Dr. Michael Hudson On Landlords and Bankers in Charge of the Economy Again

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Regrettably, your editor was back at the doctor’s office early this morning being diagnosed with tonsillitis after a lousy night. We were especially disappointed because scheduled for today was a noon lunch with Dr. Michael Hudson. His tour of the country is being sponsored by Prosper Australia and tonight at the Melbourne Town Hall at 6:30 Dr. Hudson and Dr. Steve Keen will be “lifting the lid on the GFC.”

We’re not sure if there are still places available. It’s free, but you’ll have to RSVP. You can do so here. It’s a great chance to hear two independent thinkers offer an alternative explanation for what’s going on, an alternative to the rosy everything’s fine clap trap in the mainstream.

If you’re not in Melbourne or can’t make it, don’t worry. We’re going to take up some of Dr. Hudson’s main contentions over the next month and “unpack them” as the saying goes. Among other things, he’s arguing that we are moving to a “Neo-Feudal” world where the landlords and the bankers are again in charge of the economy (and the world).

Their strategy is to get the rest of the country into as much debt as possible. Whether this is so they can increase their claims on financial wealth (rents, interest payments, and capital gains on asset prices) or whether it’s a political program to subjugate the population…that’s one of the questions we were going to ask.

We were also going to ask if the “de-industrialisation” of advanced Western economies that Dr. Hudson talks about is a reversible process. Can Europe and America ever compete with China and Asia in manufactured goods? And if they can only do so in high-end goods (capital goods, technology, aerospace, IT etc.) what does that mean for the structure of employment in Western economies and corporate earnings.

Dr. Hudson, it seems to us, is right to point out that there is a kind of “Financial Oligarchy” that seems to be benefitting the most from the financialisation of the economy. But everyone else – those betting on higher share and house prices to pay for retirement (and pay off huge debts) – may not fare so well. What should you do? What can you do? More on this in future reckonings.

For today, we’ll go to the mailbag and see what your fellow readers have to say.

Dear Dan,

Global governments are attempting to levitate a collapsing private sector debt fuelled asset bubble by using a debt fuelled public sector bubble.

There is now raging inflation out there. Property prices have gone mad; the stock market is doing the same. Everyone feels great at the moment which is a classical sign of the early stages of inflation. Prices are rising for goods and services.

The US has passed the limit where government deficits exceed 40% of government spending. This 40% figure has been found to be the tipping point for hyperinflation, 20 such episodes occurring after 1980. (Berholz: Monetary Regimes and Inflation: History, Economic and Political Relationships).

In the Weimar Germany hyperinflation, the masses were impoverished but the government debt was wiped out.

Is this the fate awaiting us from all the massive public sector stimulation of a seriously wounded private sector economy?

One needs to remember that even a dead body will twitch if enough electricity is applied to the corpse.

Regards,

Peter S.
Melbourne

Dear Dan

Enjoy reckoning…just sometimes wonder why so many experts underestimated the strength of this bear market rally. Do you think it may be because bear markets rallies on average run 70% from their lows and can last for 17 months or longer so why all the amazement?

Yeah so the IOUSA sucks. What’s new? Bankers are rewarded for stealing, families living in car parks – banks making big profits circulating taxpayers money between themselves and the government while they public starve.

Top line growth bah humbug nar that’s a thing of the past – sure it’s a sham but it’s as good as it gets.

It’s really all about the US dollar carry trade i.e. sell us dollars and buy any other real asset on the planet and it comes with helicopter Ben’s blessing.

In reality the last days of Rome are really about having fun not warning people about the abyss we are descending into. When in Rome do as the Romans do. I’m really a perma-bear but have invested in a set of darts just for the time being.

Hi,

I enjoy your daily comments. They provide balance to the relentless spruiking of property provided by all with an interest in selling it. Our stock market is way too high for real earnings and I feel we have learned absolutely nothing over the past two years.

Aussie debt is ballooning with the crazy message that we need to keep spending. I read a lot of financial and economic material every day and we need your comments for a reality check.

If the Western Govt’s keep printing and throwing money around as at present then we are destined to finally fall into a depression around 2012 or 2013. There are too many real facts which unfortunately do not support the general belief that all is coming right.

Best wishes
Ralph M.

From another Ralph…

Hi

Thank you for your daily analysis. It’s refreshing to read common sense occasionally. The western world culture has become the masters of spin.

You write “the Keynesian approach to monetary policy focuses on demand, not on production.” As you have often said in relation to real estate, price is a major factor in (housing) demand, so also for any demand (unless you are a government spending other peoples’ money!) so perhaps we should “focus on productivity” rather than just “production,” the difference being that productivity will increase demand because the price will improve [drop] or the ‘bang’ will be bigger.

For me to buy something for myself with my money, three things must happen – I must want it, I must be able to afford it, and it must represent to me better value for money than something else (or nothing – i.e. saving). Price is up there in two of the three.

Best Regards

Ralph F.
Little Hartley, NSW Australia

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. In the USA the federal government is bailing out the banks at the expence of the average person. Big banks benefit, others lose.

    In Oz the wealth transfer is happening at the corporate level with the boards and managements of many companies helping out their ‘mates’ and the so called ‘sofisticayed’ investors by having equity capital raisings by issuing cheap, deeply discounted shares to these types.

    In company after company the ordinary shareholder sees his/her holdings diluted and often fall in price as these types get the cheap shares and flog them on the market for huge instant profits.

    How many millions of dollars have been given away in this manner over the recent past? How many more hundreds of millions will flow into others’ pockets at the expence of the ordinary shareholder?

    How much risk is there in getting shares at 15 cents when the market price is at 25 cents?

    And to top it off the same people that allocate the shares to their mates often reap huge salaries, bonuses, options, and other perks that verge on the ludicrous in terms of the company’s market cap, sales, or profit.

    To see a Managing Director of a small mining or oil company making well over $300k in salary alone is not uncommon. Ridiculous.

    Ordinary shareholders are being legally ripped-off.

    Reply
  2. Beside the headline below the most ominous line is .

    http://money.cnn.com/2009/10/15/real_estate/foreclosure_crisis_deepens/index.htm

    “lenders themselves have scaled back repossessions over the past few months to give the program time to work”

    more like however “to stave off mark to market and bank insolvency”

    Reply
  3. Yep, Ross. It’s hard for them to hide the elephant in the room, even by standing in front of it. They just aren’t fat enough!

    Reply
  4. Would it be fair to say though Lee that credit is tight for our miners?

    Lachlan Scanlan
    October 15, 2009
    Reply
  5. Spot on Ross.
    How long can they play that game? Not long unless the Gov offers support.

    Reply
  6. Lee,

    “To see a Managing Director of a small mining or oil company making well over $300k in salary alone is not uncommon. Ridiculous”

    That doesn’t seem to unreasonable to me…. perhaps on the low side even… i would hope they were getting significant performance related pay.

    What is the average salary in Aus now… 60k ?

    They are only 5 times the average.

    To be in the priveledged position of being in the easiest money making game in the world – i.e Banking (especially the money creators) and getting 100,200,500, even 1000+ times the average salary is more ridiculous.

    Reply
  7. Exactly right prozac. 300k is value for money!

    The situation in global banking is what is so seriously wrong with the world, however. We are seeing a new class of people emerging, an oligarchy of bankers and financiers, who do practically no work (seriously, they and their families don’t work – the underlings do all the work), and rake in impossible amounts of money. They basically have magic money that never runs out and can buy anything and anybody. Actually this has been the case for over a century, but it’s laid bare for all to see now. Socialism can’t fix it – Snowball and friends will be at the top of the chain of command quicker than you can blink.

    Reply
  8. Dan,
    yep I agree.
    I don’t think the ordinary fellow on the street really understands how easy the money is in banking and how priveledged bankers truly are.

    An economist (i think it was, i got the slides somewhere!) recently proposed a solution to cowboy banking. Make the banks unlimited liability partnerships… all directors are partners… and therefore they have unlimited liability… they get wiped out first.

    At first you think.. NO WAY. No one would be a banker. But that is because of a lack of understanding about how easy it truly is to make risk free money in banking (as a money creator not these small time mortgage types).

    It is the combination of unlimited greed and limited liability of bankers and banks that has caused their recent reckless practices and left the rest of us on the hook.

    Unlimited liability partnerships would change that.

    Reply
  9. Yeah, but an even more elegant solution would be to make all bankers liabilities redeemable in gold.

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  10. Justin, don’t doubt that the banksters already have their inverse spin plan on that score. When its hits the fan and if we all decide that gold is the only safe form of currency then they will do just like FDR did in the 30’s and force you (on pain of a steep criminal sentence and annexation of your assets) to surrender your physical gold to them in exchange for whatever worthless paper they have on offer at the time. Who says ammo hoarders are loonies!

    Reply
  11. You’ve got to remember that the blokes running those sorts of companies are most likely mining engineers with at least 20 years of experience – They (and even their immediate underlings) carry heavy legal responsibilities should bad things happen and people get killed – With the prospect (albeit remote because they are adept at covering their butts) of spending 5 or 10 years eating fishhead soup in the goal of some third world country needing to be rewarded. And the start off pay for a know nothing mining engineer fresh out of uni in a nice safe place like Oz would have to be 120k I guess?

    Lots of us have limitted appreciation for the money that gets moved around and dealt with by others I suspect – I had a mate who works for the ATO stay with me a while back – He spent about 4 hours working on a Sunday in preparation for a Monday work meeting. That’s not usual for him – But he’s a legal eagle with 25 years in the game who’d come up from Canberra to pull together a Monday meeting where the troops were chasing $100 mill in offshore tax fiddles – That’s big money in most people’s language I think? And I’d be surprised if even the mean spirited Oz public service isn’t paying him something like $200k pa (or more?) Especially given stuff like the last time I saw my own solicitor face to face back in 2005 he was presumably having a bad day and saw fit to comment to me that the thought was flicking through his mind to give the business away and just go and work for wages for some other dill at $140k pa.

    Then there are the bankers as Prozak says – Who are in another league altogether I guess? (A bit more like my Chinese Malaysian rellies who move serious loot around.)

    Which is why I see nothing in any way unbelievable/offensive about anything that Biker says – All grist to the mill for those who have an interest in learning a bit about finances I reckon.

    Reply
  12. I can only speak on behalf of the processing engineers in the industry and say that making 100k+ several years out of Uni is pretty common these days. Mining engineers would easily get that with less experience and yes I have heard of them going straight into high paying positions directly from Uni – especially at the height of the boom. So on that balance 300k is not astronomical considering the pay scale at the moment in the industry.

    Reply
  13. Yes Don, the boss of Lihir and at least one of Barrick’s numerous operations are processing people – And I’ve not heard anything to indicate they aren’t doing pretty respectable jobs of it.

    I’ve even heard of an accountant being picked once. Although I’d imagine he had to do a bit of heavy duty cramming if he really wanted a mine manager’s ticket – Smile!

    Reply
  14. $300k for doing what?

    Let’s see:

    Number of employees? Usually Less than 10, if that, and that INCLUDES the members of the Board and company secretary!! Oh, add in another couple of hundred K for the CEO, another 150K for the company secretary and pretty soon you are over A$1,000,000 in salary alone for the board.

    Throw in another couple hundred K for a “Manager” and pretty soon the company is going through a couple of million a year and then its back to the markets with more cheap shares for the mates so the salaries can be paid. Exploration costs? How can they afford to do explration with those kind of ‘administrative’ costs?

    Don’t forget the options, bonuses, those retirement benefits, other nice admin costs like trips to overseas conferneces, etc, etc, etc.

    Sales: Nil.

    Income: Some interest on cash balances.

    “That doesn’t seem to unreasonable to me…. perhaps on the low side even… i would hope they were getting significant performance related pay.”

    Performance for what?

    Seeing the that the mates get the discount shares?

    Seeing the market cap of the company sink from over A$100 million to less than A$15 million? Yep, hand out more performance pay – maybe they can get the share float up to a billion shares and the market cap of the company down to A$10 million.

    How about the dills at one company that had a cap raising at 15 cents a share (market price 25 cents a share) for an “investment opportunity” only to see the market cap of company fall by MORE than the ‘proposed income’ from the deal? Yep, shareholders in that company were real winners.

    Or how aabout another company that issued shares to the ‘mates’ at 9 cents a share when the market price was 22 cents? Yep, caused the share price to sink right back down again. Lucky that the ‘mates’ and the directors took up their shares are they now have zoomed up after a long delayed drill was finally undertaken…after the cap raising at the market low…..

    I suggest that those that have (not) commented on how ‘fair’ the system is take a look at some of Terry McCrann’s column at the Herald Sun on this matter.

    Face it, ordinary shareholders in Oz are being leaglly ripped-off.

    Reply
  15. Huh those bankers make Kevin Rudd on $1M look like an overworked low paid puppet.
    We can dump shares if we’re unhappy with a company. We have little power over banks and politics. If governments make the mining sector “fair” the net result will be broken mining industry with remaining participants poorly remunerated (the farmers will have someone to commiserate with).

    Lachlan Scanlan
    October 17, 2009
    Reply
  16. Look at Toro energy asking the shareholders to ”vote”a big bonus of shares to keep a CEO ,manager whatever to keep him from leaving Toro what a bloody ripoff

    Reply
  17. Lee:
    I don’t think the argument is about whether the payment of CEO’s/Board members is about fairness.

    See, it is all relative.

    If I had shares in a $5 billion company, I would definitely want the CEO (and board) to be on top of their game. If that costs a few million dollars, then so be it, because that is absolutely nothing compared to the cost of the decisions that those people make in running the company.

    I think the premium we pay is for accountability, experience, connections and ‘image’.

    * accountability – we don’t want to pay Joe Bloggs off the street, we want someone who is theoretically accountable financially and in name. Unfortunately (and especially in the banking sector), accountability is not enforced as much as it should be.

    * experience – industry experience. Including dealing with other companies, management experience, all that jazz.

    * connections – sometimes these people have connections with other people.

    * ‘image’ – this is significant. For instance, “renowned XYZ manager is now heading our company and has a great track record”, can send share prices soaring. This is mostly to do with investor confidence.

    Reply

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