Geopolitical Economy Report
Can the US central bank, the Federal Reserve, really stop inflation? Or is it more committed to inflating asset price bubbles for the rich?
Political economists Radhika Desai and Michael Hudson discuss the Fed’s monetary policy, and its implications for average working people.
You can find more episodes of Geopolitical Economy Hour here.
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(This transcript has been edited for clarity and concision, by Zach Weisser.)
RADHIKA DESAI: Hello and welcome to the 32nd Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I’m Radhika Desai.
MICHAEL HUDSON: And I’m Michael Hudson.
RADHIKA DESAI: And working behind the scenes to bring you our show every fortnight are our host, Ben Norton; our videographer, Paul Graham; and our transcriber, Zach Weisser.
Another August, another speech by the Federal Reserve Chairman at the Jackson Hole Conference, where top central bankers and economists go to hobnob. So what’s new?
Well, plenty. The last two speeches by Chairman Jerome Powell in 2022 and 2023 had markets nose-diving.
In 2022, appearing contrite about having considered inflation transitory, Powell signaled that the unrelenting rate rises and promised to do all it takes to slay the dragon of inflation.
Markets, high as they have been on the easy money of recent decades, went into severe and violent withdrawal.
The following year, having brought rates up from a low of 0.25 percent to 5.5 percent, Powell now promised to keep them higher for longer, as he put it, because that is what he considered necessary to quell the still-persisting inflation.
Of course, markets plunged again. This time, however, the market reaction has been very different.
They read Powell’s speeches signaling the end of high interest rates and the beginning of a series of rate decreases. In particular, it focused on three claims he made.
First, that inflation was on a sustainable path back to 2 percent.
Second, that the labor market had cooled considerably from its former overheated state, thanks not to elevated layoffs, as is typical in the case of an economic downturn, as he put it, but he said it was due to a substantial increase in the supply of workers, so more people coming back into the labor market, and a slowdown in the previously frantic pace of hiring.
Thirdly, therefore, he now claimed his dual mandate to keep inflation low and employment high required him to consider lowering interest rates.
And what was the result? It was what Bloomberg called an all-conquering rally in asset markets.
Of course, it helped that the August meeting was preceded by a bad jobs report, which itself was followed by an even worse correction to the jobs report that showed that the U.S. labor market was doing much less well than in previous months, and over the past many months, in fact. So this helped, of course.
Now, what we have is a situation in which markets have shown so much enthusiasm for what it sees as an imminent decline in interest rates that it is almost certain that although Chairman Powell did not promise rate decreases, he said, look, I’m going to look at the data, the incoming data, and then decide what to do.
Nevertheless, it looks highly unlikely that rates will not be decreased. The only question is whether they will be decreased by a quarter basis points or 0.25% or a hefty 0.5%.
So the question then arises, has Jerome Powell accomplished the near impossible? Has he quelled inflation? Has he done it without inducing a recession? Has he performed as the pilot of the aircraft of the U.S. economy, the metaphorical soft landing?
Let’s examine this question and a whole bunch of other associated questions with Michael. Why don’t you start us off by giving your general observations on the matter?
MICHAEL HUDSON: It”s always hard to predict what somebody is going to do if they don’t really know what they’re doing. But at least we know how Powell and the Federal Reserve bankers think.
We’ve criticized the Fed’s anti-labor bias before. And the great worry is not inflation, it’s rising wages.
You said that the purpose is to prevent inflation and support employment.
In reality, we know that ever since Paul Volcker, it’s been the opposite. He’s worried about rising wage rates, and he blames wages for the fact that prices have been going up.
The problem, he says, is that too many jobs are available.
What’s surprising is the number of jobs is much greater than the number of workers. And the reason is that many workers have to work two jobs and sometimes three jobs just to be going.
Powell didn’t really know how to read the employment figures and understand that the number of jobs are growing without employment growing at all.
The cause of the inflation was, it’s called profit, rent-seeking, profit inflation, not really wages.
The Fed attributes all inflation to labor getting too much money. And that’s sort of his guide all along.
The Fed continues the role for which it was founded in 1913, to serve the banks by serving Wall Street. It pretends to the health workers and the 99% by keeping inflation down.
But the real aim is to keep asset prices up.
Powell and the Fed are concerned with inflation overwhelmingly. But it’s the prices of real estate, the prices of stocks and bonds that they care about. That’s why they had quantitative easing in the first place, but he doesn’t talk about that at all.
What do we have to say about the fact that the Fed’s job is to increase inequality by raising asset prices, raising stock and bond prices, keeping wages low, and becoming part of the problem instead of the solution?
RADHIKA DESAI: Well, exactly, and you prompt me to make a number of points.
You rightly point out that people should know that when the Federal Reserve was originally founded, it had a single mandate, which was to keep inflation low.
The [current] dual mandate is a result of legislation in the late 1970s. That legislation essentially told the Federal Reserve that it should also make “keeping employment levels high”, that is to say, “keeping unemployment low” another one of its equally important mandates.
Now, on paper, that is what the Federal Reserve is supposed to do. Every time any chairman of the Federal Reserve since then has opened his mouth, they have always said that they are mindful of the dual nature of their mandate.
But in practice, what we see is that the Federal Reserve only cares about one thing.
Just consider the very simple fact that no sooner was this act passed and the Federal Reserve given its employment mandate, then Paul Volcker prioritized the reduction of inflation to the extent that he constricted money supply.
He said, I don’t care what effect this has on interest rates, I’m going to let them go up as high as they like.
They went up really high. Here is a chart depicting just how high they went:
What you see here is that the highest point ever reached was in the late 70s and early 80s, right after the legislation to give the Federal Reserve its employment mandate was passed.
Essentially, the Chairman of the Federal Reserve, Paul Volcker is saying he does not care about that mandate.
You have here the famous double dip recession, a recession that had one dip, and then another dip, these shaded areas are, of course, the recession.
Basically, right after the mandate was given to the Federal Reserve, it completely forgot about it and essentially focused on quelling inflation.
Now, the second thing you have to say, and again, I completely agree with you here, Michael, is that, if all you have is a hammer, then everything looks like a nail, right?
The Federal Reserve has only one policy, which is essentially manipulating interest rates: increase interest rates, decrease interest rates, tighten or ease monetary conditions.
The Federal Reserve has only one instrument with which to deal with inflation, and that is manipulating interest rates. In the case of high inflation, they will let interest rates go up.
The purpose, as you rightly say, is to induce a recession in such a way as to kill off demand by killing the economy for a short while, hoping that it will recover.
When Paul Volcker induced the recession, the United States economy was in a relatively healthy state.
More than 40 years later, after 40 years of neoliberalism have continued to weaken the productive economy and strengthen the financial economy, the productive economy is even less capable of taking the burden of these high interest rates.
MICHAEL HUDSON: It’s good that you showed the long-term chart. What that chart shows is that the Fed gets everything wrong about the relationship between interest rates and employment.
Lower interest rates are supposed to spur employment on the theory that somehow the banks are lending money to companies to employ people.
But the zero interest rate policy (ZIRP) since 2008 is what enabled private capital to take over corporate industrial firms.
What do they do? They begin downsizing the labor force to increase productivity. They close them down, and they end up leaving Sears-Roebuck and the other firms as bankrupt shells, as we’ve discussed in a number of our programs before.
Finance has led the whole American economy down the path of deindustrialization, largely by the zero interest rate policy.
It didn’t help labor at all. It helped deindustrialize the country, and industrial labor employment has plunged.
Likewise, the high interest rates that you pointed to, they’re supposed to lead to unemployment. And that’s the basic aim of the Federal Reserve, to cause enough unemployment so wages won’t rise, and that will increase profits.
If profits increase, these will be capitalized into higher stock prices.
That’s the aim of the Fed, to inflate stock and bond prices and real estate prices. It’s succeeded in that all along.
But, as the U.S. economy has become monopolized and corporations are no longer able to keep their prices high, suppose that there’s increased employment, wages fall, companies don’t have to cut their prices in order to reflect their lower costs, because they’re monopolies. They’re all mergers and acquisitions.
So this policy of zero interest rates has essentially done exactly the opposite of what the Fed imagines to be the relationship between employment and interest rates.
They simply want the unemployment as part of the larger picture, because that deindustrializes the economy.
Deindustrializing the economy is what’s made fortunes for the financial sector, for the one percent.
Here’s the problem in their assumptions, and certainly how the New York Times and the public media explain it.
Banks do not lend much credit for consumption. They make a small portion of their loans for credit card loans, auto loans, and student loans to buy education.
But 95 percent of the banks’ loans are against assets, to purchase assets, mainly real estate.
The effect is that bank loans, if they increase low interest rates, these loans are used to bid up the price of real estate.
Or now, under low interest rates, you have private capital borrowing at very low rates to take over companies and smash them up. That’s what private capital does.
When you realize that the relationship between employment and interest rates is just the opposite of what the Fed says it’s doing, you realize that after, I think, from 2008 to today, after 15 years, if they keep on making the same mistake, it’s not an accident anymore.
That’s their intention. But they don’t want to tell the public that our intention is to cause unemployment because we’re part of the class war against you, the voter.
They have a cover story. What you read from the speeches is the cover story, not an explanation of what they’re really doing in reality.
RADHIKA DESAI: The way I would put that aspect is the following.
The Federal Reserve has historically, particularly since the late 1990s, during which neoliberalism had advanced to such an extent that essentially the general understanding was that governments, the treasury, et cetera, needs to do very little and that the economy can be kept humming along primarily by central bankers, by them modulating a monetary policy.
That’s why you got all this rhetoric around Alan Greenspan being the maestro that was conducting the American economy with just light-touch variations in monetary policy and so on.
Since that time, the Federal Reserve has essentially been the main manager of the economy because the government, elected governments have done next to nothing.
Moreover, the Federal Reserve has always used statistics around employment and inflation levels to justify its monetary policy.
But you are absolutely right. What actually has motivated their monetary policy is the health of the financial economy.
There are two particular things that are important here.
First is that, within months of Alan Greenspan becoming the chairman of the Federal Reserve in 1987, he became Federal Reserve chairman in August and then in October of 1987, there was a big stock market crash.
Beginning then, Alan Greenspan instituted this policy that, whenever there is a crash, you inject loads of liquidity into the system so that all the losses, essentially, that are made by the financial corporations that created the mess in the first place, become socialized.
Of course, in the run up to building the bubble, all the gains that are made by the same financial institutions are privatized. So the gains are made by the rich people. And when there is a problem, then the money printing is done. And so essentially, the Federal Reserve helps to fill the black holes that are the corporations. So that’s the first thing that happened.
The second thing that happened is that beginning in about 2000, when the dotcom bubble burst, since that time, and again, I just want to show you this chart again for a second:
So if you look at this chart, basically what you have is that this is, of course, the high point. And then you have a period of relatively high interest rates. They’re not as high as they were with Paul Volcker sending interest rates up, but still here they’re relatively high.
Beginning in 2000, Alan Greenspan induced a reduction in interest rates and kept them fairly low until a decline in the dollar and the rise of inflation forced him to start increasing interest rates.
It was Bernanke by this point, but the chairman of the Federal Reserve was forced to increase interest rates.
Then the 2008 bubble burst, and then you had essentially a zero interest rate policy with a small attempt to increase them again. But then there was the pandemic and we have had low interest rates.
Only since then we have had this relatively high increase.
But what you’ll notice is that both these levels of high interest rates of the last 25 years of the 21st century are lower than even the average points of the previous decades.
Essentially this has been, the new century has been the era of easy money, systematic easy money, which first inflated the housing and credit bubble and then inflated, despite all the talk of financial reform, inflated the everything bubble.
MICHAEL HUDSON: Okay, what you’ve described is a Ponzi scheme, basically.
When you talk about Greenspan coming in and flooding liquidity, that means you have the problem that Ponzi schemes have.
What are you going to do when there’s not enough money to pay the people who are beginning to withdraw the money they put into the stock and bond market Ponzi scheme?
Well, you get new members to join and somehow the old members are paid by the new members.
Well, there aren’t new members that are going to join except the Fed. The Fed is the new member joining the Ponzi scheme to bail out things.
Of course, the pressure right now at the very end of your chart is going down. Why is right now, this month, the Fed talking about lowering interest rates? It happens every four years at this time.
The purpose of the Fed is to re-elect the existing government. So you could say the election is the 13th Federal Reserve District. How are we going to re-elect the Democrats and prevent Donald Trump, who wants to make the Federal Reserve part of the Treasury, from getting the presidency?
That [i.e. the equivalent of the Federal Reserve being a part of the Treasury] was a situation America had from the beginning of the revolution all the way until 1913.
And what the Federal Reserve did when it was created by J.P. Morgan and others, he said, we’re going to get the government, the Treasury, and elected officials out of the equation.
The Federal Reserve is going to be run by banks for banks. We are not going to let any Treasury official or any government official sit on the board. We’re going to move the Federal Reserve out of Washington.
Mainly the administrative part of the Fed will be in New York City.
We’re also going to have chapters at the places that the U.S. Treasury had the sub-treasuries in: Boston, Chicago for the Commodities Exchange, Philadelphia, San Francisco.
The Fed privatized the credit system.
That’s been the case since 1913, as opposed to doing what, let’s say, we’ve described China is doing, where the credit system is run by the government for the increase in the economy at large, not to increase a financial class.
The Fed was explicitly created not to serve the economy at large, but to serve the financial class.
This was all spelled out in 1913 and by the National Monetary Commission in 1907 after there was a big crash then. They said the solution to the crash, when the Ponzi scheme ended, was to take credit out of the hands of the government and let the banks do it so that we can just continually flood the market with credit, either to keep the asset price inflation going or to make sure that we elect the kind of presidents that we want in the November elections or dis-elect them if we want to raise interest rates.
You’ve had this fall in interest rates before every election, I guess since World War II.
They’re not going to say that, but of course, all of the observers and the insiders know that that’s how the Feds run.
It’s very political, all in its aim, but its politics are those of the financial sector, not of elected officials, and not for the government caring about the economy and employment at large.
RADHIKA DESAI: No, absolutely. And I would say there is one further thing that I think very few people are noticing, and this has been my point.
I’ve made this point in an article I wrote in 2022 when Chairman Powell first said that he basically said, I was wrong about inflation being transitory and now I’m going to do what it takes to quell inflation.
I said that he is not going to be able to quell inflation.
I’m now going to tell you why this is not going to, and he’s not going to be able to do that. And it has everything to do with the Ponzi scheme you’re describing, Michael.
So once again, let’s go back to this chart and let me show you a very interesting point. And that is that, as I said to you, we’ll be discussing the latter part of this chart now:
What you see here is that in around 2000, Greenspan reduces the interest rates in order to allow the housing bubble to continue and add to it a credit bubble, because now, of course, the housing bubble was going to be kept going by a massive credit bubble. And so you get the inflation of the housing and credit bubbles.
That’s reliant on these low interest rates.
What then happens is that there is a huge pressure on the dollar, there is an increase in inflation, so then Bernanke has to increase interest rates.
He does it in the same way as Powell has been doing it now, that is little incremental increases in the interest rates.
What you see here is that the interest rate had just to go to a little above 5% before they pricked the housing and credit bubbles in 2008. And of course, once they were pricked, the Federal Reserve immediately went into what used to be called “the Greenspan put”, but now, of course, because all the Federal Reserve chair people have done that, we call it “the Federal Reserve put”.
That is to say, every time there is a big financial crisis, asset markets crash, the Federal Reserve is there to inject liquidity into the system so that the asset markets are revived, the wealth of a small number of wealthy people is restored.
That is exactly what they did. They brought interest rates down again and left them flat.
Now, after a long period of low interest rates, as people started complaining, people who cared about the fact that the everything bubble was being created and so on, as people started complaining, the Fed slowly started increasing interest rates, but that itself was cut short by the pandemic and we went down.
Now, with the pandemic, we’ve had a resurgence of inflation and we must come back to the question of why inflation is surging again.
But let’s just say, for whatever reason, inflation is surging.
Now, you have seen the Federal Reserve bring interest rates up slowly, gradually to roughly the same point as they were back then.
We have already seen that as they came up to their high point, even before this flat bit was reached in July 2023, already before July 2023, we already witnessed the failure of the Silicon Valley Bank and a bunch of other banks. We have witnessed the problems in commercial real estate. We have witnessed problems in private equity. We have witnessed problems even in the treasury market.
My prediction was that the Federal Reserve would not raise interest rates and would not be able to quell inflation.
This is essentially what you see here. This is another chart in which the same interest rate, which is the blue line, is plotted against the rate of inflation.
What you see in this bit here, which is covered by the yellow line, this period up to 2000, you see that on the whole, the Federal Reserve, for good or for ill, by essentially creating recessions every time it needed to in order to bring down inflation to keep wages low, as Michael pointed out, it did so, but on the whole, inflation remained below interest rates, which means interest rates remained positive.
What you see in the period after 2000 is that the Federal Reserve has lost its ability to control inflation.
Why? Because as you see here in 2008 and today, the moment you increase interest rates to a certain point, which is the only way the Federal Reserve knows how to deal with inflation, it triggers a financial crisis.
The 2008 financial crisis was triggered when interest rates reached around 5%. They are around there again.
You see here, the interest rates had to be brought down. And you saw here, throughout here, this period, you see that inflation has remained above interest rates. You have a period of effective negative interest rates.
Today, we are seeing here, we are being told that there is a slight decrease in inflation going below the interest rates, etc.
Let me show you one other chart, and then we can discuss this. But this next chart tells you what’s really going on.
This chart is published by the Bureau of Labor Statistics, and it shows you general inflation, which is the red bar, food price inflation, which is the blue bar, energy inflation, which is the black bar, and all items less food and energy, which is the green bar.
Now, this green bar is called core inflation. It leaves out the very volatile food and energy prices.
What you see here is that although general inflation has become below 3%, which is what the Federal Reserve was celebrating, what Powell was celebrating in his speech last week, what you see here is that core inflation remains high.
What’s more, practically all market commentators are pointing out that these volatile prices of food and energy are going to go up again.
I would say that the ability of the Fed to control inflation remains very much in doubt, because the Federal Reserve cannot increase interest rates beyond a certain point, not because they care about employment, not because they care about working people, but because they care about the fact that any further increase in interest rates will prick the asset bubbles on which the wealth of a small number of wealthy people depends.
That is exactly what they are not willing to do. They are not going to be able to control inflation in the only way they can.
MICHAEL HUDSON: I have a very different reading of all this. When you say, and when the Fed says, the housing bubble is pricked, that would give you the idea that, oh, housing prices are coming down.
RADHIKA DESAI: Well, hang on, Michael. The Federal Reserve does not say that the housing bubble is pricked.
MICHAEL HUDSON: No, that’s how you characterized it.
RADHIKA DESAI: The Federal Reserve (unclear) when the housing bubble is pricked. So, that was me saying the housing bubble was pricked, not the Federal Reserve.
MICHAEL HUDSON: I know. I’m just saying that characterization.
What does it mean to say the housing prices are pricked? It doesn’t mean housing has become more affordable by Americans.
It means housing prices are much less affordable by Americans. That seems to be ironic. How can that be?
Well, the way that you prick the housing bubble, the way that you reduce housing prices is to raise the interest rates.
It now costs much, much, much more to buy a house at the lower housing prices today than it did before because the interest rates on mortgages have doubled from 3.5% to over 7%.
Now, imagine what that means. At a 7% mortgage rate, that means that in 10 years, at 7% interest, the bank makes as much money on the house mortgage that the seller made.
To begin with, it doubles the money. So, home buyers cannot afford to buy a house because the interest rates to carry the mortgage are so much higher than they were before.
RADHIKA DESAI: There’s absolutely no doubt that the result of increasing interest rates is that. Nobody is denying that.
And what’s more, the result of raising interest rates also has a negative effect on employment.
MICHAEL HUDSON: Yes.
RADHIKA DESAI: It will create a recession. In fact, there are many indications that the U.S. economy is already entering a recession, that it is essentially imminent.
MICHAEL HUDSON: Well, what I’m talking about is the price relationship again, the inflation that voters are so angry about now.
We have to realize that the speech that the Fed gives is in the context of the run-up to the November election.
Why are voters so angry about the situation that the Fed and Paul Krugman and the Democratic lobbyists are all saying should be happy? The rising asset price inflation is creating huge wealth for the banks, the 1% that are getting so much more money now.
But the soaring cost of housing, whether you’re renting or buying a home, now that people in their 20s, early 30s, can’t afford to buy a home because of the high interest rates, they have to pay rents.
Rents are going way up. That’s not included in the price index. The cost of carrying a mortgage, not included in the price index.
RADHIKA DESAI: I think rents are included, Michael. Yeah. Mortgages may not be included, but rents are included.
MICHAEL HUDSON: Right. The high cost of education that forces students into debt even before they graduate. Voters are complaining because there’s no upward mobility. That’s not something that has entered into the Fed’s discussion. They’re being squeezed.
We talked about the labor market figures.
RADHIKA DESAI: Michael, this is really interesting. I completely agree with you. In fact, I will add to the points you’re making.
There is a sense in which what the Federal Reserve is doing, which is inflating the asset bubbles, actually contributes to inflation. It contributes to inflation by increasing rents.
And of course, it also contributes to inflation because a small number of very rich people can afford to pay whatever prices they want. So they are not the ones who are complaining. They can drive prices up by paying what it costs to do that.
MICHAEL HUDSON: I wasn’t disagreeing with you. I was saying I’m talking about something completely different. My perspective is different from yours because I’m looking at different things.
What you describe is quite right, but I’m talking about what is left out of the public discussion about the Fed policy.
People are unhappy now. They sense that while they’re having to work harder and harder at more and more jobs just to break even, they see this enormous growth of wealth in the stock market, bond prices, the biggest bond rally in history has occurred since the Obama bailout of 2008.
They see that the 1% are getting yachts. So they’re getting so many yachts, they’re dying in them now when they sink.
RADHIKA DESAI: I would just like to say that, you know, again, you’re quite right. We are looking at the same thing from different perspectives, and I think they’re very good and complementary perspectives.
So without at all disagreeing with what you’re saying, what I’m emphasizing is that, you know, when you said, you said a couple of different things that I wanted to come back on.
Number one, you’re quite right. I’m sure that Chairman Powell is not particularly keen on Donald Trump winning, and so he will certainly try to do what he can to enable the Democrats to win.
The question really is, though, can he really do anything? That is to say, before November, it is quite likely that he will be shown to have lost control of inflation, and it is also quite likely that it will be shown that he has not actually achieved a soft landing, that, in fact, he has caused a recession because, you know, Paul Volcker may have caused a recession by allowing interest rates to go up to 20%, but today the economy is so weak that you can cause a recession by much lower levels of interest rates. He may have already caused that.
So all of this will actually mean that, try as it might, the Federal Reserve cannot succeed. So this idea that central banks can manage economies is completely rubbish, and it was always rubbish, but now it will be shown to be so in a much more spectacular way.
And the other thing that you said that I also wanted to come back to is that, you know, you’re quite right, you know, the employment situation is very bad.
So, you know, what happened in earlier, some of our earlier shows, we have pointed out that unemployment was quite high until recently, and it’s once again worsening, even though the labor market, that is to say, yeah, even though the labor market has shrunk, the labor force participation rate is lower today than it was before the pandemic because a lot of people have simply left the labor market.
Now Powell said in his speech that what is happening now is that on the one hand, more people are entering the labor market, and on the other hand, the frantic pace of hiring has reduced.
Well, why are more people entering the labor market? More people are entering the labor market because inflation is biting them.
And why is the frantic pace of hiring not being kept up? Because the economy is likely entering a recession.
MICHAEL HUDSON: I wish people would stop talking about inflation in the labor market. They’re missing the whole point.
And the reason they talk about inflation in the labor market is precisely because it distracts attention from the fact of what’s really troubling the economy.
Inflation is treated as if somehow that’s a measure of welfare. Low inflation is good, and high inflation is bad, and you should be very happy.
If there’s low inflation, Paul Krugman says, you should be happy. That’s the only measure you should think about.
But what is it that people are thinking about? They’re running into debt more and more and more. They have to take on more debt just to live,
They’re taking on so much debt that 50% of Americans, according to the Federal Reserve, are maxed out on their credit card debt. They’re at the very top, just because they’ve had to do that in order to live. The Fed says, oh, that’s an inflation problem to be cured by interest rates.
It’s not an inflation problem. It’s the fact, it’s the way the economy is structured to force them into debt as a condition of living. It’s a structural problem.
RADHIKA DESAI: Yes, Michael, and what I’m simply saying is that in order to pay, pay both for groceries and for debt, people are having to come back into the labor market.
If in one family out of, say, two people, only one person was working, the second person is now having to go into the labor market.
MICHAEL HUDSON: You’re being suckered into their statistics. It’s not people going into the labor market. It’s people already in the labor market taking a second job or a third job in order to be, to afford a living, not being a homeless person.
RADHIKA DESAI: The statistics are right to the extent that people are going back into the labor market.
I think that that shows that there is something, something, something going on, which is not as Powell says it is.
His interpretation is not my interpretation.
MICHAEL HUDSON: I’m trying to have people think in different terms than the way in which the Fed and the popular press are framing the problem of why the economy is so screwed up and why people are so unhappy.
Once you’re maxed out on your credit card debt, you’re going to fall into arrears.
We find the arrears on automobile loans rising and defaults rising, defaults on credit card debt and arrears rising. Now, once you’re in arrears on your credit card debt, your interest rate goes up from 19% to 31% or 32% to usurious rates.
That’s not included in the Federal Reserve index. The Federal Reserve price index excludes everything that is really squeezing the Americans, largely by either financial or monopolies.
RADHIKA DESAI: Yeah, no, and that I do not disagree with you. So the cost of living is even worse than revealed by the Federal Reserve statistics, by the Bureau of Labor Statistics statistics.
Yes, I agree with that.
And what’s more, you can actually say that if the Federal Reserve is unable to quell inflation, even as revealed by the Bureau of Labor Statistics, it’s not going to be able to quell inflation and the cost of living crisis in other ways either.
Do you see what I’m saying?
MICHAEL HUDSON: Then think of the job of the Federal Reserve is to create a fairy tale for the American economy. If we can only have you stop looking at the big economy and have a tunnel vision, and only care about the few variables that we care about and we can manage, then you won’t see the roots of your problem.
And if you don’t see the roots of the problem, you’re not going to do anything to solve it.
RADHIKA DESAI: And that’s exactly what I was saying, that the Federal Reserve spins this fairy tale by saying that its monetary policy decisions are based on statistics about employment and inflation and so on. And they’re not.
What they’re based on is basically their concern for continuing the inflation of asset bubbles.
MICHAEL HUDSON: That’s correct. The asset bubble, I mean, you can call it a Ponzi scheme in motion.
And what your chart shows, as you pointed out, all of the declining in the peaks ever since Volcker, you’re seeing the job of the Fed is to keep this Ponzi scheme going that has created all this explosion of wealth in the form of stock bonds and real estate prices that have gone up since 2008.
But wages have not gone up at all. So if you have wages here and the asset bubble going up here, you have a polarization. You have real estate and insurance sector going up.
You have the industrial economy, the economy people actually go to work for not moving at all. It’s worse than not moving at all. It’s being squeezed more and more.
And it’s the fact that it’s being squeezed, it’s forcing people into debt.
People are not going into debt for the reasons that economists say. Oh, consumers are impatient. They want to consume now instead of in the future. It’s their choice to go into debt.
They don’t have a choice. Their choice is to be homeless and move out or and not be able to continue to live or to pay what they’re faced with.
The problem is within the economy. And that’s what the Fed doesn’t talk about that. I mean, I think our discussions and all of our shows have tried to do is to expand the consciousness and the perspective of the economic discussion beyond the tunnel vision that the Fed and the media are talking about as if it’s only employment and interest rates.
And as I discussed at the beginning, they get the relationship wrong, upside down for all of this.
And they can do that if they look at the wrong prices and they confuse the number of jobs with how many people are actually employed.
RADHIKA DESAI: OK, so I think, you know, Michael, I mean, I think our points have been really complimentary. I think one of the things that we have agreed about in the past is that what really needs to be done, even to tackle inflation, let alone to tackle a whole host of other problems that the economy is suffering from, how to tackle the cost of living crisis.
This can only really be done if you actually improve the productive structure of the economy. And you cannot improve the productive structure of the economy unless you fundamentally change the bank industry relations that exist right now.
I mean, today, quite frankly, you could almost say that bank industry relations are more or less non-existent because banks don’t lend for productive investment at all.
So in that sense, we have to do, you know, this is the whole financialization of the economy has to be stopped and reversed. The financial sector has to be regulated in order to bring it under control so that it finances productive activity rather than speculation, which is, as we’ve been saying repeatedly, that’s what it’s been doing.
And that is and only in that way you will have a handle on inflation.
For example, if inflation is too much money chasing too few goods, and if restricting money supply only leads to recessions, what is the best way of dealing with inflation? To improve the supply of all those commodities that are going up in price.
And that can only be done by a well-regulated developmental state in which money and finance are made to serve the purposes of productive expansion.
MICHAEL HUDSON: So we’re talking about the difference between finance capitalism and industrial capitalism or socialism?
RADHIKA DESAI: Yes, I would say, I wouldn’t call it, I would say, I would call it financialization because finance capital then refers to Hilferding, who was actually talking much more about what you were just calling industrial capitalism.
So I would say we’re talking about financialization versus a productive economy. Yeah.
MICHAEL HUDSON: But financialization, there’s a tendency to think it occurs within a system and it’s become an independent system all of itself. And it’s taken over the government, it’s taken over the economy, and it’s turned the economy into something very different than it used to be.
RADHIKA DESAI: And in a certain sense, you’re right, of course. But in another sense, I would say that you cannot have a completely independent system of financialization because every system of financialization has a predatory relationship with the underlying productive system.
Unless the underlying productive system can be, unless value can be sucked out of it on an ongoing basis, the Ponzi scheme cannot grow.
But with that qualification, I would entirely agree. So to come back to the original starting point, and we will end with this, the point that at least I’ve been trying to make, and I think, Michael, you’ve not exactly been disagreeing with it, but we don’t think the Federal Reserve will be able to deal with the cost of living crisis with inflation for all the reasons we’ve said, which is that essentially even the one instrument it has to deal with it, namely increasing interest rates, it cannot use because the use of that instrument will prick the various bubbles, asset bubbles, upon which the wealth of the wealthy rests.
And this is why it is our prediction that come November, or well before November, we may very well have a problem of inflation as well as a problem of recession on the hands of the Democrats.
And therefore, this will not necessarily be very good for them.
MICHAEL HUDSON: And I think what we’re trying to do is to elevate the scale of the discussion, the scope of it, to take into account much more than the economics profession and the bankers.
RADHIKA DESAI: Exactly. And we’re looking at the contradictions in the system. But I hope this has been helpful to you. Please like and subscribe to our show. And we will see you in another couple of weeks. Thanks and goodbye.
