Banks biting the hosts that feed them

There is a growing suspicion on the left that the anti-Zuma and anti-Dilma Rousseff campaigns in SA and Brazil are part of a calculated demolition of BRICS by the West. Killing the Host by Michael Hudson attempts to explain how the global financial system works, and it bears no resemblance to what we were taught in university.

Michael Hudson is regarded by some as the best economist in the world, though his anti-establishment views guarantee he will never win a Nobel prize. His most recent book ‘Killing the Host’ is a brutal dissection of how a ‘parasitic’ financial sector has the world in a death grip.

Hudson started out studying music and the history of culture, but an evening spent with Terence McCarthy, then an economist with General Electric, altered the course of his life. He decided to become an economist. McCarthy explained why most economic crises happen during the northern hemisphere autumn, when crops are harvested and moved to market. The logic was simple: when crops failed, the banks were drained of cash and forced to call up their loans.

The current financial system carries within it the seeds of its own inevitable destruction, says Hudson. One factor above all others guarantees economic collapse: the mathematics of compound interest. The financial system expands faster than the underlying economy, overburdening it with debt which can never be repaid. Financial ‘parasites’ in the form of banks, hedge funds and investment firms have replaced governments around the world as collectors of economic rent in the form of interest payments on loans. Central banks are co-conspirators in this grand deception, by unleashing tidal waves of money to support stock and asset prices, primarily for the benefit of the elite.

Hudson is no ivory tower professor peddling an ideological theory (a charge that could be levelled against Thomas Piketty, author of the hugely successful ‘Capital in the 21^st Century’, a kind of modern day Marxist treatise). Hudson worked as a balance of payments economist with Chase Manhattan Bank in the 1960s. His first task was to forecast the balance of payments of Argentina, Brazil and Chile, so New York banks could assess how much interest these countries could afford to pay.

The aim of the lending banks was to attach the entire economic surplus of these countries for payment of debts. Governments played along with the scheme, running up massive and unsustainable debts that would ultimately be shouldered by their citizens. The world today is captive to a system of debt peonage that has been a hundred years in the making. In short, we are headed for a train wreck.

The solution, we are told, is endless austerity, cut-backs on pensions and smaller government. That would be sensible if the savings were redistributed to the citizens in the form of infrastructure investment or consumer spending, but the purpose of austerity is to ensure the banks are repaid their loans plus interest. Viewed in this light, there is no longer any credible form of national sovereignty left in the world. Governments are hostage to a parasitic financial system: Greece, Ireland, Portugal and other countries have surrendered their fiscal and budgetary policy making to unelected technocrats hand-picked from the banks.

While at Chase, Hudson developed an accounting format to analyse the balance of payments for the US oil industry. Oil companies purchased oil under flags of convenience in Liberia and Panama which allowed them to escape paying tax either in the producing or the consuming countries. The key to this ruse was what has become known as transfer pricing. Shipping companies in these tax-avoidance centres would purchase oil at low prices from Saudi Arabia or Venezuela and sell the oil at marked-up prices to the US and Europe. The profits were booked in Panama, where they paid no tax.

Hudson’s next task at Chase was to come up with a scheme to divert criminal savings going to Switzerland and other hideouts. The US State Department had asked Chase and other banks to establish Caribbean branches to attract money from drug dealers and smugglers and their kin into dollar assets, to support the dollar as US foreign military outflows escalated. The Vietnam war was raging and most of the US balance of payments deficit went to feed the war machine. Unless arrested, the dollar was in trouble, so the US government decided to capture criminal financial flows to support its currency.

Hudson came to the stark realisation that modern economic theory, particularly that relating to international trade, was nonsense. Gunboats and military spending are absent from modern economic theory. So, too, is a torchlight on the all-important ‘errors and omissions’ entry on national accounts that hides capital flight, criminal money and transfer pricing intended to avoid tax. “These elisions are needed to steer trade theory towards the perverse and destructive conclusion that any country can pay any amount of debt, simply by lowering wages enough to pay creditors.”

In 2014 the US slapped Banc Paribas with a $9 billion fine for dealing with its arch-enemy Iran, and then imposed trade and financial sanctions on Russia for reclaiming Crimea from the rump of Ukraine after the US engineered an anti-democratic coup in that country.

Hudson argues that the BRICS countries are being targeted by the West. Why? Because BRICS intends to transact trade and investment in their own currencies as well as the US dollar, insulating them from dependency on Wall Street. Venezeula, a long-time adversary of US imperial ambitions, is also curiously in the throes of political turmoil.

Reading ‘Killing the Host’, these political developments seem a little less random than most South Africans suppose. Indeed, it challenges the economic suppositions on which we have been nurtured for decades. Hudson shows that economic crises are created events that provide the financial conquerors an opportunity to rape and pillage their victims.

This is a must-read for anyone seeking to understand the financial insanity that has sucked the oxygen out of our industries and left ordinary workers worse off than they were 30 or 40 years ago.