Michael hudson: I was referring to debt deflation. As the debt overhead grows exponentially, it siphons off more and more money from being spent on production and consumption. For the financial sector, this is applauded as being the miracle of compound interest. The volume of loans keeps on growing by purely mathematical principles, without much regard for the economy's ability (or inability) to generate a large enough surplus to pay. More and more wages, corporate profits and tax revenues have to be earmarked to pay creditors. These creditors then turn around and lend out their flow of debt service to yet new borrowers. This involves finding more and more risky markets, while the debt becomes heavier and heavier. To pay the carrying charges on these debts, wage earners cut back consumption while debt-wracked companies cut back on new capital investment, research and development. State, local and federal governments also pay interest on their deficits by cutting back on spending to maintain infrastructure or improve services. These cutbacks shrink the domestic market, leading to lower investment and hiring. All this is applauded as the magic of the marketplace in allocating resources. But it's the financial sector that is doing the applauding, not industry. MW: Does that mean that there will be sudden jolts to the system like a major bank--perhaps Citigroup or Merrill---keeling over and sending the stock market crashing? Michael Hudson: The economy reaches a Ponzi stage where banks lend their customers the interest to keep payments current. More and more mortgage loans have been structured this way in recent years. When creditors stop making these loans, there's a break in the chain of payments and defaults spread, crashing markets. MW: Is the dollar doomed, or can the US lower its dual-deficits (fiscal and trade deficits) and continue to attract foreign capital in the future? And if the recession takes hold, business slows and unemployment rises, would that strengthen the dollar? Michael Hudson: I assume that by doom you mean that the dollar will continue to sink against foreign currencies, while price inflation eats away at what wages will buy. The idea that a worse economy will be self-curing is IMF anti-labor ideology and Chicago School propaganda. This is indeed what Nobel Economic Prizes are given for, I grant you. But it's Junk Economics. A falling dollar threatens to become self-reinforcing. For starters, dollar-denominated stocks, bonds and real estate are worth less and less in terms of euros, sterling or other harder and foreign currencies. This doesn't provide much incentive for foreigners to invest here. And if we go into a recession (not to speak of depression), there will be even fewer profitable opportunities to invest. Meanwhile, U.S. import dependency will continue to rise as the economy de-industrializes ­ that is, as it is further financialized. U.S. overseas military spending will throw yet more dollars onto the world's foreign exchange markets. So a weak economy here does NOT mean that the dollar will strengthen; it means we have a bad investment climate! Austerity will make us more dependent on foreign countries. For a foretaste, just look at what has happened when the IMF has imposed austerity plans on Third World debtors. And remember, last time when Robert Rubin was given a free hand, in reforming Russia under Clinton, the result was industrial collapse and bankruptcy. full _http://www.counterpunch.org/whitney07012008.html_ (http://www.counterpunch.org/whitney07012008.html)
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