How Brazil Can Defend Against Financialization and Keep Its Economic Surplus for Itself – Published on Global Research.ca, by Prof. Michael Hudson, Sept. 16, 2010.
… I would like to place this seminar’s topic, “Global Governance,” in the context of global control, which is what “governance” is mainly about. The word (from Greek kyber) means “steering.” The question is, toward what goal is the world economy steering?
That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent from the populace, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies.
The natural history of debt and financialization: … //
… The bankers’-eye view of economies:
The business plan of bank marketing departments is to capitalize any economic surplus into debt service. Loan officers see any net flow of income as potentially available to be captured as interest payments. Their dream of growth and financial success is to see the entire surplus capitalized into debt service to carry loans. Net real estate rent, corporate cash flow (ebitda: earnings before interest, taxes, depreciation and amortization), personal income above basic spending needs, and net government tax revenues thus can be capitalized into as much as banks will lend. And the more credit they lend, the higher prices are bid up for real estate, stocks and bonds.
So bank lending is applauded for making economies richer, even as families and businesses are loaded down with more and more debt. The easier debt leveraging becomes, the more asset prices rise. Lower interest rates, lower down payments, more stretched-out amortization periods, and even fraudulent “devil may care” lending thus increases the “capitalization rate” of real estate and business revenue. This is applauded as “wealth creation” – which turns out to be debt-leveraged asset-price inflation that can infect an entire economy. It is a far cry from what Adam Smith wrote about in The Wealth of Nations.
The limit of this policy is reached when the entire surplus is turned into debt service. At this point the economy is fully financialized. Income spent to pay debts is not available for new investment or consumption spending, so the “real” economy is debt-shackled and must shrink.
This is why the recent financial takeoff ended in a crash. This is what much the world is witnessing today outside of Brazil and its fellow BRIC countries that have not gone so far down along the neoliberal financialization path toward its culmination in debt deflation and austerity.
The World Bank and IMF are not reformable, because they are based on a destructive economic philosophy: … (full long text) …