Money is Debt

Review of Dr. Hudson's book The Bubble and Beyond

Economists like to treat money in an economy like a politician treats air in politics. It is absolutely necessary to the exchange of ideas but plays no fundamental role in history. Dr. Hudson’s book, The Bubble and Beyond, is an attempt to disabuse you of that idea.

Money is fundamental to an economy. How it comes into existence, how much of it there is in circulation relative to how much is required to clear the markets of goods and services, how interest rates are established and how money is taxed determine the winners and losers in an economy. Money makes the economy more like Mt. Kilimanjaro than a level playing field.

In the economy that we have created all money is debt. All debt must earn interest, otherwise it is not debt. This is because we have chosen to have a fractional reserve banking system and a central bank that uses its monopoly power to set interest rates without regard to market conditions. Economic rent is the profit one earns by simply owning something. Banks (especially central banks like the Federal Reserve) extract economic rent from the monopolistic privilege of creating money from nothing. In this system it is a tautology that total savings equals total debt since savings and debt are the same thing. From this we can infer that the total amount of money equals the total amount of savings equals the total amount of debt and the terms savings, debt and money are synonymous.

The interest on this debt is exactly equal to the profits realized from commercial enterprise, rents extracted from the use of land and various forms of monopoly privilege.

bubbleBecause of compounding the interest on the debt grows much faster than the physical productive capacity of the economy to generate revenue. Eventually there comes a point where the economy can no longer service the debt (pay the accrued interest). This situation is delayed by financial asset inflation (stocks and real estate) generating capital gains coupled with deflation in the nuts and bolts sector of the economy which facilitates generating revenue from the asset stripping and looting of the physical economy. This further decreases the revenue generated from the economy’s productive capacity. The end result is that the economy slips into permanent debt peonage, a kind of financial feudalism, in which Gross Domestic Product and the standard of living continually decline.

The historical alternative is WAR. War revitalizes the revenue generated from the physical productive capacity of the economy with government contracts for the implements of war while putting the economy further into debt. Exactly how this will play out in an economy that has a vanishing tax base and has already spent the accumulated surplus of the last century preparing for war is yet to be determined but the likely outcome is financial collapse and military defeat.

A third alternative is to switch from ‘trickle down’ economics to ‘percolate up’ economics by transferring money from the 1% to the 98%. This can be done by increasing Social Security benefits paid to current recipients while removing the cap on income subject to Social Security taxes and providing a minimum guaranteed income to all U.S. citizens financed by a financial transaction tax and a steeply progressive income and estate tax. The purpose of this is to put money into the hands of people who will spend it thereby creating the demand for goods and services that will provide the investment opportunities for tomorrow’s entrepreneurs. Regrettably the powers that be would rather eat their young than even consider such a proposal.

I am only half way through this enjoyable and informative book so I can’t tell you Dr. Hudson’s solution to this quandary although I suspect that it has something to do with taxing economic rent.

Buy the book and find out what this is. I highly recommend it.

Paul Majchrowicz served in the US Army from 1966 to 1968. He graduated from the State University of NY at Buffalo in 1972 with a BA in Philosophy and worked in the insurance industry until he retired in 2000. Read other articles by Paul.