Transcription
Financial crashes are gold mines for the wealthy company, uh, uh, sectors with money. The, the high interest rates are threatening another crash in the real estate market. This time, it's not from bank fraud. It's just from the fact that, uh, the economy is debt-strapped.
Welcome, everybody. Thank you so much for joining us. I'm Lyanna Petroa, with a new episode of World Affairs in Context. Today, I have the privilege of welcoming back to the program a renowned American economist, Dr. Michael Hudson. Michael is distinguished research professor, prolific author, former Wall Street financial analyst, and internationally recognized scholar. Michael is also the author of multiple fascinating books, including Superimperialism, which explores the role of the US dollar and American financial dominance in the global economy; Killing the Host, a critique of financialization and debt-driven capitalism; The Destiny of Civilization, which focuses on the emerging multipolar world order; and J is for Junk Economics, which dismantles misleading economic narratives, which is precisely what we're about to do in this interview. Michael, thank you so much for joining. I appreciate your time.
Well, it's a good time to be back. Uh, today, uh, the stock market is, uh, surprisingly up. Uh, the bond market yields are very slightly, uh, down, and there's still sort of a blind spot. So, I want to talk about the stock and the bond market and how irrational they seem to be behaving in the face of what Trump says is going to be a stepped-up Iran war. Uh, that's going to result in even more blockages of OPEC oil, uh, to the rest of the world. And that's going to cause, uh, as I've explained before, it's going to lead to a world depression this year and next. And, uh, who knows how long it's going to last.
I want to say one thing before I begin. Uh, I no longer advise people as to how to get rich or what to invest in in the stock or the bond market. Uh, if I really told them how to get rich, what do you do? Well, be a criminal. Crime pays. Evade taxes by using offshore banking centers. Uh, speculate in, uh, basic raw materials, buy arms makers, uh, and oil and environmental polluters. That's where all of the big money, uh, is being made, and that's what today's wealthiest, uh, investors are doing. And, uh, it's, it's made them very rich while the rest of the economy is idled along.
So, what I want to do is, uh, show that there is an alternative, and that the present alternative, uh, is going to make the disaster worse. And I've tried to explain how this is today's financial capitalism, not industrial capitalism anymore, but how the financialized capitalism works. And I realize that my books have sometimes been used as the how-to-do-it guides instead of trying to reverse what is happening. That I can't help but, at least I can explain, uh, what, what's happening without making recommendations. So, that's the spirit in which I want to comment on today's stock and bond market, the unrealistic short-termism in not understanding what's in store for the world and for the, uh, oil and energy crisis and for the stock markets.
I think that interest rates are rising as if this is somehow going to slow the price inflation that's caused by oil, not by, uh, too much money creation. And the reality is that this increase in interest rates is going to increase the economy's inability to cope with the breakdown that is already in progress. That's the big picture of what I want to talk about today.
This is absolutely fascinating, and I've been looking forward to this conversation with you. Several days ago, the latest inflation reading was announced. And as one would expect, and I'm sure that you were expecting to see this, inflation accelerated as a direct result of the United States and Israel's war against Iran. And it is now official, looking at the data, Americans are indeed paying the cost of Trump's interventionism. The unfolding energy crisis is now pushing prices higher and higher, while the Federal Reserve is now, of course, hinting at the possibility of having to raise interest rates. How did the myth of interest rates rising in response to price inflation even begin?
Well, it began with the attempt to turn economic theory into a public relations exercise to justify, uh, banks and the financial sector as playing a productive role in the economy, and as if, uh, the recipients of interest and the rentier class generally is playing a productive, uh, role by supplying a service, actually, and, uh, is making a sacrifice in order to, uh, uh, to make its interest and somehow to create a, a kind of parallel universe. All trying for a moral, uh, rationalization of, uh, why finance needs to control the economy, not governments. Uh, uh, governments shouldn't interfere with whatever finance and the large, uh, masses of monopoly capital and, uh, stock and bond market and bankers want.
So, the pretense, uh, underlying all of this, uh, uh, public relations view of what's happening is that creditors use their interest to buy goods and services. Uh, and in other words, if there's an inflation, well, then interest rates have to go up so that the bankers and the creditors don't lose their purchasing power over labor. Well, there was a discussion about this already in the middle of the 18th century, and critics of debt financing already at that time, uh, pointed out that, uh, bondholders spend most of their money in making new loans. They don't buy goods and services, and when they do spend, uh, money into the non-financial economy, it's mainly to buy prestige real estate, especially in the financial, uh, centers and cities, and secondly, to buy luxury goods. Even back then, most, they pointed out, most of these luxury goods that the, uh, wealthy financial class buy are imported from Italy, just like today.
So, that by the 19th century, uh, you had, uh, creditors making an even bigger excuse for interest. They, they had to fight, uh, against the rising antipathy towards banks in the United States and socialist reformers, and, uh, they, they wanted to say, "Well, interest is a compensation for the risk that we're taking." The risk is not only against, uh, non-payment, uh, as if we don't have enough collateral to, uh, cover all this risk, but it's also the loss of purchasing power over goods and services as prices rise. And more to the point, they want, what we really want is the purchasing power of our creditor claims over the labor that produces these products. The financial rationalization of interest and financial gains has always been primarily anti-labor, and it was developed by the Austrians and others as a political and ideological argument against socialism. And you had, for instance, Austrian economists like Böhm-Bawerk, who went so far as to claim that interest is a payment for the service of creditors by abstaining from consuming their income. But, uh, there's a, what he called, at that time, preference. Uh, the, the savers were individual middle-class people, and they wanted to consume more later. Later, so they saved up their wages and profits and earnings to, uh, be able to consume more labor.
This myth of, uh, that somehow the financial sector is part of the production and consumption sector. Well, having to pay interest was just depicted as, uh, the price of impatience. It's a blame the debtor. It's as if wage earners, uh, were had a choice to refrain from running into debt, and because they lacked prudence, not because they were squeezed by their wages not covering the cost of living. So, this prompted Karl Marx to quip that the Rothschild bankers must be the most abstinent family in Europe, uh, if that were true. And it's as if there was no financial sector, bankers and bondholders acting independently of the economy of production and consumption. And that's the main theme of my books, that, uh, the economy has two sectors. There's a production and consumption, uh, sector, and the distribution facilities, and the financial sector is completely apart from that. It acts independently, and that's really what runs the stock and bond markets, and I, that, that's the framework I want to discuss today.
Thank you so much for walking us through this, and we are going to turn to stock, uh, stocks and bonds and the geopolitical sort of background in just several minutes. But Michael, would you first walk us through how does raising interest rates actually affect employment and wage growth? Because I know that your theory is quite different from sort of the mainstream narrative, and I would love our viewers to get a better sense of, of your perspective on this.
Well, this is where, uh, reality clashes with the junk economics that the media are discussing, uh, right now. Uh, the most recent 20th-century logic was that of Paul Volcker, when he increased interest rates to over 20% at the end of the Carter administration in 1980. I don't know if you remember that. Uh, but he, uh, uh, he was my boss's boss at Chase Manhattan, uh, when I worked there in the 1960s. Well, uh, Volcker saw wages rising as a result of the Vietnam War's guns and butter, uh, fiscal policy, and that was called military Keynesianism, when, uh, the aim was to increase, uh, profits and, uh, investment and employment. Uh, well, Volcker, uh, wanted to increase unemployment so as to keep wages down and prevent them from rising further. And he said, "If wages are low, prices will be low." So, all we have to do is raise interest rates, and that will slow investment and employment, and, uh, there will be more unemployment, and, uh, that'll stop the wage inflation, blaming it all on wages, not on, uh, the, the fact that the government was running a huge deficit for Vietnam and was trying to get both, uh, military spending and a consumer economy at the same time.
Well, what Volcker did was he succeeded in creating a crash as interest rates rose to 20%, which is completely, uh, unsustainable. And, uh, in, in that sense, you could say that, well, interest rates rising slowed, uh, uh, the price inflation because it, it crashed the economy. It crashed employment. That's what, why Ronald Reagan was elected instead of, uh, Carter being reelected. Well, this obviously is not the aim today in raising interest rates. They're not trying to increase unemployment, uh, but it's going to be the effect of what they're doing. And this is just the opposite of compensating for risk. Uh, raising interest rates because the economy is more risky, because it's more inflationary. The raising the interest rates today, and we're seeing the, the long-term interest rates go over, uh, 4.6, six or seven percent for 10-year bonds and over 5% for 30-year, uh, Treasury bonds. This is, uh, much higher than it's been, uh, in the last 17 years. So, this sharply increases, uh, economic risk, because what's going to happen with these high interest rates? Well, it stops, uh, stock market prices, uh, from, uh, going up, for one thing, because people are not going to borrow from banks at high interest rates to speculate in, uh, buying stocks that probably are not going to rise in price because the oil crisis is, uh, causing, causing them to slow their output and everything. But this whole stock market is going up and down on this wave of rumors of whatever the Trump administration is saying about the likelihood of peace, uh, restoring a happy, uh, happy, uh, faith.
So, the theory is that bank, the, uh, if you make it harder for people to borrow from banks at a high rate, banks won't lend money to build new factories and employ more, more labor. But that's not what really, what banks do at all.
Of course. And you've also argued that, uh, governments and their central banks may sort of pretend, and I don't know if pretend is the right word, but they may announce that they are lowering interest rates to spur the economy, but the real reason is to reinflate prices for financial securities and real estate, which, of course, benefits the top 1%. Uh, would you walk us through how that works in practice?
Well, the way to understand that is to see what happened in, uh, after the Obama administration came into office in 2009. The, there was a breakdown, uh, in the economy, and, uh, the, the because of the junk mortgage crisis, huge bank frauds had led to defaults rising on junk mortgage loans, uh, and also the economy was so unstable and had become such a casino gambling arena that many large companies like AIG had made wrong guesses about what direction derivatives were going to go in. I won't describe derivatives. There were bets on, uh, the, what interest rates and stock prices and, uh, loans, uh, defaults, uh, were, were going to be. And so, uh, the whole idea was, well, how do we, uh, save the banking system? The Federal Reserve and other central banks don't represent the public interest. They represent their customers, the banks. And, uh, they said, "Well, the banks now are holding collateral for their mortgage loans and for, uh, other loans that are now below the, uh, the amount liabilities that they owe to their depositors and to their counterparties. So, uh, we have to save the banking system. What do we do?"
Well, Obama said, "Okay, what we're going to do, first of all, we're going to, uh, I'm going to break all the promises I made. We're going to throw, uh, the, the black and minority victims of junk mortgages under the bus. We're going to, uh, let the banks foreclose on their property so that we can sell it all, uh, to the banks. And we're going to lower interest rates so much that we're going to use the Federal Reserve to flood the economy with credit. In other words, we're going to lower the interest rates under the zero interest rate policy that began in 2009 and went on until about 2022 to 0.1%, uh, and we're going to, uh, make the banks be able to borrow so inexpensively that they can make a profit by making loans at only 2%. And, uh, companies, uh, uh, and private capital can now borrow at 2% to buy stocks that are whose dividend rates are more than 2%, to buy companies that are underpriced and hoping for a capital gain. And when interest rates go down, that means bond prices go up. So, if you have a bond yielding, uh, 5%, and the, uh, interest rate goes down to just a fraction of 1%, then the bond price goes way, way up. And what Obama did was create the biggest bond market boom in history. Uh, banks got rich on their bond holdings, and, uh, the bank bondholders and stockholders got rich on their bond and stock holdings. And so the banks, uh, the stock market went up, the bond market went up, the, the banks, uh, with, uh, such, uh, inexpensive borrowing costs, lent mortgages at very low interest rates. So, you had the private capital companies, both Blackstone and BlackRock, I think, were buying, uh, real, the homes that were being sold as Obama foreclosed on, uh, the groups that had voted for him, and, uh, there were distress sales that enabled the large capital firms absent to become absentee landlords, turning the US economy away from a home ownership economy, back into a landlord, uh, economy.
So, the low interest rates caused a huge boom in stock and bond prices because they, they move in opposite directions. And this policy, uh, has to fail in the long term because if you keep the prices for collateral held by banks and other creditors, uh, from falling in price, that causes, uh, a, a loss of financial asset price gains, uh, that requires the economy, uh, to take on more and more debt. So, yes, uh, let me say that more clearly. Uh, the, the increase since 2009, the economy, wage levels have been pretty stable, but there's been enormous growth, enormous growth in the wealth of the wealthiest 1%, and in fact, the 10%. All this wealth is stock market wealth and real estate, uh, prices. It, it's been inflated on credit. So, the, uh, bank lending, because, uh, the more a bank lends, the more a borrower can borrow and bid up the price of real estate or stocks and bonds. And, uh, that, uh, bank lending, any home or office building or stock or bond is worth whatever a bank will lend against it to people who borrow, uh, interest, hoping to make a capital gain, uh, that's larger. And that's exactly what happened. But all this wealth, valuation of wealth, the higher price for real estate already in place and stocks and bonds already, uh, issued. All, all of this, uh, was financed by debt, and the whole economy was loaded down with debt. That's what a zero interest rate policy did. So, you rescued the economy from, uh, and the banks from insolvency by essentially helping the economy borrow its way out of debt. And that, uh, is what's, that's the situation we're in today. Today, as we're facing a situation that's just as serious as 2009, 2008, just as serious, because, and all of a sudden, you have, uh, bank loans and real estate that, uh, is going to have difficulty being refinanced. How is the United, can they once again follow a zero interest rate policy to revive and issue yet more debt when the economy has already painted itself into a debt corner?
Exactly. And it does sound that the entire framework that you just described very much resembles a Ponzi scheme, doesn't it?
Well, yes. A Ponzi scheme has to be kept going because you need new entrants into the Ponzi scheme. There's not, there's no real, there, there. Uh, there's nothing. It's, but you have a pretense, a claim that it's going to make money, but in, you pay out very high dividends, uh, to and capital gains to the investors, uh, as if you're somehow making a lot of money. Well, where do you get this money to pay the investors if there's really no, uh, generation of profits? Well, you keep hyping up the Ponzi scheme, and you hope that new investors, there's a sucker born every minute, as P.T. Barnum said. You hope to get more and more suckers coming in, and you use their contributions to pay the high dividends to the early investors in the Ponzi scheme. And it keeps going, but ultimately, uh, the, the, the debts, nominal debts to the, uh, depositors or the participants in the scheme get so high that there's no more money for, uh, being provided by new investors, and the whole scheme fails.
Well, the economy is like that today. The, uh, the, uh, real estate sector, the banking sector, uh, the stock, stock companies have all borrowed to pay the interest, uh, rates that are falling due. And as they, they've borrowed money to buy real estate or stocks. And how are they going to, uh, be able to pay, uh, the banks as, uh, the stock prices go down and the dividends, and, and rent, uh, rents are squeezed by the higher costs of real estate? Not only mortgage costs, but the rising insurance costs. Well, the banks, uh, can't afford to let them default. So, the banks said, "We'll lend you the money to pay, and we'll lend you the money to pay, and, uh, we'll keep lending more and more money, and you'll bid up the prices of the real estate and, uh, stocks, and we'll say, well, our collateral is worth it. We're lending solid, uh, loan against real estate's already there and against, uh, stocks, and look, everything's going up." So, uh, we have, uh, we're not in negative equity at all, but all of this rise in equity values that backs their liabilities is, is, uh, all financed by debt. And if there's, uh, no way that, uh, borrowers can go to the bank and say, "Well, lend me more money to pay you, uh, the, uh, the interest and the debt service we owe." Well, then what's going to happen is they default. Uh, the banks said, "We can't afford you loan money because, uh, uh, you don't have any prospects for paying." Well, that's a situation that we're in today. Right now, with interest rates, uh, 30-year mortgages, as I said, they're over 5%. The, if the bond market, Treasury, uh, uh, securities are over 5%, so mortgage rates are up near 7%. Well, it's almost impossible at, uh, interest rates what they are today, mortgage rates for, uh, new buyers to or new sellers to be able to sell their homes. Suppose you have to move. Suppose you can't afford the home anymore. We'll let you put the home on the market so that you can pay the bank what you owe it and hopefully come out with a capital gain. But all of a sudden, the homeowners, and you could say the same for the stockholders, are realizing, well, there's no market for, uh, real estate at the prices that I paid just a few years ago because I borrowed, and the carrying charge for my house is pretty low because I had a low-interest mortgage. But now that, uh, new buyers are going to have to take out a higher yielding mortgage, uh, they're going to, the cost of carrying, uh, this mortgage month after month is beyond their ability because wages aren't going up. The economy is not expanding. The economy is shrinking. Bad weather is coming. Uh, the risks are up. Uh, our insurance, home insurance costs, uh, are rising, and our local taxes are rising. So, uh, the, the high interest rates are threatening another crash in the real estate market. This time, it's not from bank fraud. It's just from the fact that, uh, the economy is debt-strapped.
You mentioned the Treasury Department having to borrow more. Well, recently, the Treasury Department announced that it would need to borrow more money than previously expected. And in turn, that statement sort of reinforces fears that Washington's fiscal position is deteriorating rapidly.
It really is. And I think it's out, out in the open for everybody to see now. But the risk of lending to a government that's already running massive deficits from one year to the next with rising interest expenses means that investors around the world are going to demand higher and higher returns. They're going to want higher yields. So, how significant is the growing US national debt in pushing borrowing costs higher across the US economy?
Well, that fear that the government cannot pay because it's running a, a budget deficit is total junk economics. That's the, uh, the fallacy that thinking that the government balance sheet is like a private household. The government's not a private household. If all of a sudden, you, uh, have to spend more money than you're earning, you can't go to the grocery store and, uh, buy groceries and tell the, uh, cash out, uh, uh, person, "Well, I don't have enough money to pay. Let me write you an IOU, and, uh, you can just, uh, maybe pay your, uh, whoever is supplying your vegetables with the IOU money." That's just crazy. The, the government can always print the money. And when I say the government can print the money, that means the central bank can do it. The Federal Reserve, uh, can simply create, uh, electronic money on its balance sheet, and the government, uh, essentially, uh, runs a deficit. The Federal Reserve gives it an electronic credit on its balance sheet, and the Federal Reserve ends up holding, uh, more and more, uh, a, increasingly large portion of the federal debt that's running, uh, up. So, the government just owes it to itself. It doesn't have to borrow the money from the market because the Federal Reserve can create it freely, just for the cost of electricity running its, uh, its computers.
So, there's this, this pretense that somehow, uh, finance is part of the real economy, just like a household budget. That's part of the junk economics that people, that economists are taught in school. And that's why economists are not the people who are running most of these, uh, investment funds and the stock market funds. There are people who, uh, have, uh, been free of an economic education, and they, they can go to business schools and they learn how to debt leverage and, uh, uh, how to, uh, save on taxes and how to, how to make themselves tax-exempt. But, uh, that, it's, it's just silly.
So, the, the Federal Reserve's response, uh, to 2008, not only did they, uh, they funded the, uh, government debt by, uh, printing the electronic money, but, uh, they lent, as I said, to the banks all the way down to 0.1%, but they paid the banks something like 2%, I forget the actual rate on deposits. So, the banks could borrow at less than 1%, uh, just take the money they borrow, leave it on deposit at the Federal Reserve, and get free money. This was a special law that the Obama administration administered. He said, "We, I've got to reward my campaign contributors with, uh, uh, a free lunch, uh, and, uh, a way to make billions of dollars easily. This is what we'll do. Uh, give them free money to borrow, let them invest it at the Fed, just leave it on deposit, and they'll make enough money to earn their way out of the financial fraud, and then if they don't go under, we won't have to prosecute any of the crooks, uh, that ran these, uh, the, the mortgage fraud." I mean, this was, uh, the travesty of, uh, the Obama administration. And so, rather than letting, uh, the, uh, banks and their depositors lose money, uh, they, he, uh, essentially said, "Well, we can load the whole economy down with debt to, uh, to make hundreds of, make trillions of dollars for the stock and bond holders. Sacrifice the economy." But after all, who do I represent? Who does the Democratic party represent? My campaign contributors, of course. So, that's what he did.
So, the result was, I said, was an enormous, uh, bond market boom, but a K-shaped economy. The, the financial and real estate sectors, uh, and the wealth of the one to 10% of the population went way up. The rest of the economy was squeezed increasingly because it had to pay, uh, debt service on more and more of the debt that it was running up. Mortgage debt, credit card debt, student loan debt, uh, auto debt, uh, all of this, uh, debt service, uh, was squeezing its ability. And the result is that the, the consumer market in the United States really hasn't been expanding. And one result is that last year, in 2025, half of all of the increase in consumer spending in the United States was by the wealthiest 10% of the population. In other words, the billionaires were buying, uh, luxury, uh, handbags, again, a lot of Italian fashions, just like in the 18th century. They're buying, uh, Botox facelifts, that's, uh, very popular. They were, uh, the luxury spending was way up, but not spending on basic needs, groceries, and, uh, transportation, and gas, and oil. So, uh, this K-shaped economy is a result of running the economy in order to, uh, pre-increase the wealth of the finance, insurance, and real estate sector, the FIRE sector, at the expense of the economies, uh, at large. And this is what's called financial engineering, not industrial engineering. Uh, and that, uh, that was what had, uh, sort of engineered the whole post-2008 recovery, and, uh, it's left the economy very debt-leveraging, debt-leveraged, and, uh, this means that it has hardly any room to begin raising interest rates again, especially to distress levels, and especially if the break in, uh, the international oil trade causes companies to have to stop production because they can't get oil to, uh, fuel, uh, their, uh, their production process. The, the farmers, uh, are reported now in the Wall Street Journal to have been cutting back their, uh, their planting, uh, in this season because they can't afford the high fertilizer that's made out of natural gas, which has gone way up in price because America's exporting it all to replace Russian gas to Europe, and to Asia. Uh, they can't afford, uh, to the gasoline to power the tractors. They can't buy the tractors. The tractor prices are way up because the big tractor companies are, uh, American companies have moved a lot of production facilities into Europe. And what do you make tractors out of? You make them out of steel and aluminum. And, uh, Trump has imposed, uh, high, 50% tariffs on the steel and aluminum in these imported tractors, uh, for that farmers need. The tractor prices are way up. So, the price of used tractors has gone way up as farmers try to avoid having to pay the new high prices. Trump's tariffs have also played a big role in bankrupting the US economy. All because he said, "If we can raise money by tariffs and make, uh, the wage earners pay, falling on, and farmers pay, and industry pay, then I can cut, uh, then I can cut, uh, taxes for the wealthiest, uh, 1%, my constituency of billionaires." So, uh, Trump has created, he's tied the economy in an even tighter knot than Obama did. That's the problem that we're, uh, having today. And, uh, uh, plan companies are not even getting the oil to make plastics that need NAFTA. Uh, they're worried about who's going to get the plastic bags, uh, that you need to put so many things in and to wrap the food at the supermarkets. You know, who's, who's going to, construction is going to be failed back. You have, uh, fluid, all sorts of, uh, oil fluids, oil for the, uh, that you need for the cars, for the lubricants are being cut back. You're going to have a break in the chain of payments, and that means companies are going to have to cut back their production, and that means cutting back employment, and that means unemployment, which is going to increase the, uh, the deficits here and in other countries, and, uh, cause an even more lopsided, uh, economy where, that is being crushed under the debt burden, because when you're unemployed, or when you have to pay higher cost of living, how are you going to meet the debts that you have? Not only if you're an individual, but if you're a company, how, if you're a company cutting production, how are you going to pay the debts falling due? If you're a real estate company, cost of heating, uh, houses, cost of electricity is going way up. How, how are you going, uh, to pay it? The, there's a total mess in the making. And yet the stock market is going up.
And before we turn to the stock market, because I know our viewers have many questions about the stock market doing well while the rest of the economy is weakening. But we, before we turn to that, I would love to briefly focus on the bond market because I know that's, that's, that's been a focal point for the past several weeks. There's been a sell-off, and, um, bond yields have increased, as you mentioned in the beginning of the interview. How do today's bond market conditions actually compare with past periods such as the maybe the 1970s inflation crisis, or the early 1980s, or even the post-2008 financial system? If you had to compare them and sort of, uh, point out the differences and similarities and how this one is different now, what would stand out to you the most?
Well, good question. As I pointed out, the 1970s inflation crisis was the guns and the Vietnam War caused it. The guns and butter economy. Uh, the econ, America's foreign military spending accounted for the entire balance of payments deficit, uh, of, of the country. It, it absorbed, uh, an enormous amount of capital investment, uh, and, uh, employment. So, employment was up. The Vietnam War in the 1970s was the golden age for American labor. That's when its, uh, wages and its living standards went up. Uh, and Volcker said, "I represent the banking class. Uh, labor is our enemy, as it's always been the enemy of bankers. In the 19th century, in the early 19th century, uh, we believe that the lower the wages are, the more money can be squeezed out as profits to pay dividends and buy stock buyback programs. And my constituency, uh, is essentially, uh, the bankers, uh, and the enemy is labor. So, I'm going to bring about a depression that'll teach labor to try, that'll break the unionization movement. Uh, it, it means that there won't be jobs, and, uh, companies are, labor is going to be desperate for getting work, and workers are going to, uh, work for lower wages, and that's what we want. Lower wages mean higher profits. Higher profits mean more investment in bank loans for my constituency."
So, but, but today, we don't have an over, what he called, an overheating economy of too high employment. We're having unemployment going up. We're having underemployment, uh, uh, happening. We're not having a wage inflation. We're having wages being squeezed tighter and tighter. Uh, and that is what is forcing wage earners to, uh, run into credit card debt and defaulting on credit card debt to, they're being squeezed by, uh, they now have to pay, uh, the enormous, uh, student loan debt that they've taken under every form of debt, mortgage debt, auto, auto debt. They're, they're all rising in default rates. Uh, so it's a completely different situation from the 1970s. And yet, the rhetoric and the, sort of, junk economics that the stock and bond market and media promote is the same. Not realizing that we're now in a tighter corner than, uh, we were in the 1970s, when, uh, the government was able to say, "All right, we're going to cut back our military spending. We're going to rebalance the budget. Uh, we're going to cut taxes and do all that." Uh, is not possible to cut taxes anymore, uh, than Trump has already done, without there being a political revolution here.
Could the current bond market, uh, condition or situation, could it eventually force Washington into, uh, fiscal austerity or, uh, as you said, major spending cuts would likely be impossible? So, what is the alternative here?
Washington's not going to cut spending, except they're, it's going to do what, uh, West Germany and Europe is doing. It's going to say, "Well, uh, we have to, uh, we've used up so many arms in the, uh, Iran war. It's already cost, uh, two or three trillion dollars. We can't afford to fight war, uh, to maintain, uh, the American Empire and have social spending. We're going to have, I'm afraid we can't, we're going to have to roll back Social Security. Can't pay it. We're going to have to roll back social spending. Can't pay it. We're going to have to slash government, like, uh, Mr. Musk has said. We're going to slash re, uh, uh, grants for research and development. We're going to slash supports for the universities. We're going to slash social spending. And we're just going to hit the economy real hard. We're now a military economy. Forget any social service economy. You voted Republican. You voted Democrat. Uh, we're all together. We both agree. Cut back social spending. Uh, private, sell off the, uh, the post office for money. Let it be privatized. Sell off whatever the government has, uh, parks or, uh, oil, uh, reserves or natural resources. Uh, just, uh, shift our spending to military spending and to payment to the financial sector, uh, so that we can pay the interest rates on the debts that I, Donald Trump, have run up by my, uh, tax cuts that, uh, Congress went along with, Republicans and Democrats. Uh, so now that you've, uh, cut the taxes on the rich, uh, you're going to have to lower your living standards 10%, 20%. You're going to have to go bankrupt. You voted for me, that you voted for tax cuts. Now pay the price. Has to be paid by somebody. It'll be paid by you, the, uh, the majority of the population, what used to be called the middle class."
There's no free lunch, right? And that, that's just proof of it. Um, let's turn to the stock market. Um, what impact do rising long-term interest rates actually have on the US stock market? I think there's so many misconceptions, and I would love for you to, to kind of walk us through the, the, the basic concepts here and explain how the rise in interest rates actually impacts the US stock market and everybody's 401k and and investment accounts and everything in between.
Well, this, uh, the most stocks are not, uh, bought up by the savings of, uh, the work, the workers through their, uh, pension funds, uh, or through their own personal savings. It's borrowed money. Most stocks are bought up by, uh, institutional investors. They borrow from banks. Uh, this was, uh, what we dis, what was shown in the 1980s, the junk bond takeover movements. Uh, investment banks, starting with Drexel Burnham, in particular, uh, would borrow, raise money from, uh, potential bondholders and investments, you know, at, uh, a relatively, uh, high interest, saying, "We're going to make a killing by buying out companies, so invest in our, uh, corporate rating companies, and we'll borrow cheap, we'll buy up companies, corporate rating." That's what the junk market was all about. Uh, uh, you had interlopers, financial companies buying industrial companies, taking them over, and then slashing production costs, de-industrializing the economy, cutting any long-term, uh, research and development or capital investment in order to make money very quickly, pay out in dividends. Uh, and so, in the last few years, few decades, over a decade, over 90% of, uh, industrial companies' earnings, cash flow, profits, and, uh, other, uh, non-tax-exempt, uh, income has been used for dividend payouts and, uh, stock buybacks. The whole purpose of investing in stocks isn't simply to borrow at a low price and buy stocks paying a higher dividend. But that's most of the borrowing. Uh, but to, uh, buy buy companies and then break them up. If you buy buy hospitals and say, "How do you make money by a hospital that is hardly breaking even?" Well, the hospital will sell off its real estate to a separate company, uh, and, uh, lease it, uh, lease it back from the company. So, the, the hospital will take on, all of a sudden, have to pay a huge rental charge for the land under it and the, the building of the hospital that is now owned by a separate real estate company. Uh, but the, uh, the corporate raiders of the hospital will use the money that this parallel company has, uh, used to buy the, uh, the real estate and pay it out as dividends to themselves. It's all de-industrialization. So, essentially, the stock market has becoming become no longer a way of raising money for capital investment to employ labor. It's, uh, raising money to break, to take over companies, break them up, and de-industrialize them, and leave them in bankrupt shells. That's happened again and again and again. Uh, Sears Roebuck, uh, Toys R Us, that, uh, private capital bought out in, in the smash and grab way. And that's called enshitification. New words added to the English language to describe, uh, this whole process. So, most stocks are bought with borrowed money. Uh, and of course, there's, there's always been the pension fund investments, but the pension funds have lent money to the private investment companies to do this, to financialize, uh, companies. So, the industrial sector has been financialized, and that's what I meant when I said we've moved from industrial capitalism to finance capitalism.
It, it's interesting because the long-term, uh, interest rate on 30-year Treasury has hit 5%, and that's sort of that threshold where everybody seems to, uh, start noticing the, the interest rates once it hovers above 5%. And then the 10-year note, I think, is at 4.6% or so. And it's, you know, if this is temporary, then there's a good argument to be made that, well, this is just sort of transitory, using Powell's favorite word, but it, it, it's not in this case. So, then the question becomes, how long can the US economy actually sustain long-term interest rates like these? and, and what, what do you expect moving forward as a result of this?
Well, I discussed this whole problem in my book, Killing the Host. And, uh, I mentioned there's something called the rule of 72. Any rate of interest is a doubling time. And you want to think, well, how long does it take, uh, a debt, to double? Well, you divide, uh, the interest rate, 72. It works out to 14, 14 years. At 5%, your debt is going to double in 14 years. Well, imagine what this is going to do to, uh, the, the federal debt, to the, uh, real estate debt, to the personal debt in the economy. If you have the debt doubling, uh, if you're having trouble carrying today's debt overhead, how on earth can you, uh, in the next 15 years, pay twice as much debt? Well, the only way of doing that is for the economy to grow more rapidly than debt. But that's not what happens over, over history. Economies always grow less rapidly than the growth of debt because the growth of debt is exponential. It's purely mathematical, uh, and a rising, uh, doubling time. But economies grow in the form of an S-curve. They taper off. And one reason they taper off is because the debt burden becomes heavier and heavier. And that is what slows down the economy until there's a crash. And the crash usually wipes out the debt. Well, that didn't happen in 2008 and 2009. By not wiping out the debt, the Obama administration kept the debt on the books. It didn't let the economy free itself from debt. Uh, and so it's maintained it all. And, uh, the, uh, this is unsustainable growth in further debt is unsustainable in an economy that is already debt-strapped.
And there is one elephant in the room that I would love to quickly touch upon. I know this is sort of a, a topic on its own that's very, very involved, but let's talk about the private equity bubble because obviously rising long-term interest rates have a direct impact on, uh, the refinancing potential and, uh, debt defaults. And you've sort of alluded to it earlier in this conversation, but with respect to private equity firms, what are the consequences then? Because there is, I think it's a trillion, multi-trillion dollar bubble at this point. So, it is very concerning to even imagine the situation where long-term interest rates are rising and the debt comes due.
Well, the private equity companies borrow, you raise money from investors, pension funds, and other, mainly institutional investors, to, uh, do their, uh, corporate rating and, uh, smash and grab, uh, to make profits by, uh, cutting, cutting employment, working, laying off labor, not replacing, uh, workers who've retired, uh, cutting back on profitable businesses, and then selling off parts and parts just to pay higher dividends to the investors. But right now, the, uh, with the economy slow shutting down in many areas or slowing down because of energy, the companies are not able to make further corporate rating, and, uh, the, the parasite has already drained the host of what it, uh, uh, the revenue that it has. And so, the private equity companies, uh, say, "Well, how are we going to pay the investors?" A lot of the investors see what I've just described, and they said, "Well, you know, it looks to me like, uh, the boom is over. Uh, I want to, can you, uh, cash in our shares? We want to sell. Will you give us the money? You know, we've made enough money. Thanks. But now, uh, uh, give us, we want to withdraw our deposits." Well, uh, the, the private equity company says, "I'm sorry. We've frozen withdrawals. If, uh, you try to withdraw your money, we will have to sell all of the, sell some of the assets that we've bought, some of the companies that we've bought. And of course, we've already crippled them. Uh, we've injured them, we've left them, uh, uh, on their way to being corporate shells like Sears and to Toys R Us. And, uh, we'd have to take a huge loss. And if we took, took a loss, we'd have to report our net worth as negative. And that would panic even more of our, uh, depositors and investors, uh, to sell, and then we'd be bankrupt. So, there, all of a sudden, the investors are locked into the, uh, private equity. So, the runners of the private equity said, "Let's pay ourselves a special dividend and a, and bonuses for a big hurry. Let's just let everything collapse." And that's what they're doing. And the losers are the, the investors and, uh, pension funds that thought this was a new magical way of making money instead of just post-industrializing and enshitifying the economy.
So, with everything that you've just described, what are the prospects for today's US and foreign economies in the face of the oil crisis? Because we know that there is no diplomatic solution, um, that we are aware of at this point in the US-Israel war against Iran, and Iran is of course capable and willing to inflict enormous economic costs in the event of an attack on its territory. So, the energy crisis, I think it would be fair to say the energy crisis is going to get worse. How is that going to affect the US and foreign economies coupled with the things that you just described in today's conversation?
There will be a lot of debt defaults. And when there's a debt default, properties transferred from debtors to creditors. Uh, homeowners are going to lose their, uh, homes to the banker, the mortgage bankers. Uh, companies are going to have to, uh, uh, lose the company to their own bankers and, and bondholders and creditors. So, you're going to have, uh, much more of a concentration of property. Financial crashes are gold mines for the wealthy company, uh, uh, uh, sectors with money. Uh, the, the United States will probably go through something like the Asian financial crisis of, uh, 1998, when the Asian countries, uh, were in a squeeze and the currencies crashed, except for Malaysia, that imposed capital controls instead of free markets and, uh, pre-saved itself from a crash. The other Korea, Japan, Singapore, uh, other, uh, countries crashed, and foreign, uh, capital investors came in and, uh, grabbed up, uh, companies in distress at bargain prices. So, that's what, uh, the United States is going to look like, except, uh, it'll be the, uh, wealthiest 1% that has access to bank credit, uh, and the bankers and the financial sector that ends up with more and more property that used to be owned by the popular, the non-financial economy at large.
Professor Hudson, thank you so much for being so incredibly generous today with your time and for joining us. It's always an honor to host you, and the conversation has been incredibly educational and, uh, thought-provoking, and I would love to have you back again to continue the conversation. And to our viewers, please give Michael a follow on Patreon. Support his work. I, I'm, I'm a, I'm a big fan. And also check out his books, which I will link in the description below. Uh, check them out, purchase them, read them. You will not be disappointed. Michael, thank you so much for your time today.
Well, it's a good time to have this discussion.