In a recent in-depth conversation, renowned economist Dr. Michael Hudson and host Lena Petrova discuss the troubling state of the global economy. Their dialogue highlights the risks of having financiers and conventional economists at the helm, particularly in the context of escalating inflation driven by geopolitical tensions like the ongoing U.S.-Iran situation. Hudson’s insights reveal that raising interest rates to safeguard creditors could inflict further harm on households and the broader economy. He also provides important context on how these hawkish policies are influenced by Austrian economics.
Originally published at the World Affairs In Context channel
Lena Petrova: Welcome, everyone! I appreciate you joining us today for a new episode of World Affairs in Context. It’s my honor to welcome back Dr. Michael Hudson, a prominent American economist, prolific author, former Wall Street analyst, and well-respected scholar. Dr. Hudson has written several impactful books, including Superimperialism, which examines U.S. economic dominance, Killing the Host, a critique of financialization and debt-driven capitalism, The Destiny of Civilization, which focuses on rising multipolarity, and J Is For Junk Economics, addressing misleading economic narratives. Thank you for being here, Michael!
Michael Hudson: Thank you for having me back. With Trump intensifying his threats against Iran, the stakes are high. Iran is poised to disrupt oil production among OPEC countries unwilling to act against U.S. aggression, potentially deepening the existing global economic depression.
Despite this turmoil, the stock market continues to rise along with interest rates, which cannot persist without a crash in real estate and equity markets. Many in the media and investing community mistakenly perceive rising interest rates as a mechanism to counter inflation, when, in fact, they only exacerbate the economy’s inability to cope with the unfolding crisis.
Lena Petrova: That’s intriguing. Recently reported inflation has surged, influenced by the U.S. and Israel’s military actions against Iran, with Americans now bearing the brunt of this interventionism. As energy prices soar, the Federal Reserve is signaling potential interest rate hikes. How did we arrive at the narrative that interest rates increase primarily due to inflation?
Michael Hudson: The justification often presented is one of protecting the purchasing power of creditors’ claims against debtors. However, this overlooks that many creditors reinvest their interest earnings, primarily in luxury goods and prime real estate, rather than the broader economy.
Critics as early as the 18th century pointed out that much of the money bondholders received was recycled into new loans. Moreover, while Austrian economists like Böhm-Bawerk argued that interest payments are a form of compensation for deferring immediate consumption, this perspective simplifies the complex dynamics of modern finance, ignoring the roles of financial sectors in influencing the real economy.
Lena Petrova: How does increasing interest rates impact employment and wage growth?
Michael Hudson: In the 20th century, for instance, Paul Volcker raised interest rates over 20% in the early 1980s to combat inflation linked to the Vietnam War’s fiscal policies. His intention was to curb wage growth by increasing unemployment, which he accomplished, leading to a significant economic downturn. Today, while the intent behind rising interest rates differs, the economic consequences remain the same, exacerbating risk across the economy, industry, and employment sectors.
Lena Petrova: You’ve argued that governments and central banks may feign reducing interest rates to stimulate economic growth, but the true goal is often to inflate asset prices for the benefit of the wealthiest. Can you elaborate on how this plays out?
Michael Hudson: The assumption that rising rates control inflation through reduced bank credit is deeply flawed. Banks primarily lend against existing assets, inflating prices for real estate and financial securities rather than generating new industrial growth.
This strategy has transformed economies into Ponzi schemes, as financing mechanisms require increasing debt levels, preserving the value of bank collateral, but at unsustainable costs to the overall economy.
Lena Petrova: This financial capitalism you describe bears a resemblance to a Ponzi scheme, doesn’t it?
Michael Hudson: Yes, in essence, a Ponzi scheme perpetuates itself through the influx of new participants while losing real economic value. The system relies on attracting more investors to keep paying earlier ones, which inevitably leads to collapse once that flow slows.
In today’s economy, the real estate and banking sectors have become over-leveraged, relying on borrowed funds just to meet interest obligations, making financial stability increasingly precarious.
Lena Petrova: Faced with soaring interest rates, how does this impact home buyers and the housing market?
Michael Hudson: Current interest rates, surpassing 5% for 30-year Treasury securities and nearing 7% for mortgage loans, are creating significant barriers for new home buyers. As homeowners feel increasingly trapped by rising costs and stagnant wages, many are unable to sell their properties without incurring losses, leading to a dangerous flattening of the market.
The combination of high interest rates and escalating costs threatens another real estate crisis, not driven by banking fraud but stemming from excessive debt burdens crippling the economy.
The Federal Reserve’s response to the 2008 financial crisis serves as a precedent for potential future actions. ZIRP was introduced to bail out banks while neglecting the broader economic fabric, enabling financial markets to boom while the industrial economy languished.
While this system has created a K-shaped recovery, benefiting the wealthiest, it has left countless households under crushing debt burdens, further weakening the consumer economy.
As the real estate and financial markets become increasingly vulnerable to external shocks, the looming energy crisis exacerbated by domestic and international tensions may push many companies to the brink.
Lena Petrova: The Treasury Department has announced a need for increased borrowing amid fiscal concerns. How will the rising national debt affect borrowing costs?
Michael Hudson: The idea that government deficits equate to household budget constraints is flawed. The Federal Reserve has the capacity to create money, allowing it to hold a significant amount of federal debt. This fundamental difference means that managing public finances cannot be compared to individual financial management.
By creating money to finance deficits, the government bolsters fiscal maneuverability, rather than being bound by the limitations faced by private entities.
Ultimately, public debate should shift from misguided comparisons to household finance, focusing instead on the systemic implications of government spending and the control wielded by financial sectors.
Lena Petrova: As we stand on the brink of a potential renewed conflict in the Middle East, what do you foresee for the U.S. and global economies amid an impending oil crisis?
Michael Hudson: We are likely heading towards widespread debt defaults, meaning property will shift from borrowers to creditors. The wealthiest will consolidate property ownership, often to the detriment of wider economic stability, reminiscent of past financial crises.
Lena Petrova: Professor Hudson, thank you for sharing your invaluable insights today. It’s always a pleasure to have you on the show, and I hope to welcome you back soon.
Michael Hudson: Thank you, Lena. This topic is indeed critical and worthy of ongoing discussion.
