Government Debt and Deficits Are Not the Problem – Private Debt Is

Michael Hudson: Why do they call for governments to balance the budget by pushing the economy at large deeper into debt, while trying to save the banks from taking a loss?

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

As the effects of the sequester agreement ripple through the American economy—massive cuts, that is, to social programs, and the military to some extent—one thing is clear: both sides—President Obama and the leadership of the Republican Party—seem to think that public debt is the biggest challenge facing the American economy. Well, our next guest begs to differ.

Now joining us in the studio is Michael Hudson. He was a Wall Street financial analyst, is now a distinguished research professor of economics at the University of Missouri-Kansas City. His recent books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us again.

MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you very much.

JAY: So I’m reading your material, and clearly you don’t agree that public debt’s the issue. Why? And if not, what is?

HUDSON: Well, the one kind of debt that really isn’t an issue is public debt, because there’s a great difference between public and private debt. Governments can own the printing presses. No government can become insolvent as long as its debt is owed in its own currency. And not only has the U.S. public debt gone down as a proportion of GAP [sic] and national income; it actually is financed very largely by the Federal Reserve simply printing money.

The pretense in Washington is that when government debt goes up, it’s because you’re borrowing from people and somehow crowding out other markets, and if you don’t borrow from the banks, if you print your own money, that somehow that’s going to create hyperinflation.

JAY: Yeah. I mean, the contention—the argument would be you can’t keep doing this without any limits to it, ’cause at some point people don’t want your currency anymore.

HUDSON: The United States has been doing it without limit and has no limit for the last—since the financial crisis of 2008.

Now, there’s something very interesting. All of the people in Washington—and I just came from a conference down there—they’re all talking about the debt that’s owed to the Social Security people, recipients, to the Medicaid recipients. They’re talking about—and the debt owed to labor and to most of the population.

And yet for every half a trillion dollar deficit that the government has spent into the economy, it’s created twice as much, $1 trillion, in the form of giveaway to the banks.

Not a single Republican, not a single Democrat has talked about what has actually increased the government debt by $13 trillion since 2008. And that is the bailouts of the banks, taking a Freddie Mae [sic] and Freddie Mac onto the public balance sheet for $5.3 trillion to bail out the banks from their reckless mortgage loans, the more than $2 trillion in quantitative easing when the Federal Reserve has just created credit to give to the banks to buy their junk mortgages and cash for trash.

So somehow there’s an idea that creating a credit to give to the banking system for President Obama to say, we want the banks to get lending again and we want Americans to keep borrowing—. They want to re-inflate the private debt market, the real estate market back to its previous unaffordably high levels.

JAY: So the point you’re making is you’re saying it’s okay to, quote-unquote, print money as long as it’s going to the banks,—

HUDSON: Yes.

JAY: —but you can’t print money—the reason I’m going quote-unquote is you don’t really have to print it. It’s just, like, tapping into the—

HUDSON: It’s all on a computer keyboard now. They don’t even have [crosstalk]

JAY: —tapping at the keyboard. But they won’t create that same kind of money in order to get the real economy going.

HUDSON: Right. Now, it’s just amazing that the people who were talking about let’s get the government debt under control are only then following it by saying, so cut back Social Security and squeeze labor and cut back social spending. Not a single person is saying, cut back the giveaways to the bank; stop trying to reinflate the market. To the Obama administration and the Republicans they’re saying more private debt is the solution.

Well, in reality, the problem is private debt, not the government debt. And that’s because unlike government debt, private debts have to be repaid. And there are only two ways of resolving a private debt problem for an economy as a whole. Either you do the American way, which is foreclosure and essentially foreclose on the real estate, or you write down the debts to the ability that can be paid.

Now, in the past, when you had a financial crisis, the banks would have to liquify the loans. They take the loss on the loans. The debts would be written down to whatever the market could afford. That was the old market solution to the debt problem. But now the government is saying, we cannot have a market solution to the debt problem because our constituency, our largest campaign contributors, the banks, would lose, so we have to keep the debts in place, and in fact we have to have even more debt to reinflate the real estate market so that the banks won’t lose any money on the fact that they’ve lent much too much money that cannot be repaid.

So you have something very interesting. The largest form of debt in America is real estate debt by homeowners.

When I first went to work on Wall Street in 1961, everybody had to—there was a rule of thumb on Wall Street. If you were taking out a home mortgage, they would limit it: the mortgage payment couldn’t exceed 25 percent of your income. That was the rule of the thumb. The banker would ask: how much money do you make? And they’d say, okay, you can afford to pay 25 percent of that in debt. Well, then the banks began to make larger and larger loans.

So last year, Sheila Bair, the head of the Federal Deposit Insurance Corporation, said she recommended limiting the amount of mortgage debt service to 32 percent of the loans.

Well, just a few months ago, the federal housing agency of the government said, okay, the government will guarantee nine out of every ten mortgages in America are now guaranteed by the federal housing administration to the banks for up to 43 percent of the income of the borrower to be paid to the banks as mortgage service.

Now, just imagine what that does to a family. If you’re paying 43 percent of your income to the banks for your mortgage, if you’re paying—some people are paying 25 percent of their income for student loans. But forget student loans. Let’s say only 10 percent of your income, above that, goes for other bank loans, credit card loans; you have 15 percent of your salary taken out for Social Security; and then you have income tax. Then you’re only going to be able to spend about 20 percent of your salary on the goods and services you produce.

JAY: And then they wonder why there’s no demand in the economy.

HUDSON: That’s exactly the point. It’s all about demand in employment. And what the people who are talking about the debt situation in Washington are leaving out of account is the employment. How on earth are Americans going to buy what they produce if they have to pay all the money to the bankers, and the bankers are using this money not to buy goods and services themselves, they’re using the money to make yet more loans to try to get yet more interest, and it’s [crosstalk]

JAY: Yeah, I’m seeing in my mail now I’m getting all these do you want a new credit card ads, or envelopes are coming through again; TV ads for credit cards are in full steam again. So I guess now that the banks have gotten a lot of free money from the Fed, they’re going to maybe perhaps start another credit bubble to try to get things going.

HUDSON: Well, that’s the government—the government policy doesn’t call it a credit bubble this time. They call it reflating real estate, and they call it a fiscal responsibility of balancing the budget.

But fiscal responsibility for the government debt is irresponsible for the economy, ’cause if the government doesn’t run a debt, if the government doesn’t run a surplus, then it’s not going to be pushing money into the economy. And if the government doesn’t use this opportunity that we’re having now to run a deficit and to—not to tax the Social Security recipients (this just occurred in January), not to add to the tax withholding, if it does what the Republicans want and runs a surplus or balances the budget, then all of the growth in the economy will be left to commercial banks to finance. The growth of private debt will grow to even more than the current 75 to 80 percent of family income—.

JAY: That’s even assuming the private banks are willing to loan, because part of the problem is they don’t want to loan because they don’t trust the economy.

HUDSON: But as long as the government treats the entire loan system like student debt—the government is now saying to the banks, loan whatever you want to students. We don’t care if they can’t pay. We don’t care if your loan is reckless. We, the so-called tax payer, will pay. And it’s not the taxpayer, of course; it’s the Treasury that just creates the money to pay.

So, first of all, there’s a pretence that the taxpayer has to pay when the government runs a deficit. The taxpayers don’t pay for the deficit; the government simply prints the money. A private family can’t do that. If you run a deficit and you’re a family balance sheet—.

JAY: But hang on. A lot of the money they’re raising is through Treasury bills, which is a form of a loan.

HUDSON: Yes.

JAY: They’re not just—and there is a rising public debt, and they are paying interest. It’s very, very low right now, the interest the American government’s paying on its debt, but that could go up. So it’s not this isn’t without risk of at some point paying serious interest.

HUDSON: Well, there are three sources that a government can borrow from. They act as if—the only source they talk about is borrowing from the capital markets, from the banks and the bondholders. But the government can borrow from the Federal Reserve, no interest whatsoever, and simply create the money. That’s what it’s done for the $13 trillion of bailout that it’s given Wall Street.

JAY: But they seem to believe there needs to be limits to that; otherwise, people lose confidence in the dollar. That’s at least the logic they say. And then they go out and they—but they—and they are getting almost interest-free money now for T-bills, so they are borrowing it.

HUDSON: But it’s—you’re absolutely right. That’s just what they’re saying. And how can they say that people are losing faith in the dollar when the dollar has continued to go up and up and up against the euro, against the pound sterling, against other currencies that don’t have the printing press? The reason people are putting their money into Treasury bills, the reason the Treasury bills, if you buy them, only yield half a percent or a quarter percent now, is because other countries have faith that America has the printing press and can print the money. So it’s exactly the opposite of the Zimbabwe syndrome. People talk about Zimbabwe, but only Zimbabwe can print its own money or America can print its own money.

JAY: But there’s clearly got to be some limit to how much you can do that. Otherwise, give everybody $1 billion and, you know, life would be fine. There are limits to this.

HUDSON: Yes, of course there’s a limit. The limit is so far not being reached because the rest of the world is imposing the very kind of austerity that the Republicans are trying to force on America. The rest of the world is saying, we want to be fiscally responsible even at the cost of shrinking our economies. So their economies are falling apart, and the savers in their economies are sending their money into the United States. So the reality is the opposite of the rhetoric that’s being used by the politicians.

JAY: But the argument they would give you is that if you start printing too much money, then people will lose confidence and they won’t keep doing—they stop buying American T-bills and they won’t be sending money here. Right now it’s the safe haven for global money.

HUDSON: There is indeed one entity that has been producing too much money, way too much money, irresponsibly, and that’s the banking system that led to the credit crisis. It was—the money that has been inflating prices has been the commercial banks inflating real estate prices, inflating education prices, inflating prices for stocks and bonds that have just had a huge bubble. So the inflationary money creation is by the commercial banks, not by the government. And nobody’s talking about that. Of course they’ve reached the limit. But it’s the banks that are creating money.

And somehow people have believed that inflation is very good if what’s going up is the price of your home. But then when the price goes down, what’s really gone up has been your debt, and what people thought was an asset boom in net worth and wealth creation (as Alan Greenspan said), it turns out to be debt creation. And all—they’re left with a massive debt. And it’s the private debt that is the residue of the bubble economy that is now the big problem in overlaying the economy. And instead of trying to resolve that problem by writing down the debts to the ability to pay, by writing down housing debts to the real value of the house, so the current mortgage, or writing it down to the one-quarter of your income that used to be normal and is normal in other countries—by refusing to roll back the public debt and write it down, the government is pushing austerity here, just exactly as the pound is doing in Europe, as the Eurozone is doing.

So all you have to do is look at Greece, Spain, and Ireland, and you say, is that going to be America’s future under this kind of pretence that government debt’s bad, bank debt is good, run into more debt, that will save us? It’s as if they believe the Americans can borrow their way out of debt. That’s the current policy.

JAY: Thanks for joining us, Michael.

And thank you for joining us on The Real News Network.