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Michael Hudson on the erosion of democracy

Michael Hudson was on RT’s Capital Account with Lauren Lyster, speaking about the loss of democracy that has accompanied the global financial crisis. The video is below, but recently Michael also wrote two articles for the Frankfurter Allgemeine Zeitung in which he gives one a more in depth view of his perspective.

His account is predicated on a historical understanding of credit in the context of recent creditor-favouring economic policies. The outcome can only be a debt deflationary one as creditors seek to get "paid in full". I take a less ‘moralistic’ view on economic policy but I agree with the framing of creditor-centric policies leading to debt deflationary outcomes, where a different policy stance focused more on full employment would be less pro-cyclical and therefore less deflationary. See my thoughts from "The political economy of the European sovereign debt crisis" this past summer and "More on the political economy of the European sovereign debt crisis" from last month.

My conclusion in June was this:

The point for policy makers is to socialise enough of the bank losses onto taxpayers in order to recapitalise the banks, survive the crisis and maintain the status quo. Taxpayers will accept this if the economy is robust enough. As an investor, you should see this as an uncertain political situation. more than most. That means avoiding periphery sovereign debt until the situation stabilizes.

Will the current fix now being implemented stabilise things? I believe they will to a point, as I indicated when discussing more on what I think will happen in Europe last week. Willem Buiter thinks so and seems to suggest buying peripheral debt is now a go in a piece from earlier this week. However, Buiter also believes there is no politically feasible route to sustained growth for many years to come in the euro area, the US or Japan. And I agree with him on that point. Commenting on his view, earlier in the week, I concluded writing "over the medium-term, absent debt deflation dynamics, cuts will yield results if they are politically sustainable. This is a big if."

That brings us back to Michael’s view of eroding democracy to repay creditors in full, which is what we are now seeing.

Here’s another view that Tyler Cowen frames for us as the German view:

When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word.

2. When it comes to debt, the periphery countries simply don’t want to pay up. Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece. It’s amazing how many people won’t come out and utter or recognize this simple truth. Italy for instance doesn’t have to make a huge fiscal adjustment.

3. It is a privilege for a poorer country to be in an economic union with Germany, France, the Netherlands, and other wealthy EU countries, just as you might feel privileged to co-author a piece with a great scholar. If the poorer countries have to engage in some economic sacrifice to stay on good terms in such a union, so be it. There is also such a thing as catch-up growth, and it is robust in the broader world today, at least if a country is willing, like the East Asian countries have been, or for that matter Turkey and Brazil these days. The sacrifices being asked from the periphery countries are quite small in comparison.

4. We did a deal with East Germany, and the terms of that deal violated a lot of precepts of economic theory. It even included an overvalued currency for the poorer region and a long period of adjustment. Yet we insisted up front that all dealings be done on the terms of the more successful region and culture, with very little compromise. This transition, for all of its short-term flaws, will go down in the history books as a great long-run success. In part it succeeded because it was all done on the terms of the values of the successful nations of northwestern Europe. (I am surprised that this angle is not discussed more in the press, given Merkel’s own story.)

5. Economic unions do not succeed by lowering all members to the standards of the economically less successful and less responsible members.

6. If it wasn’t for us, would Greece, Spain, and Italy (plus Ireland and Belgium) all currently have technocratic, reform-oriented governments as they do?

7. If you are trying to estimate the future economic fate of a country, shouldn’t you put aside a bit gdp drops and the like, and instead look at what do people in that country esteem and which values are transmitted by their system of education? Do read the Estonia story at the previous link.

8. The German emphasis on rules, and the attachment to the idea of an abstract order, worthy of loyalty in its own right, above and beyond any immediate personal connection or loyalty, is exactly what makes them able to run such a successful economy and successful social welfare state. When it says “Don’t Walk,” they don’t cross the street, even if no cars are coming. An economic union should be set up to support those principles, not tear them down, and social democrats should value this most of all.

Even if you disagree with these perspectives, they shape real world behavior. And might you still bet on a country which stuck to them? Be honest now.

This last part is the key: these are indeed the views shaping real world behavior and that’s why we are seeing this erosion of democracy to promote a creditor-centric policy. Remember, "the debtor is the one breaking the agreement and breaking his word".

I anticipate this policy orientation will continue until it either succeeds or something breaks. Over the short-term, things have and will continue to stabilise. Over the medium-term, debt deflation dynamics will be a factor. Likely, something will break as I believe the current policy direction in Europe is unsustainable politically.

So that’s my piece. Here’s the video.

P.S. – Also see Jack Straw’s recent piece from the Telegraph on the same issue: The arrogance of eurozone elites could kill the European Union

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

6 Comments

  1. 2memrory says:

    The principles espoused are worthy but the framing of the issue seems misplaces. This is not about a country not paying its debts (granted this is a part of it) but of banks unable to hide or refinance their losses and unable to pay debts. Miraculously the financiers have managed to enthrall governments to socialize their private losses and load up public debt to crisis levels. The “moral hazard” of lax regulation, financial slight of hand, and crony capitalism brings us chaos. Taxpayers then were the ones given the rotten bank bills to pay and their public debts inherit the insolvency of the banks. Then the financiers demand austerity and the debase political power through “crisis management” (or stage a vitual coup d’etat so they can run things and get repaid. We never learn a thing.

    • Right. Its all about the Credit Writedowns. They can and should be taken because too many creditors trying to extract too much from debtors that can’t pay leads to debt deflation and LESS payment in the end.

      And no we never learn a thing. It seems a lot of people must experience it first hand rather than through stories and legends from 80 years ago.

  2. dvdhldn says:

    Quite a good piece from the weaselly Straw. Personally I think the bumbling Boris Johnson put it well “we are in danger of saving the cancer and not the patient”

  3. Re: moral equivalence: it takes two to tango. When a creditor and a debtor enter into a loan agreement that they both know the debtor will most likely not be able to pay, that agreement and that debt constitute fraud and both are at fault. If the creditor then contrives to transfer the debt obligation to an innocent third party, that makes matters worse still…so if we are weighing moral responsibility, the creditors are if anything coming out ahead (which is to say, more culpable).

    In any event, the morality is all very interesting to discuss, but the immutable bottom line—as Michael Hudson has pointed out—is debts that can’t be paid won’t be paid.

    • Very good points all around. And I assume by third party you mean taxpayers.

      This reminds me of the debate on cramdowns in the US. Cramdowns are a way of apportioning losses and moving on. What we need are writedowns and an equitable split between creditor and debtor. If the debtor can’t pay, there is zero reason taxpayers should before the creditor’s own shareholders and debtholders.