Michael Hudson & Steve Keen to the David Graeber Institute. How the global crisis will unfold

(Bolding is mine and this is a must read!  Here is a crux:  Trump clearly intends to deliberately create a world economic crisis lasting at least four years, but read and contextualize.)

NIKA

Hello, everyone. We are very happy to invite back Michael Hudson and Professor Steve Keen to the David Graeber Institute. Steve Keen is an economist and author, one of the few who warned about the 2008 crisis in advance. He is known for his critique of mainstream neoclassical theory and his models of debt deflation and financial instability. Michael Hudson is an American economist and historian of debt at the University of Missouri, Kansas City. His work on finance, rent, and deindustrialization deeply influenced David Graeber’s own thinking on empire, tribute, and the politics of debt.

Today we will explore the deepening crisis and possible scenarios of how it might unfold, specifically in the context of the ongoing war, which increasingly resembles the Soviet invasion of Afghanistan — to me personally. My question to Michael and Steve is: inflation, hyperinflation, or deflation? Which scenario do they think will happen? We start with Michael Hudson.

MICHAEL HUDSON

If you look at the stock and bond markets today, the world is expecting that the war in Iran is not going to last more than a month or so.

It’s a world war because the entire world is dependent on oil and liquefied natural gas — for fertilizer, energy, electricity, heating, cooking, glassmaking, and helium.

Helium and natural gas were provided to much of the world by Qatar, as part of the Arab OPEC countries. But their billion-dollar installations to liquefy natural gas — which took four years to build — have just been bombed by Iran, because Qatar is hosting US military bases used to bomb Iran.

Iran has said: if you try to destroy our oil industry, we will make sure the entire world oil, gas, helium, and energy industry shuts down and causes a Great Depression — as a result of oil prices doubling. That will trigger a balance of payments crisis for America’s allies, not only in Europe, but in Korea, Japan, and the Philippines, which are already taking emergency measures.

Trump clearly intends to deliberately create a world economic crisis lasting at least four years — as World War I and World War II did. He thinks this will put America in the driver’s seat: America is self-sufficient in gas and oil. Other countries will have to buy from us. And if they do, we’ll require them to impose sanctions against Russia, Iran, and anyone else we’ve designated as an enemy.

Meanwhile, the ten-year US Treasury bond rate has gone over 4.5%, and the 30-year rate is over 5%. Wall Street has figured that  if oil export prices double, that’s inflationary. But all of this is junk economics.

Of course oil prices are going up — so much so that Asia and the Global South will look like Germany after the US stopped it from buying Russian gas. Germany’s glass industry shut down. The fertilizer industry shut down. The automobile industry is cutting back — Mercedes and others are moving to China.

Trump’s tariffs on steel and aluminum are raising the price of agricultural combines and tractors. Farmers in the US face the same problem as farmers everywhere: higher fertilizer costs, higher harvesting equipment costs, higher gasoline costs.

What Wall Street doesn’t take into account: Yes, energy and energy-related prices are going up. But this will shut down industries and cause a huge depression. Layoffs. Governments will have to divert revenues to help families afford electricity and gas — which means cuts to social spending. Unemployment.

People getting poorer and poorer. That’s not inflation. That’s deflation.

Prices will rise for oil, steel, aluminum, fertilizer, gas, and helium, while other prices in general fall. We’re facing the biggest collapse since the Great Depression.

That is the deliberate aim of US foreign policy. They’ve gamed it out. They think that no matter how much this hurts the American economy, it will hurt labor by lowering its wages, by causing unemployment and making people desperate. It’s a godsend for the class war.

When companies have to cut production, how will they pay their debts? Workers — euphemized as “consumers” — are already paying over 30% interest on credit card fees and penalties. Student debt defaults are rising. Medical debt is the fastest-growing cause of bankruptcy in the United States. Mortgage rates have gone way up.

This is a new form of class warfare. It’s not employers against labor, because industry and labor are suffering together trying to survive. It’s the financial class against the rest of the economy.

Finance, insurance, and real estate — the FIRE sector — is where almost all US GDP growth has occurred, while the real economy has shrunk.

This actually is  a replay of debates from the mid-eighteenth century: How was Britain going to deal with the fact that creditors spend their money on luxury imports rather than domestic production? London was getting rich, not the rest of England.

NIKA

Michael, I want to include Steve. What do you think about Michael’s description?

STEVE KEEN

If there’s one person I agree with, it’s Michael. When you first asked me about this, I said: inflation initially, then deflation. Michael has given the historical context. Let me share some statistical elements.

The absolute foundation of the economy is energy. What I’m showing is energy use in petajoules on the left axis, and gross world product on the right. The two lines match almost perfectly. And crucially: it’s one-for-one. A 5% fall in energy produces a 5% fall in gross world product.

What’s happening now: roughly 20% of the world’s liquefied natural gas has been cut off. Together with the loss of oil from the Strait of Hormuz and other supply disruptions, we could be looking at something of the order of a 10% fall in global energy — which implies a 10% fall in GDP.

My shorthand: labour without energy is a corpse; capital without energy is a sculpture.

Now, that collapse is going to raise oil prices — conventional thinking agrees on that. But we’re also in a financialized economy. And this is where Michael and I differ from mainstream economists, because they completely ignore private debt. They obsess about government debt. They don’t even look at private debt.

In America right now, private debt is around 140% of GDP — still enormous. That’s the burden Michael was talking about, on households and corporations. If they find they can’t make as much profit because of higher oil prices, if unemployment rises — they won’t be able to service that debt. And what you’ll likely see is the same as 2007-08, only on steroids: a complete collapse in credit-driven demand.

Workers can’t pass on oil price increases into higher wages. Industrial capitalists can’t necessarily pass them on either. So what happens? People cut their prices, hoping to keep customers. But their neighbour is doing the same thing. Everybody is trying to pay down debt — which destroys money, slows the economy, and causes deflation.

Irving Fisher said it beautifully in the 1930s — what I call Fisher’s paradox: the more debtors pay, the more they owe. The real burden rises as the price level falls. That’s what leads to Great Depressions.

And here’s the horrific part: if fertilizer supply falls by 20%, food production probably falls by more than 20% globally. That means enough food for about 6 billion people — and there are 8 billion. We may be looking at a global famine this year.

Just as the anarchist who pulled the trigger that killed the archduke had no idea what he’d set off — I think Trump is the same. He has no idea of the consequences. He’s behaving like a mafia boss, squeezing money from ups and downs in the market. But the rest of us will live with the unintended consequences.

And if any world leaders are watching this — which I doubt — get rid of Trump. Stop this. America has to concede defeat and step back, to give us a chance to rebuild the world’s physical infrastructure before global famine sets in.

MICHAEL HUDSON

I want to pick up on Nika’s question about hyperinflation, since deflation and hyperinflation may go together. When countries cannot pay their foreign debts — and the Global South has enormous foreign debts falling due, all in dollars — what do they do? The IMF says: impose austerity. Make labour poorer and poorer until you can pay the debts. That’s today’s  junk economics, and it goes back to David Ricardo’s bullionism.

Every hyperinflation in history has been caused by the need to pay foreign debt.

Germany’s hyperinflation in the 1920s wasn’t caused by government spending on labour or social programs — that’s the myth. It was caused by printing Reichsmarks to throw onto the foreign exchange market to pay reparations. Chile and France had the same hyperinflation pattern.

And this reality is not taught in academic economics. So the graduates who join central banks around the world don’t understand the difference between hyperinflation, regular price inflation, and deflation. Steve and I are essentially persona non grata in polite circles, because what we’re spelling out threatens a very large power grab being put in place much like the Asian balance-of-payments crisis of 1997-1998.

NIKA

It’s interesting, Michael — I just realized Russia also owed a lot, because Yeltsin agreed to pay all the Soviet Union’s foreign debts. And oil was maybe $10 a barrel at the time. I never thought hyperinflation and deflation could happen simultaneously. But maybe that’s exactly what was going on in Russia in the nineties.

STEVE KEEN

Yes — Russia didn’t have much domestic debt, but had enormous foreign debt. And there are arguments — which I haven’t fully researched — that the Weimar hyperinflation was partly deliberate: it wiped out the debt that American speculators had bought in German bonds. So it had a horrific cost, but a beneficial side effect: Germany’s foreign debt was eliminated.

And one thing Michael and I keep having to correct: people say the Weimar inflation caused Hitler. No. Hitler was in jail during the Weimar inflation. He came to power ten years later. What brought him to power was deflation — the cascading collapse of 1932-33, when prices were falling 10% a year. That’s what leads to social breakdown.

We are going to see a catastrophic year. Even setting aside the debt dynamics, losing 10% of global energy alone implies a 10% fall in GDP. And people are going to starve, because you aren’t eating vegetables — you’re eating oil. The Haber-Bosch process, invented in World War I, uses petroleum to create nitrogen fertilizers. Without it, the planet’s carrying capacity is about 1-2 billion people. We currently have 8 billion. If we lose 20% of global fertilizer production, we lose food for 20% of the planet. We have never seen a global famine before. We’ve seen localized famines. This would be something else entirely.

MICHAEL HUDSON

To clarify the chronology Steve mentioned: the financial economy collapsed in 1929. The world moved into depression by 1931. In 1931, the world finally declared a moratorium on Europe’s allied debts to the United States and on German reparations. That moratorium — the recognition that the debts couldn’t be paid — came before Hitler came to power. The deflation that followed was what created the political conditions for his rise.

STEVE KEEN

And this connects to what neoclassical economics gets fundamentally wrong. They model the economy as a single good, produced by combining labour and capital — with no natural resources, no energy input at all. They’re not even aware that you cannot produce output without energy. They don’t know that helium can’t be stored — it evaporates through any container in a month or two. So as soon as that supply is cut, those industries break down.

Forty or fifty years ago, even the economists we criticized for their equilibrium fetish at least had input-output matrices. They understood: to produce this, you need these inputs. The morons who took over since — with their Dynamic Stochastic General Equilibrium models — have a single-good, no-natural-resources model of reality. They don’t know that going to war over the Strait of Hormuz cuts off a third of the world’s fertilizer supply. They’re finding out the hard way.

This is why I think it’s idiocy rather than conspiracy.

The people making these decisions don’t realize you need physical inputs from the natural world to produce goods and services.

MICHAEL HUDSON

Any economic theory has a political implication. Equilibrium theory serves those who want government to play no role: let the financial sector regulate markets, let wages fall to whatever equilibrium the one percent demands. The reason Steve and I support debt cancellation isn’t abstract — it’s because canceling the debts cancels the savings of the creditor class. It ends the financial class’s stranglehold on the economy.

China has done what the West failed to do. It treats money and credit as a public utility. Almost 80% of credit in the US and Britain is created to buy real estate — inflating asset prices, inflating debt, enriching mainly the financial class. China’s People’s Bank creates money to finance infrastructure, industrial investment, high technology. It doesn’t have a financial class. That class fled to Taiwan or the West after Mao’s revolution.

The historical precedent goes back three thousand years. From Sumer, Babylonia, the ancient Near East — the Bronze Age to the first millennium — when debts couldn’t be paid, they were canceled. The laws of Hammurabi ruled that if there’s a flood or drought and crops fail, agricultural debts are canceled. Because the alternative would have been that the debts accumulate to a creditor class that becomes an oligarchy foreclosing on the land and reducing the population to debt bondage. That’s what happened to Rome. And that same dynamic is what the world is entering now.

That’s what my book The Collapse of Antiquity is about. China has managed to avoid letting a financial class take over.

STEVE KEEN

And one reason is that China learned from Marx, not from neoclassical junk. Marx, in Volume III of Capital, chapter 33, described the financial class as “roving cavaliers of credit” who pay high interest out of other people’s pockets while living in grand style on anticipated profits. He described the credit system as giving this class of parasites “the fabulous power not only periodically to spoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it.”

That awareness has seeped into the bones of the Chinese Communist Party. Because the neoclassical theory completely ignores finance, the West has let the financial system take over the economy. That’s why Western economies are in the state they’re in.

MICHAEL HUDSON

And Marx was anticipated by Ricardo, who showed that if landlords take all the rent, there will be no profits left for industrialists — because they have to pay workers enough to buy food whose price is inflated by rent. Marx extended this concept from land rent to monopoly rent to financial rent. That was the analytic and fiscal project of classical economics: to identify and eliminate unearned income. Adam Smith and John Stuart Mill have been called socialists for wanting to prevent a financial oligarchy.

Then at the end of the nineteenth century came the counter-revolution. Neoclassical economics denied the very concept of economic rent — because rent, in the classical sense, is income without playing a productive role. Neoliberalism was built on this denial that rentier income was unproductive. And so today we have economists who don’t even include debt in their models — because, they say, “one person’s debt is another person’s asset.”

What they don’t say is: the debts of the 90% are the assets of the 10%.

And that 10% of credit grows exponentially, regardless of the economy’s ability to produce anything or pay anything back. That’s the blind spot of academic economics.

And yet China still sends students to the United States to study economics. Michael taught at Peking University for two years. His students told him: the government and companies prioritize hiring economists trained in the United States over those trained in China. That’s the contradiction China still hasn’t fully resolved.

NIKA

But how is China different? They were stockpiling everything — oil, grain. They have electric vehicles. They’re in a very different position. Michael, how do you think China will benefit from this crisis? Might they simply take over?

STEVE KEEN

China apparently has one and a half years of grain in reserve. So even if there is a global famine — and I think there will be — China can still feed its people. They’ve also put more energy than any other country into transitioning away from fossil fuels: solar, nuclear, wind.

And there’s a deep cultural reason for all this preparation: every Chinese schoolchild learns about the Opium Wars. They know that Britain, unable to produce anything China wanted, forced China to import opium to balance trade — and that this humiliation defined the nineteenth century. Chinese children learn that. American children don’t even know what the Opium Wars were. So China’s drive for self-sufficiency isn’t just policy — it’s a multigenerational response to colonial exploitation. Because they’ve made that preparation, they may avoid much of what’s coming for the rest of the world.

NIKA

Can you explain — in words that I can actually understand — how deflation and inflation can happen at the same time? I think many people find this genuinely confusing. Especially when one part of the world, China, looks like it will do much better than everyone else. Suddenly we don’t have a connected world anymore. We have this split. And in our part, we’ll have this strange beast — deflation and inflation together.

STEVE KEEN

The basic point is this: mainstream economics doesn’t understand the economy’s dependence on energy. Destroying energy supply, fertilizer, and critical production inputs will cause a plunge in global physical output — that alone. And they don’t understand private debt. They obsess about government debt. By ignoring private debt, they can’t see the deflationary follow-through — when so many people and corporations are unable to service their debts, that destroys money, shrinks the economy, and pushes prices down.

I have to run — third podcast of the day. Great to see you, Michael.

MICHAEL HUDSON

Steve has said it exactly. Deflation and inflation at the same time. What’s being inflated is energy prices. What’s being deflated is the rest of the economy — which needs that energy, and can no longer afford to operate.

NIKA

Looks like a scary year ahead. Thank you both for coming. We had about 250 people watching live on Twitter — that’s good. Thank you so much, Michael. Can we continue talking after this?

MICHAEL HUDSON

Yes, yes. We just ran out of time.