Dec 5, 2013
The Insider’s Economic Dictionary: Part A
Posted on Aug 9, 2013
By Michael Hudson
Adam Smith (1723-90): Campaigner against public debts and the wars that gave birth to the taxes to carry their interest charges. In a typical if bitter irony of history, Smith’s opposition to war taxes has led neoliberal economists to appropriate him as the patron saint of free markets. Yet he accused landlords of reaping where they had not sown, and business men of forming predatory schemes wherever they were able. The moral is that if one is to select a patron saint, it is wise to co-opt a well-known icon so as to forestall opponents from citing his authority. (He criticized Dutch finance and applied the term Invisible Hand to the workings of laissez faire.)
Addictive demand: Neoclassical price theory is based on the assumption of diminishing marginal utility: The more food, clothes or other consumption goods one has, the less pleasure each additional unit gives. But as the ancients knew, this principle is not true of wealth, especially of money. The more property one has, the more one wants. Wealth is addictive, sucking its possessors into a compulsive drive to accumulate. (See Hubris.)
Agio: Medieval Europe banned usury, but legalistic-minded Churchmen rationalized the practice of charging it in the form of a foreign-exchange fee. Money was borrowed in one country or currency, to be paid back in another at an exchange-rate which incorporated the usury charge in the guise of a money-changing fee (agio). The most egregious example was the “dry” exchange in which no goods actually were imported or exported. This agio loophole helped channel European banking along the lines of short-term trade financing and discounting bills of exchange.
Asset-price inflation: A policy in which the banking system recycles savings and extends new credit to finance the purchase of real estate, stocks and bonds so as to create windfall gains (euphemized as capital gains). The financial boom that resulted from steering pension-plan reserves into the stock market has inspired proposals to privatize Social Security’s wage withholding in a similar way (see Forced Saving, Labor Capitalism and Pension-Fund Capitalism). Meanwhile, property prices are inflated by steering mortgage credit into real estate, lowering interest rates so that higher mortgage debts can be carried, and loosening the terms of mortgage lending, reducing the down payments needed yet minimizing the repayment of principle by stretching out the loan maturity. Fiscal policy contributes to this phenomenon by shifting taxes off of finance and property onto labor (see Tax Shift).
Asset-price inflation goes hand in hand with debt deflation and aggravates polarization as higher prices for homes oblige families to go further into debt. This diverts more income to the financial sector to channel into real estate, as well as into the stock and bond markets.
An inner contradiction of this process occurs as higher price/earnings ratios reduce the income yields on financial securities, while higher price/rent ratios for real estate reduces the ability of rental income to carry the interest and related financial charges. This leads to pressure to reduce property taxes in order to alleviate the financial squeeze.??Asset stripping: Corporate raiders take over companies, cut back research and development spending and other lines of business that do not produce short-term returns, and downsize their labor force in order to make the remaining employees work harder to pick up the slack. This practice is euphemized as wealth creation when its effect is to improve reported earnings. This raises stock prices over the short term, but undercuts long-term growth in production and competitiveness. (See Free Market.)
International asset stripping occurs as the IMF and World Bank oblige governments to sell off the “crown jewels” of the public domain – mineral rights, public land and buildings, and enterprises long held in the public sector as natural monopolies – as a precondition for obtaining the credit needed to service their foreign debts and avoid currency destabilization. (See Conditionalities, Privatization and Washington Consensus.)
Upcoming – ‘B’ is for Bailout
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