sharing a little bit of enthusiasm, but pointing to the fact that they hadn't come up with a system that really was going to let them leave the dollar behind. And I'd be interested in hearing his analysis of whether they've gotten better at that, whether that's on the horizon. You know, it's basically a specific question that's within my bigger question of how much of this rigged system is still going to be standing after all the mistakes or missteps that current leaders in the West have been making.
MICHAEL HUDSON: Well, I did two shows on this week. In today's Naked Capitalism, and on my website, I have my discussion with Glenn Diesen on this. And I just did an 11 o'clock a.m. interview today with Nima on Dialogue Works on this very topic. They have not yet put together a system of how they're going to restructure their economies to make it something different. All that the countries have been doing really since 1955 has been to complain ever since the Bandung Conference. Isn't the world unfair? But you have to go beyond saying, yes, the world's unfair. What are we going to do about it?
And the solution has to be to change the whole tax policy around. That's really what they have to do. Number one, they're unable to pay their foreign dollar debts and foreign currency debts, without sacrificing their own economic growth. Number two, the BRICS countries and the Global South are faced with a problem. Foreign investors from the United States, England, and Europe own their raw materials, their oil, their mining, their forests, their plantations, and they extract rent. And these foreign companies that own raw materials extract raw material rents from the Global South countries and other countries today.
They're playing the same role that landlords played in Britain and France and Europe in the early 19th century, charging ground rent for everybody. It's a deadweight charge. It's a transfer payment that classical economics set out to free economies from, to create a market that there was no economic rent that ended up in private hands. And Ricardo described value and price and rent theory in chapter 2 of his principles of political economy. He said land rent includes natural resource rents. He didn't say monopoly rents, and he didn't say financial returns, but at least he said raw materials.
He said it's price without cost value. And his labor theory of value was designed to say: what part of the price system that we pay is not value? What price is it that is not really a necessary cost of production? If all the costs ultimately are resolvable into labor; land is provided by nature, raw monopolies are created by legal systems, and bank extraction of interest and financial charges is also an institutional creation, not part of necessary labor.
The whole doctrine of classical rent theory, from the Physiocrats to Adam Smith to John Stuart Mill to Marx, to Thorstein Veblen, was all about how do we bring the actual price structure in line with the actual cost of production so we don't have any zero-sum transactions, any more free lunches, any more payments to a rentier class that makes money in its sleep. That was what was so revolutionary about industrial capitalism. It was evolving into socialism by freeing economies from the rent-extracting classes.
Well, then there was a whole anti-classical reaction, early 20th century. By World War I, you had the rentiers fight back. The banks and real estate interests join hands, saying there's no such thing as economic rent. Everybody earns whatever they make and they have earned whatever fortunes that they have been able to accumulate.
We'll call it saved up. Even though it wasn't saved up, it was made in their sleep without their playing any role in saving at all. So you had the whole economic vocabulary designed to create a fictitious narrative of how economies work, and that fictitious narrative required negating the whole century of classical value, price, and rent theory that was designed to minimize rent. That's a long answer to your question, but I've tried to provide the context for it.
MATT CONNORS: Thank you very much. I'm sorry. I have more questions, but I don't want to hog air time here, so I'll let other people go.
MICHAEL HUDSON: The questions are all a good question. I'm always glad to have it. I'll let Karl decide what to do.
FRANK MOELLER: Okay. My question is: how does China subsidize education, healthcare, transportation, and communication so that they have competitive wages for their employees? Whereas in this country, we have exorbitant costs for insurance and education. There's a $1.7 trillion student debt. It's all financed through loans. How does China finance their education process and all these other attributes that society partakes in?
MICHAEL HUDSON: They have taken finance, money creation, and debt creation out of the private sector and made it a public utility. And instead of banks creating money just on their computer keyboards, the People's Bank of China, the central bank, creates money. It's as if the U.S. Treasury were simply printing banknotes to spend into the economy. So if you're creating your own money, then the government creates the money and decides, what are we going to spend our money on?
We want to spend it on providing free education. We don't want people to have to pay so much. We want to make sure that we can lower the cost of production. And we want to do just what an industrial capitalist economy would want to do. We want to minimize the cost of production to make our economy more competitive with other economies. And we make it more competitive by minimizing the cost of living that employers have to pay their wage earners. And we don't want the employers in China, whether they're public sector or private sector employers, to have to pay their wage earners money to just pay for education.
So China provides education freely. We don't want the employees to have to spend their money on Obamacare to pay the big medical insurance conglomerates and the pharmaceutical companies. So we'll provide medical care. This was good conservative economic policy in Britain in the 19th century when Benjamin Disraeli said, "Health and health care are all." And that was what the Conservative Party was all about, making British labor more competitive by having public health minimize the cost that labor had to pay.
Well, the same thing with housing. China has not really followed through treating housing like it's treated education and health care. And that's been a problem that it's now coming to realize is a problem. But it's trying to do it. China does not have a banking sector that lends money to Chinese companies to buy out other Chinese companies and then borrow more money, once they bought out the company, to buy the company and then pay it out as a capital dividend to the stockholders or to buy its own stocks.
None of these financial shenanigans that make money by purely financial engineering in the United States are done in China. Their economy is designed as if by engineers, and most of the Central Committee has either an engineering background or a public administration background so that they can avoid treating their economy in the financialized, privatized way that the United States economy works.
MATT CONNORS: Thank you.
MICHAEL HUDSON: Does that make it clear?
FRANK MOELLER: Yes, it does. Thank you.
MICHELLE ROMINE: I just want to ask him, if the BRICS countries can arrange another alternative system at some point in time, will they then declare odious debt and nationalize their own resources back?
MICHAEL HUDSON: Well, they have to act together to do that. They can't do it one by one because they could all be picked off and their foreign holdings could be grabbed just like Paul Singer tried to grab Argentina's assets to pay bondholders. So it has to be done all together. And they have the perfect excuse to repudiate their debts now because Donald Trump's tariffs have prevented them from earning the dollars to pay their bondholders. He's closed the U.S. market to them. And if they can't export to the U.S. market, there's no way they can get the dollars to pay the foreign debts.
So they can join together and say, this is the Donald Trump debt holiday. This is it. He's made it impossible. He's destroyed the ability to pay the debts. We're not going to sacrifice our growth and let the United States destroy it. Donald Trump's policy is to say, we will create chaos for your economy, declare war on Russia and China and do to you what has happened in Ukraine.
They can say, we've chosen the path of civilization. And so you have a fight between civilization and what's called, now, late stage barbarism.
MATT CONNORS: I'm going to jump in with a quick question. Michael started out talking about Chile in 1965, if my memory is working for a one and a half hour stretch here. Any thoughts on Chile's ability to come back to the question of getting out from under the Pinochet constitution that they tried to rewrite and it failed? Did they learn from that? Or did other countries watching them learn from it? The idea that a foreign country can own all their raw material, their mines, and all that kind of thing was my understanding of what they were trying to do. Was that a one and done? And now they're in even a weaker position to try something like that?
MICHAEL HUDSON: It's a total mess down there. Pinochet introduced this rip-off system of pensions so that companies could simply invest – they'd pay pension money to the workers to be paid in their own stock, and then they'd organize the company that employed the workers as a subsidiary of the bank holding company. Companies were organized as what they called "grupos," a holding company and the private company.
So that the Chilean company would go on and on, and then it would say, one day, we've just paid all the money in the treasury to ourselves. We're broke. I'm sorry, we've wiped out all the pension debt. We have to go under. We've sent it all to our grupo, our bank head, and they've wiped out all the pensions. So I've been appalled at Chilean politics. I cannot understand why they've been so bad ever since I began to follow it in the 1960s. We were all watching President Frey and how he was mismanaging the economy.
Then Allende mismanaged the economy by this sort of vulgar Marxism that ignored the land question. Chile has the most serious land reform problem in Latin America. Vast plantations and the lowest farm productivity, yet it has the highest natural fertilizer resources in all of Latin America. Guano, that's one of its major exports. It's just an example as to how not to run an economy. And we're all using that as, you know – Chile is the self-destructive, just utterly mishandled economy in Latin America. I don't understand how they can flounder so badly. So, there's no answer to half of your question. How do you explain why people are so incompetent?
KARL FITZGERALD: Okay, thanks, Matthew. We're going to move on to Wendell, who has put his hand up. So, Wendell, do you want to come in?
WENDELL FITZGERALD: My favorite economist, which Michael knows about, is Henry George, who suggested that a full 100% tax be levied against unearned income from ownership of land and other monopolies.
MICHAEL HUDSON: Why do you say Henry – why not say Adam Smith? Why not say John Stuart Mill? You could run down the line with the economists. They were all saying that.
WENDELL FITZGERALD: Let's have an actual free market. The way you get a free market in land is that you don't let people keep the rent of land that they don't actually create. The community creates that value. So let's pay it to the people who actually create it. Marx, and I mean, Adam Smith and Ricardo, yeah, absolutely. Henry George.
MICHAEL HUDSON: Here's the problem: George was a journalist 150 years ago. And now, all this rent is privatized not to a hereditary landlord class anymore, not to the class that he described, that George described so well in the Irish land question. The rent is paid to the banks. And I don't think neither George nor any other economist of his time anticipated that. Yes, you have the free market mentioned in housing and real estate.
Anybody can buy a home or building by themselves. But almost everybody, in order to buy this property, has to borrow from a bank. And they compete with other borrowers to get the mortgage loan, to buy the home or the commercial building. They agree to pay the interest to the bank. And so most of the interest and the land rent in the American economy is paid to the banking system.
There's no successor to George that is saying these things today. It ended up, it turned out, that the bankers threw all of their weight behind the real estate interests, realizing that whatever the government cut in taxes against the land would be free to pay the economic rent as interest to the banks. So the real question in every economy today is not whether the landlords or homeowners or the government will get the land rent. It's whether the banks or the private landlords will get the rent.
The government obviously has not taxed the rent, and whatever the government has failed to collect ends up being paid to the banks. That's the problem. That's what financialization is. And that's why the finance capitalism that's occurred in the last century is so different from the outlook for industrial capitalism, as it seemed to Adam Smith, John Stuart Mill, and Henry George in 1879.
WENDELL FITZGERALD: So what's the solution? I'm not disagreeing with you. What's the solution that you propose? Is there a tax solution?
MICHAEL HUDSON: Yes, of course you have to tax the land. But today, if you tried to tax the land, it's much more difficult than it was in George's day, because if you tax the land, the land's rent, the rent is already pledged to the banks to pay mortgage interest. The banking system will go under. Well, I'm all for that, quite frankly.
Yes, the banking system has to go under. You have to, in order to have the land tax that Henry George and Adam Smith and John Stuart Mill and Karl Marx all supported, you have to deprivatize banking and you have to wipe out all of the banking and creditor claims that are already, for 30 years in advance, claims on this land rent to be paid to them, not paid to the tax collector.
KARL FITZGERALD: Yeah. Can we, we're trying to specialize on the balance of payments in this discussion. We often cover this topic. And we've only got a little bit of time. So Wendell, I hope you don't mind if we move off our favorite topic. But yes, I'm interested, Michael, Frank's question earlier about China. Is there a country anywhere where, in terms of trade theory, comparative advantage still rules? Where they do pursue…
MICHAEL HUDSON: Trick question. It never held. It was always my whole theory of trade development and foreign debt. The whole theory of comparative advantage was, if you read my book, it was all fictitious. It never worked. It never held.
KARL FITZGERALD: But China has had this huge trade surplus because they've had a comparative advantage in manufacturing. So, you know, how does trade policy work for them? They have this conundrum of having all these treasury bills, what are they going to actually do with them?
MICHAEL HUDSON: It doesn't have a comparative advantage at all. It has an absolute advantage. There are certain costs in America and the world economy that are common. Every country, except the United States now, has to pay the same price for its copper, steel, and oil, and this makes absolute cost structures the key.
Ricardo's theory of comparative advantage, to make a long story short, was to show that Portugal was the winner in trading with England and that the solution was that other countries should provide raw materials and depend on English manufacturers and monopolies. This was garbage, garbage from the beginning. And I go over that in my trade theory book.
But China does – of course, it has an advantage because it's followed the original plan of the classical economists. You minimize economic rent overhead and you streamline the economy.
So there's no parasitic private financial sector, no parasitic rentier class. And at least President Xi has said that housing is to live in, not to treat as an investment good. And I think they're beginning to try to move in that direction these days.
What China has done is follow the logic of industrial capitalism. They call it socialism with Chinese characteristics. They could call it industrial capitalism with Chinese characteristics because it's exactly what they're following; the same path by which Britain and Germany and the United States organized their industrial takeoff.
KARL FITZGERALD: Well, until the last 10 or 15 years, where the FIRE sector, particularly the real estate sector, got power, got in control, and now we have all these ghost cities in China. So it's sad to see that, even there, they've fallen victim to the rentier economy. We're talking balance of payments, and I'm not sure we've talked about it today, but transfer pricing. What role does that play with multinationals using transfer pricing to write down their tax obligations in various nations?
MICHAEL HUDSON: It's fictitious pricing. They organized a series of multinational shells and they made sure that – here's how the oil industry did transfer pricing: all of the oil that was produced in the Middle East and other countries would be sold to a corporation in Liberia or Panama that had zero taxation. The Liberian and Panamanian affiliate of Standard Oil or Saccone or any other oil company would then resell this oil at a very high price to the refineries in the United States or in Europe.
And the price of the affiliate in this offshore banking enclave, these sorts of fictitious corporations, all of the profits would be made there; there was no profit given [due to] the price they charged at the downstream end in countries that had an income tax. There was no income tax in Liberia or Panama. And under the tax treaty, a corporation can basically follow the tax rules of the conglomerate and can follow the tax rules of wherever its big trading company is located.
That's why, when I asked the treasurer of Standard Oil, where are the profits made? And he answered, they're made right here in my office. And he said, and I declare them to be made in Liberia or Panama because there's no tax there.
And so we get the entire profit – and he could have said economic rent but that's not how he thought – from oil, it was all paid to the parent company in New Jersey. And because it was all made in a fictitious country using the dollar currency that had no income tax, an offshore banking enclave, then they didn't owe any profit tax to the United States. So that's what transfer pricing was. The price that the trading affiliate in the offshore banking center sold its oil for, was so high that there were no profits to be made downstream in the refining and gas station distribution sector. Does that answer your question?
KARL FITZGERALD: It does. And it brings to mind, if there's any one nation that has turned the balance of payments theory and understanding of economic rents to their advantage, it would be Singapore. Do you know much about Singapore and their Temasek holdings and how they use their capital account surplus to invest in other national utilities?
MICHAEL HUDSON: I really haven't followed it. I haven't had an occasion to follow it.
KARL FITZGERALD: So I must get you to look into it. Kimberly Mims, our friend, do you want to come on screen? We're getting close to the end of today. Yes, she's one of our backroom team here with the Michael Hudson crew. She's asking about multinationals. Could you come on in, Kimberly.
KIMBERLY MIMS: I was interested in that issue of how this kind of circulation of the benefits, let's say, stay within the U.S. frame and never really go out in some sort of fair and equitable way, right?
That's what you're kind of talking about. And you also briefly mentioned private-public partnerships, and that's just a thing I see in this country as being without regulation all over the place. I mean, I see this in Chicago all over. It's just out of control. And I don't know what they are, quite frankly. Sometimes they call themselves centers. You don't even know what they are literally as business models.
So it seems to be this way of prying open a kind of non-regulated space that is domestic as well as potentially international. And I'm wondering, does that have any play or do you see any way of looking at that, that would be profitable and constructive in terms of talking about balance of payments?
MICHAEL HUDSON: Well, the whole financial sector is highly exploitative. And as you point out, these private-public partnerships were really developed under Thatcher and even more so Tony Blair. And the idea is that all the profits go to the private owner and all the losses are absorbed by government. And the effect is to transfer money from the government.
The government subsidizes a company to ostensibly make losses and the losses take the form of high interest payments, managerial payments, and other largely fictitious financial charges and transfer payments to the financial managers. So again, we're dealing with a fictitious economy. And most of the economy today, I guess you could say, is based on economic fictions with a fictitious cover story, a narrative to make it all appear as if all of this is earned and everybody has earned what they take and end up with by being productive or unproductive if you're a laborer.
KARL FITZGERALD: Well, I'm trying to think of a way to wrap this up, Michael, because it's been a complex conversation and one that we all need to study in further detail. I suppose with BRICS coming through, where do you think the future of balance of payments theory is going? And are these nations actually picking up on what you're teaching about, or are they going to fall down the same hole, do you think?
MICHAEL HUDSON: There really isn't any balance of payments theory because the whole discussion and the economic categories are as if all transactions involved actual monetary payments. And as I said, homeowners' rent does not involve a payment. Imports of oil from American affiliates do not involve actual foreign exchange payments. So people really don't discuss it.
The whole terminology and the categories that the economies use, such as GDP, I think, are not very helpful. What I've been writing about in the articles that I've done with Dirk Bezemer is recreating the GDP. Let's net out of GDP. How much is the actual product and how much is the economic rent? Not a product, but a transfer payment. And you find that all the growth in America's GDP is economic rent. It's not a product. The product, the productive sector, is declining. That's why America's deindustrializing, that we're in a rentier economy.
Well, you're never going to have the Western economies lead in recreating the statistics for GDP in this way. They want to say, well, look at how powerful America is, look at our GDP. But that's like you're saying, look at how much this little kid weighs. He outweighs the others, but it's all a tumor on his back. And so you could look at the GDP in America as a financial tumor.
The aim, I hope, that I would like to see in the BRICS countries is they avoid the financial tumor, the economic rent tumor, the landlord tumor, and the monopoly tumor. They avoid the whole thing, just as China said it was going to do at the very outset, and just as Adam Smith and the whole classical school of economists hoped that that would be what industrial capitalism would be.
But to do that, they have to go back to study the classical economists of the 19th century. I'm writing a book on that now, and it's probably going to take another half year for me to finish it. But that's exactly what I'm spending all of my efforts on at present.
KARL FITZGERALD: Well, thank you, Michael. This work is invaluable, and it's so good to have some of our Patreon supporters here. They make…
MICHAEL HUDSON:
I'm really grateful to you all for joining. I mean, this is why I'm writing. The whole idea is not just to sit and write my own ideas, but to have them spread out. And I hope you can do everything you can to keep continuing the ideas and somehow radiating them. That's the only way that you're going to have these ideas spread because it's not going to spread through the New York Times.
MATT CONNORS: That's for sure.
KARL FITZGERALD: All right. Well, thank you, Michael. Thanks, everyone. We look forward to seeing you back here in three months' time. We'll see if anything at all has changed or whether these same trends of greed and rentierism continue. So let's hope….
MICHAEL HUDSON: Spoiler alert, it's going to be the same trend.
There are always new twists and turns. And I guess we had to today take a step back. It's good that Karl asked me to focus on the balance of payments because that brought up all of how important the categories and the structure and the accounting format is and, ultimately, the tax and fiscal policy format.
KARL FITZGERALD: Well done, buddy. Excellent. All right. We'll see you in a few months.
MATT CONNORS: Thank you, everyone.
MICHAEL HUDSON: Thank you.
KARL FITZGERALD: There's cheers all around. Well done, buddy. Okay. See you all. Bye.
Transcription and Diarization: hudsearch
Editing: Kris Liti
Review: ced
Photo by Jonny Gios on Unsplash