russia-insider--2020-03-19--Our Neo-Feudal Economic System Is on the Verge of Collapse (Podcast + Transcript)

Michael Hudson : [ 00:00:00 ] There ’ s recognition that commercial banking has become dysfunctional and that most loans by commercial banks are either against assets – in which case the lending inflates the prices of real estate , stocks and bonds – or for corporate takeover loans .
The economy ’ s low-income brackets have not been helped by today ’ s financial system .
Here in New York City , red lining and a visceral class hatred by high finance toward the poor characterized the major banks .
From the very top to the bottom , they @ @ @ @ @ @ @ to lend to places with racial minorities like the Lower East Side .
The Chase Manhattan Bank told me that the reason was explicitly ethnic , and they didn ’ t want to deal with poor people .
A lot of people in these neighborhoods used to have savings banks .
There were 135 mutual savings banks in New York City with names like the Bowery Savings Banks , the Dime Savings Bank , the Immigrant Savings Bank .
As their names show , they were specifically to serve the low-income neighborhoods .
@ @ @ @ @ @ @ convinced the mutual savings banks to let themselves be raided .
Their capital reserves of the savings banks , was just looted by Wall Street .
The depositors ’ equity was stripped away ( leaving their deposits , to be sure ) .
Sheila Bair , former head of the FDIC , told me that the commercial banks ’ cover story was that they were large enough to provide more capital reserves to lend for low-income neighborhoods .
The reality was that instead , they simply extracted revenue from these neighborhoods .
Large @ @ @ @ @ @ @ , from Chicago and New York to others , are underbanked because of the transformation of commercial banks from providers of mortgages to emptiers-out , just revenue collectors .
That leaves the main recourse in these neighborhoods to pay-day lenders at usurious interest rates .
These lenders have become major new customers for Wall Street bankers , not the poor who have no comparable access to credit .
Apart from the savings banks , of course , you had the post office banks .
When I went to work on Wall Street in @ @ @ @ @ @ @ savings were in the form of post office savings .
The advantage , of course , is that post offices were in every neighborhood .
So you actually had either a local community banking like savings banks – not like today ’ s community banks , which are commercial banks , lending largely to real estate speculators to capitalize rental apartments into heavily mortgaged co-ops with much higher financial carrying charges – or you had post offices .
You now have a deprivation of basic bank services in much of the economy , @ @ @ @ @ @ @ commercial banking system .
The question is , what ’ s going to happen next time there ’ s a bank crash ?
Sheila Bair wrote about after the 2008 crash that the most corrupt bank was Citibank – not only corrupt , but incompetent .
She had wanted to take it over .
But Obama and his Secretary of the Treasury , Tim Geithner , acted as lobbyists for Citibank from the beginning , protecting it from being taken over .
But imagine what would have happened if Citibank would have been @ @ @ @ @ @ @ banks that are about to have negative equity if there is a downturn in the stock and bond and real estate market .
Imagine what will happen if they were turned into public banks .
They would be able to provide the kind of credit that the commercial banking system has refused to provide – credit to blacks , Hispanics and poor people that have just been red-lined in what is becoming a financially polarized dual economy , one for the wealthy and one for everyone else .
Walt McRee : [ 00:04:10 @ @ @ @ @ @ @ , of course , lies with the banking cartel .
They look at public banks as a threat .
They hate competition of any sort , it seems .
Michael Hudson : [ 00:04:18 ] Of course it is a threat .
Walt McRee : [ 00:04:22 ] And even when we say , Michael , that we ’ re not going after the business you ’ re already doing because you aren ’ t lending to small , medium enterprises and so forth – we want to take on the infrastructure that @ @ @ @ @ @ @ , but they still are pushing back .
How will we be able to get past that ?
Michael Hudson : [ 00:04:40 ] I think you should say that of course you ’ re not going to take business away from them , because the public community bank or government-owned bank would not make corporate takeover loans or speculative derivative bets .
It would not create the dysfunctional credit and debt overhead that has been expanding ever since 1999 when the Clinton administration changed the banking rules .
The problem is that @ @ @ @ @ @ @ want the productive kind of loans that public banking would make .
For instance , the reason they didn ’ t want to extend credit to the Lower East Side or the Hudson Yards west side of New York was they wanted to sort of drive out their residents and gentrify it , by providing the money to the big developers who socially bulldoze these neighborhoods .
Their policy is to kick out as many low-income renters or owners as they can , and replace them by raising rents from like $ 50 @ @ @ @ @ @ @ .
That ’ s what ’ s happened on the Lower East Side from the time I first lived there to what rents are today .
There is a fight of the economy ’ s unproductive sector against people who want to use credit in a productive way that actually helps the economy .
I think it ’ s a fight between good and evil , at least between the productive and unproductive economy , between economics for the people and economics for the One Percent .
Ellen Brown : [ 00:06:14 ] @ @ @ @ @ @ @ Fed is going to even allow the banks to collapse again , with what they just did with the repo market .
They can step in at any time to save anybody .
I don ’ t know that Congress , even has a say in it .
What do you think ?
Michael Hudson : [ 00:06:30 ] I think that ’ s right .
I ’ ve talked to Paul Craig Roberts and we discuss whether they can just keep on keeping these zombie banks alive .
Can they keep the @ @ @ @ @ @ @ Reserve manipulating the forward stock and bond markets to support prices ?
It doesn ’ t actually have to buy stocks and bonds beyond the $ 4 trillion it ’ s already put into Quantitative Easing .
It can simply make manipulate the forward market .
That doesn ’ t really cost any money until the big crash comes .
So I think one should have a discussion over what President Trump says is a boom that that he ’ s created , with the stock market going up .
Does that mean @ @ @ @ @ @ @ Are we fine with commercial banking the way it is , so that we don ’ t need public banking ?
I think you have to expose the fact that what ’ s happened is artificial state intervention .
What we have in the name of free market support of the banks is not a free market at all .
It ’ s a highly centralized market to support the predatory financial sector ’ s wealth against the rest of the economy .
The financial sector ’ s wealth takes the form of @ @ @ @ @ @ @ , extracting interest and amortization , while making loans simply to increase asset prices for real estate and financial securities , not put new means of production in place to employ labor .
So you have to go beyond the public banking issue as such , and look at the political context .
Ultimately , the way that you defend public banking is to show how the economy works and how public banking could play a positive role in the economy as it should work .
Ellen Brown : [ 00:08:14 ] Can @ @ @ @ @ @ @ lending ?
I mean , they don ’ t have to … Michael Hudson : [ 00:08:19 ] It ’ s not forward lending , it ’ s buying long .
For the stock market ’ s Dow Jones average , they ’ ll contract to buy all its stocks or those in the S & P 500 in one month , or one week or whatever the timeframe is , for X amount – say , 2 % over what they ’ re selling today .
Well , once the plunge protection @ @ @ @ @ @ @ the market is going to raise the bid prices for these stocks up to what the Fed and the Treasury have promised to pay for them .
By the time the prices go up , the Fed doesn ’ t actually have to buy these stocks , because everybody ’ s anticipated that the Fed would buy them at this 2 percent gain .
So it ’ s a self-fulfilling prophecy .
We ’ re dealing with a government run by the banks and the creditor powers to artificially raise asset prices , @ @ @ @ @ @ @ a system that represents itself as creating prosperity .
But it ’ s not creating prosperity for the 99 Percent .
Public banking would aim at prosperity for the 99 Percent , not just for the One Percent .
Ellen Brown : [ 00:09:46 ] I ’ m writing about Mexico ’ s AMLO , who is now who has just announced in January that he will be building 2,700 branches of a public bank in the next two years .
He ’ s expecting 13,000 branches ultimately , so it will be @ @ @ @ @ @ @ His reasoning is just what you ’ re saying , that the banks have failed and have not serviced the poor .
His mandate is to help the poor , and he can ’ t do that if they don ’ t have banking services .
Ellen Brown : [ 00:10:18 ] Yes , all across the country .
Walt McRee : [ 00:10:22 ] “ Loprabrador ” , AMLO .
So we know that a public monetary source is a public utility .
Our vision is to create a network of local @ @ @ @ @ @ @ us to the view that what we really need to be targeting is the Federal Reserve , to ultimately turn it into a publicly-owned entity .
Is that folly or … Michael Hudson : [ 00:10:55 ] I think the way to get people to support this is if they understand how the Federal Reserve was created .
A few years ago I published an article in an Indian economic journal ( I think it ’ s on my website ) , about how the Federal Reserve was created .
[ 1 ] @ @ @ @ @ @ @ led by J.P. Morgan .
America had a central bank until 1913 – the Treasury .
Until 1913 the Treasury was doing everything that the Federal Reserve began to do .
The idea of creating the Federal Reserve was to take power away from the Treasury .
The Treasury wasn ’ t even allowed to be on the board as an owner of Federal Reserve stock .
The idea was to take decision-making away from Washington , away from democratic politics , and insulate the financial system from the democratic political system by @ @ @ @ @ @ @ centers — Wall Street , Chicago , and the other Federal Reserve districts .
They were the same districts as those that the Treasury already had divided the country into .
Remember , these were the decades leading up to World War I when there was a social democratic revolution from Europe to the United States .
A guiding idea was to democratize banking .
Wall Street very quickly developed a counter strategy to this .
And the counter strategy was the Federal Reserve .
You ’ re welcome to republish my article @ @ @ @ @ @ @ both aim to reverse the counterrevolution mounted against classical economics and social democracy .
The entity you ’ re talking about would probably be under the aegis of the Treasury .
You ’ d be putting the economy back in the direction that the world was moving before World War I derailed these efforts .
You talk of nationalizing the Fed .
I know people don ’ t like the word nationalizing .
How about thing de-privatizing or de-Thatcherizing the Fed ?
You have to represent the Fed as having stolen economic and @ @ @ @ @ @ @ .
It became part of the neoliberal project taking form in Austria in the 1930s .
You ’ re trying to restore the classical economic vision of productive versus unproductive credit , productive versus unproductive labor , and public money as opposed to private money .
These distinctions were erased by the censorial neoliberal counter-revolution .
It ’ s not that you ’ re radical , that these people had a radical revolution to carve away the financial system from democracy .
And you ’ re restoring the classical vision of democratizing , @ @ @ @ @ @ @ : [ 00:14:12 ] I want to thank you for saying that , Michael , because de-privatizing the Federal Reserve is so much more accurate and powerful .
You ’ ll recall that we kind of exchanged a phrase when I said “ institutionalized deception.
” .
I think that ’ s really important .
But let ’ s say that prior to that , Stephanie Kelton gets in there , or somebody from the MMT crowd gets into a new administration prior to de-privatizing the Fed .
Does MMT have a place @ @ @ @ @ @ @ environment ?
Michael Hudson : [ 00:14:55 ] Of course , and here ’ s the role : You can leave the commercial banks to do what they ’ re doing , but you ’ re not going to provide Federal Reserve credit for them to load down the economy with unproductive debt .
The question is , if you ’ re going to create real community banking via a public banking sector , where will it get the money to lend out ?
How do we provide money to the red-lined areas @ @ @ @ @ @ @ capital investment and people ’ s living needs , not just predatory lending ?
The way that MMT comes in is much like the Chicago plan for one hundred percent reserves .
These community banks will need Treasury-created depository credit beyond the deposits they raise in their local areas .
They need more money .
MMT will provide credit to these banks in exchange for their loan originations of a productive character , on terms that borrowers can afford , with realistic mortgages also to build public housing .
The new Fed that @ @ @ @ @ @ @ a major depositor and will provider of the capital deposits and reserves to the banks .
Right now , it has provided $ 4 trillion of Quantitative Easing credit to the banks , not to put into the economy but only to inflate the stock and bond market and make housing more expensive .
Wouldn ’ t it be much better to provide credit to community banks that actually would make credit available for productive economic purposes – and not for takeover loans , stock buybacks and asset speculation ?
Productive credit was @ @ @ @ @ @ @ the late 19th century .
Germany and Central Europe were leading the way .
It was called Middle Europa banking , as opposed to Anglo-American banking .
( I discuss this contrast in Killing the Host . )
That was essentially following the classical model , as everybody expected banking to evolve prior to World War I. Ellen Brown : [ 00:17:29 ] Cool .
That ’ s totally what I also wrote about in my latest book .
The Federal Reserve is where you should be getting credit , so you don @ @ @ @ @ @ @ somewhere else .
Everybody thinks this whole repo thing is so contrived .
It ’ s re-hypothecated .
One party owns the collateral at night , the other party owns it during the day .
It ’ s all just bluff to make it look like they borrowed something that wasn ’ t really there .
So let ’ s just acknowledge that all money is just credit .
And like you say , if you have a good loan , a good project to be monetized , that ’ s the whole @ @ @ @ @ @ @ turn your future productivity into something you can spend in the marketplace .
And the central bank is there to provide the credit .
Michael Hudson : [ 00:18:24 ] That ’ s right .
My way of describing it is to look at history , to show that this is not a utopian idea .
It is what made German and Central European banking so much more productive in the decades leading up to World War I .
So we actually have historical examples of good banking versus bad banking .
But @ @ @ @ @ @ @ Ellen Brown : [ 00:18:53 ] Well , regarding this whole repo thing , one big problem we have with our public banks is the 110 percent collateralization requirement in California .
How is a bank supposed to make loans if it has to use its deposits to buy securities – something safe and yielding low interest to back the deposits ?
It seems to me that what the big banks do – and I think we could do it , too – is to take those deposits and buy federal securities at @ @ @ @ @ @ @ around and use the securities as collateral in the repo market , where they pay 1.5 percent .
In other words , they earn 1.5 percent and they pay 1.5 percent .
So it ’ s a wash .
They get their money for free .
I think we could do that , too .
Or are only certain players allowed to play that game , and we can ’ t jump in ?
Michael Hudson : [ 00:19:50 ] Well , you ’ re the lawyer .
Of course they could do @ @ @ @ @ @ @ things that you and other progressives have recommended is that the Fed should stop paying money to the banks for their reserve deposits .
Stop giving them the free giveaway .
If you want to say , “ We ’ re against the largest welfare recipients in the country .
They ’ re not the people you think .
They ’ re the Wall Street banks .
These hypocrites want to cut back Social Security to balance the budget .
They want to cut back medical care and social services , and make @ @ @ @ @ @ @ Brown : [ 00:20:30 ] Right , agreed .
But if we just stand on our high horse and say this has to change , nothing will happen .
We could do it ourselves and just show what you ’ re doing in contrast to what they ’ re doing … Michael Hudson : [ 00:20:44 ] You ’ re asking for symmetry .
They ’ re making us carry a big load on our back , that they don ’ t have to carry .
They ’ re loading the dice in @ @ @ @ @ @ @ unload the dice and stop the insider favoritism .
You correctly represent the banks as being insiders .
You have to say , “ Look , these insiders are trying to keep a monopoly.
” You could use the anti-monopoly legislation that ’ s been on the books since Teddy Roosevelt ’ s time .
You have a lot of legal power to break up the big banks .
You could treat them like I think they could treat the pharmaceutical companies if Bernie gets in .
Walt McRee : [ 00:21:44 ] @ @ @ @ @ @ @ banking industry .
New forms of payment exchange technologies seem to be eating away at that singular source of credit .
What ’ s your prognosis for how that ’ s going to evolve ?
Will the big banks find a way to clamp down on that ultimately ?
Michael Hudson : [ 00:22:05 ] Are we talking about cryptocurrency ?
Walt McRee : [ 00:22:07 ] That would be one example , yes .
Michael Hudson : [ 00:22:10 ] Well , .
you can ’ t stop people from gambling .
@ @ @ @ @ @ @ like buying an Andy Warhol etching .
Maybe it ’ ll go up in price if a large number of people want it .
But basically , it ’ s junk .
It ’ s very speculative .
It ’ s certainly not stable .
It goes up and down .
One day there may be a solar flare that ’ s going to wipe out all the bank records for these things .
But there is no way to stop people from doing something that seems to be silly or gambling .
@ @ @ @ @ @ @ So you will not give them any protection against loss .
You also will want to insulate the economy from having any transactions in crypto , in these alternative money things that pose a big threat of loss .
They are not real money , because the government will not accept payment of cryptocurrencies as taxes or for public goods and services .
The government will only accept specified forms of money .
You can create any kind of swap or bet .
If you want to create the equivalent of a racetrack @ @ @ @ @ @ @ , but that ’ s a financial racetrack .
I think there may be taxes on racetracks .
They were unregulated for a long time .
But Hollywood movies showed that there ’ s a lot of criminalization going on there .
Walt McRee : [ 00:23:59 ] We were all amused , well , maybe a little wondering about Max Kaiser .
Ellen and I and Tyson Slokum had some time with him over there just before you were at his Brooklyn studio , but Max is into Bitcoin in a big @ @ @ @ @ @ @ the new gold .
Michael Hudson : [ 00:24:20 ] He told me that a lot of people watch his show because they ’ re gold bugs or they are interested in Bitcoin .
I think he ’ s tried to take a neutral view of it , certainly in our personal conversations .
He ’ s not a gold bug and he ’ s not a Bitcoin or other bug .
But he said that a lot of people want to find out about it , so he has guests on his @ @ @ @ @ @ @ is , take your choice.
” It ’ s part of the new speculative financial landscape , just like swamps are part of landscape for Florida real estate .
So he ’ s going to cover the whole spectrum .
Reuters produces his shows , and the audience wants to hear about this .
So he talks about what they want to hear .
Ellen Brown : [ 00:25:20 ] I think he actually does promote Bitcoin .
He ’ s heavily invested in it and he was one of the originals , @ @ @ @ @ @ @ lot of money on it .
Ellen Brown : [ 00:25:29 ] I think he agrees that it can ’ t be a national currency .
It ’ s too slow , too expensive , and too environmentally unfriendly .
But like you say , it has been a good investment , just like fine art or something that , if people want it , the value goes up .
Plus , there ’ s a big black market for it , for trading and things that you don ’ t want the @ @ @ @ @ @ @ : [ 00:25:57 ] It ’ s a real phenomenon .
I know people who benefited from Andy Warhol .
So he saw the phenomenon and he seems to have made money , but when Steve Keen and I and others got together with him for a couple of days two months ago , the topic never came up in discussion .
But gold did .
I wonder where the gold of Libya went , for instance .
Apparently it was all taken and I understand the US gave it to ISIS .
@ @ @ @ @ @ @ ISIS to act as our Foreign Legion .
We gave them Libya ’ s weapons .
Some of the gold must have just been taken by the CIA and State Department for dirty tricks for its black operations .
Certainly , America wants to prevent any other country or large gold possessor from having enough gold to try to reinstate it as a means of settling balance-of-payments deficits .
America runs a large military deficit , so at a certain point , the more money it spends abroad for its 800 military bases @ @ @ @ @ @ @ .
Just like in General de Gaulle ’ s time during the Vietnam War , although actually Germany was taking more gold than France .
So America wants to keep the dollar at the center of the world financial system .
That really was why it went to war with Libya , because Libya was one of the first countries to de-dollarize and move its currency toward gold .
So you ’ re having a group of countries – Russia , China , Iran and others – add gold to their reserves instead @ @ @ @ @ @ @ a de-dollarization move throughout the world to break free from the US ability to do what it did do Iran .
When Iran borrowed in dollars under the Shah , it used Chase Manhattan Bank as its paying agent .
It put enough money into the account to pay its foreign debts service .
But then the State Department told Chase to screw Iran and refuse to turn over the payment .
Now that the Shah wasn ’ t running Iran , once Chase refused to turn over the payment and froze Iran @ @ @ @ @ @ @ Iran went into default on the entire dollarized foreign debt .
It was liable for a huge amount of capital .
That was a warning for the rest of the world that no government could safely put its money in an American bank or an American bank branch , or in a British branch that would act as a subsidiary of the Pentagon .
Because if you do , the bank can simply force you into default at any time , just like the US CIA can come in and use electronic weaponry @ @ @ @ @ @ @ That ’ s why the threat of cutting Russia and China and other countries off from the Swift Interbank Clearing System led Russia to develop its own clearing system .
With a flick of a switch it can begin to work anytime United States tries to cut Russia off from the SWIFT payments system .
So you ’ re having the whole world de-dollarize very quickly .
And right now the question is what Europe will choose .
Are Germany and other countries going to become part of the de-dollarized system , or @ @ @ @ @ @ @ This is part of the fight against using the IT chips and the communications chips from Huawei .
Huawei did not put US spyware into the system .
The United States says that if it can ’ t have a phone system and communications system that it can control by spyware and use to blow up your economy , your public utilities , your electrical systems , then you ’ re our enemy , because we feel insecure without this control .
When President Trump said that Huawei was a threat to US @ @ @ @ @ @ @ don ’ t feel secure unless we have the power to destroy any economy that acts in any way that is independent of the United States – because you might do something we don ’ t like .
This is the most aggressive concept of security that one could imagine .
So of course the rest of the world is seeing its own national security as having a financial dimension .
The financial dimension is to create a monetary and financial system that minimizes connections to the dollar except to the extent of @ @ @ @ @ @ @ stabilize foreign exchange rate .
Ellen Brown : [ 00:31:31 ] There ’ s a lot of talk , even among central bankers , that we need to get off the dollar as a global reserve currency .
But it seems to me that gold is also manipulatable .
I mean , it ’ s not the ideal I had envisioned a system where instead of reserves being a thing , like dollars or gold that you can actually trade , it would just be a measure , like a yardstick .
You @ @ @ @ @ @ @ to another according to what you could buy with it .
Like you ’ d have a whole basket of things that everybody uses in every country .
And now that they report that kind of stuff , it wouldn ’ t be all that hard to get the figures and , you know , just compare and say , well , your dollar will be worth so many pesos in Mexico or whatever .
That was my idea , but what do you think ?
Michael Hudson : [ 00:32:27 ] That @ @ @ @ @ @ @ money , which is as a measure of value , but it would not do at all for international money .
You have to have some means of constraint .
In other words , suppose the United States continued to run another military budget deficit like it did in the Vietnam War .
There is no way that you could use the balance of payments as a constraint on the policy of deficit countries , which are usually the military aggressors .
The whole idea of going off gold was that under the @ @ @ @ @ @ @ make war , because if you go to war your currency collapses .
In 1976 , Herman Kahn and I went to the Treasury and – this is to answer your question .
He put up a map of the world and said , “ These are the countries – Scandinavia , Western Europe , the United States – that don ’ t believe in gold .
They ’ re all politically stable social democratic countries .
They have faith in government .
No look at these others … here ’ s the @ @ @ @ @ @ @ South America , Africa and most of Asia .
these are people that believe in gold .
Why do they believe in gold , but not the Protestant cultural area ?
Well , they don ’ t have faith in government .
They don ’ t trust governments .
They want some option that is independent of government .
Gold is not only to bribe the border guards if they ’ re escaping from somewhere .
They want to be free of governments that have been captured by anti-democratic , predatory forces.
” @ @ @ @ @ @ @ of what you would make that is an alternative to the dollar that people could understand , well , for thousands of years , people have decided that gold and silver .
( I ’ m sure that you could add platinum and palladium . )
So they have been the ultimate means of settlement , and hence of international monetary constraint .
Gold isn ’ t to be used as money .
It ’ s not to be used as a normal means of payment .
What it is to be used @ @ @ @ @ @ @ the ability of countries to run up chronic deficits that are mainly military in character .
So I called our presentation “ Gold : the Peaceful Metal.
” Well , needless to say , the Treasury didn ’ t go for that , because they said that we had just explained how super-imperialism works via the dollar .
So they didn ’ t go back to gold .
We lost that argument .
Ellen Brown : [ 00:35:34 ] Isn ’ t the reason we went off gold standard , though , that @ @ @ @ @ @ @ and that we wound up leveraging it , and … Michael Hudson : [ 00:35:42 ] No , there ’ s plenty of gold .
There wasn ’ t enough gold to pay for the military deficit .
Every month the dollars we spent in Vietnam would be turned over to the banks in Indo-China .
They were French .
They ’ d turn the dollars over to Paris and General de Gaulle would turn in these dollars for gold .
We had to pay in gold for the military deficit , which @ @ @ @ @ @ @ balance-of-payments deficits in the 50s , 60s and into the 70s .
America went off gold so that it could afford to wage war without the constraint of losing its control over the international monetary system .
Ellen Brown : [ 00:36:29 ] We went after gold domestically because it didn ’ t work .
I mean , you had to use fractional reserve lending … Michael Hudson : [ 00:36:35 ] Yes , of course gold doesn ’ t work domestically .
It ’ s certainly not an appropriate domestic money supply @ @ @ @ @ @ @ it for settlements among central banks internationally .
Ellen Brown : [ 00:36:49 ] But you said it ’ s not to be traded .
But if you don ’ t , how do you settle your balance of payments ?
Michael Hudson : [ 00:36:53 ] It can be traded .
There is a market .
And you began by saying , quite correctly , that gold prices are manipulated .
Well , right now the US and the central banks are manipulating its price to keep it low , in the @ @ @ @ @ @ @ the stock and bond market by buying forward .
Except in the case of gold , they ’ re selling forward .
If they keep agreeing to sell gold at a very low price , people will see that if they can buy gold at this low price , why should they buy it at a higher price today , as the price will fall and be driven down .
So , yes , gold is manipulated downwards today by the U.S. – essentially the plunge protection team acting internationally to keep the @ @ @ @ @ @ @ countries and populations from buying it is protection against collapse of the financial system .
So we ’ re back to the fact that the financial system is dysfunctional .
In a functional financial system , you wouldn ’ t need domestic reference to gold .
You ’ d have a domestic financial system that works fine without gold .
Gold is what you have when the financial system becomes dysfunctional and there ’ s a breakdown .
Ellen Brown : [ 00:38:21 ] Well , it almost seems like you need some @ @ @ @ @ @ @ ’ s like a one-world government , which we all freak out about .
Michael Hudson : [ 00:38:28 ] You certainly don ’ t want a one world government .
Right now all the plans for world government are neoliberal .
They aim essentially to limit , to break up democratic government regulation of corporate business , mining and monopolies .
The idea of a one-world government is to destroy any democratic government ’ s ability to make its own laws in the interests of labor or society .
You would have @ @ @ @ @ @ @ of property .
It ’ s what the University of Chicago calls the Law and Economics regime .
And this is , this is fascism on an international scale .
And there is a wonderful book by Quinn Slobodian in 2008 , Globalists : The End of Empire and the Birth of Nationalism , showing how these plans were developed by fascists in the 1930s and by the fascist promoters at the University of Chicago .
The fascist promoters were people like Hayek and von Mises and the Geneva economists around the League @ @ @ @ @ @ @ they ’ re anti-government , they ’ re really anti-democracy .
They ’ re for an iron-fisted government by big business , big mining and big oil – and most of all , by big banks .
That is the reason why people don ’ t trust an international government .
It would be an international iron fist of fascism , the way the current maneuvering of the financial classes and the rentierclasses and the neocons have arranged things .
Ellen Brown : [ 00:39:56 ] Well , I totally agree .
It @ @ @ @ @ @ @ sovereignty for all our little nations , and even our little cities , states and so forth .
But it seems to me , how do you get everybody to work together ?
For example , Venezuela has the debt problem that any country has that ’ s heavily in debt to foreigners , or to vulture funds or whatever .
There ’ s not a universally recognized court that you can go to .
And , you know , everybody agrees .
It does seem like on some level we need some @ @ @ @ @ @ @ agree on the rules .
Michael Hudson : [ 00:40:33 ] Absolutely right .
Now , of course , the United States would not recognize any international court .
So , again , you ’ d have all the rest of the world belonging to the court , and the United States as the outlier .
It ’ s like you ’ re the healthy body and we want to parasitize you .
And it will not recognize the court .
My Super-Imperialism reviews the history of this policy .
But you ’ @ @ @ @ @ @ @ court that would recognize such things as odious debt for governments .
Venezuela ’ s problem is that under the dictators that the Americans had installed by assassination and force , Venezuela had pledged its oil reserves as collateral for its international bonds .
That gives a vested interest in the creditors to make it default and grab its oil reserves and its investments in the United States , the oil distributors it bought .
So , yes , you do need a set of international rules for writing down bad debts .
@ @ @ @ @ @ @ .
You need an anti-IMF .
Instead of acting on behalf of the creditors imposing austerity on countries , you should create an organization representing society .
And s the interest of society is to grow .
Instead of promoting austerity like the IMF does , it would promote prosperity .
Instead of financing the US government dollarization and giving US control , it would be part of the de-dollarization group .
So you ’ d have a pro-growth group of nations – of the world economy – using finance for growth and @ @ @ @ @ @ @ d also have the United States providing predatory credit , austerity , cutting back Social Security , cutting back Medicare and having a polarizing economy that is shrinking and will end up looking like Greece or Argentina .
The rest of the world would follow more productive and less oligarchic financial policies .
That should ultimately be our global dream .
But there ’ s been little preparation for that .
The financial sector ’ s neoliberals have o put together an almost conspiratorial Law and Economics lobbying group to promote the Trans-Pacific @ @ @ @ @ @ @ governments from imposing anti-pollution fines or regulating monopolies or closing tax havens .
If you fine an oil company for polluting , the government is obliged under this international law to pay the oil companies what they would have earned if they would have continued to poison the environment .
This is … Michael Hudson : [ 00:43:41 ] Definitely .
This is an international deathwish .
Walt McRee : [ 00:43:47 ] We ’ ve been speaking with economist Michael Hudson .
Our thanks to him for being on this program again @ @ @ @ @ @ @ more from Michael on future editions of It ’ s Our Money .
Walt McRee : [ 00:43:59 ] Well , that ’ s it for this edition of It ’ s Our Money with Ellen Brown .
Thanks to our guests or sponsors , Public Banking Associates , and to you for listening .
Be sure to check out Ellen ’ s latest writings on the economy and the changing world of money by visiting ellenbrown.com .
And for more information on public banking , visit PublicBankingInstitute.org .
For information on how @ @ @ @ @ @ @ insight and council about public banks from key national experts , visit PublicBankingAssociates.com .
I ’ m Walt McRee .
See you next time on It ’ s our Money with Ellen Brown .
[ 1 ] “ How the U.S. Treasury avoided Chronic Deflation by Relinquishing Monetary Control to Wall Street , ” Economic & Political Weekly ( India ) , May 7 , 2016 .
Available on Naked Capitalism an michael-hudson.com .

Michael Hudson: [00:00:00] There’s recognition that commercial banking has become dysfunctional and that most loans by commercial banks are either against assets – in which case the lending inflates the prices of real estate, stocks and bonds – or for corporate takeover loans.
The economy’s low-income brackets have not been helped by today’s financial system. Here in New York City, red lining and a visceral class hatred by high finance toward the poor characterized the major banks. From the very top to the bottom, they were very clear they were not going to lend to places with racial minorities like the Lower East Side. The Chase Manhattan Bank told me that the reason was explicitly ethnic, and they didn’t want to deal with poor people.
A lot of people in these neighborhoods used to have savings banks. There were 135 mutual savings banks in New York City with names like the Bowery Savings Banks, the Dime Savings Bank, the Immigrant Savings Bank. As their names show, they were specifically to serve the low-income neighborhoods. But in the 1980s the commercial banks convinced the mutual savings banks to let themselves be raided. Their capital reserves of the savings banks, was just looted by Wall Street. The depositors’ equity was stripped away (leaving their deposits, to be sure). Sheila Bair, former head of the FDIC, told me that the commercial banks’ cover story was that they were large enough to provide more capital reserves to lend for low-income neighborhoods. The reality was that instead, they simply extracted revenue from these neighborhoods. Large parts of the largest cities in America, from Chicago and New York to others, are underbanked because of the transformation of commercial banks from providers of mortgages to emptiers-out, just revenue collectors. That leaves the main recourse in these neighborhoods to pay-day lenders at usurious interest rates. These lenders have become major new customers for Wall Street bankers, not the poor who have no comparable access to credit.
Apart from the savings banks, of course, you had the post office banks. When I went to work on Wall Street in the 1960s, 3 percent of U.S. savings were in the form of post office savings. The advantage, of course, is that post offices were in every neighborhood. So you actually had either a local community banking like savings banks – not like today’s community banks, which are commercial banks, lending largely to real estate speculators to capitalize rental apartments into heavily mortgaged co-ops with much higher financial carrying charges – or you had post offices. You now have a deprivation of basic bank services in much of the economy, combined with an increasingly dysfunctional and predatory commercial banking system.
The question is, what’s going to happen next time there’s a bank crash? Sheila Bair wrote about after the 2008 crash that the most corrupt bank was Citibank – not only corrupt, but incompetent. She had wanted to take it over. But Obama and his Secretary of the Treasury, Tim Geithner, acted as lobbyists for Citibank from the beginning, protecting it from being taken over. But imagine what would have happened if Citibank would have been become a public bank – or other banks that are about to have negative equity if there is a downturn in the stock and bond and real estate market. Imagine what will happen if they were turned into public banks. They would be able to provide the kind of credit that the commercial banking system has refused to provide – credit to blacks, Hispanics and poor people that have just been red-lined in what is becoming a financially polarized dual economy, one for the wealthy and one for everyone else.
Walt McRee: [00:04:10] Well, power in that realm, of course, lies with the banking cartel. They look at public banks as a threat. They hate competition of any sort, it seems.
Michael Hudson: [00:04:18] Of course it is a threat.
Walt McRee: [00:04:22] And even when we say, Michael, that we’re not going after the business you’re already doing because you aren’t lending to small, medium enterprises and so forth – we want to take on the infrastructure that you don’t want to fund, but they still are pushing back. How will we be able to get past that?
Michael Hudson: [00:04:40] I think you should say that of course you’re not going to take business away from them, because the public community bank or government-owned bank would not make corporate takeover loans or speculative derivative bets. It would not create the dysfunctional credit and debt overhead that has been expanding ever since 1999 when the Clinton administration changed the banking rules.
The problem is that the big commercial banks don’t want the productive kind of loans that public banking would make. For instance, the reason they didn’t want to extend credit to the Lower East Side or the Hudson Yards west side of New York was they wanted to sort of drive out their residents and gentrify it, by providing the money to the big developers who socially bulldoze these neighborhoods. Their policy is to kick out as many low-income renters or owners as they can, and replace them by raising rents from like $50 a month to $5,000 a month. That’s what’s happened on the Lower East Side from the time I first lived there to what rents are today.
There is a fight of the economy’s unproductive sector against people who want to use credit in a productive way that actually helps the economy. I think it’s a fight between good and evil, at least between the productive and unproductive economy, between economics for the people and economics for the One Percent.
Ellen Brown: [00:06:14] I wonder, though, if the Fed is going to even allow the banks to collapse again, with what they just did with the repo market. They can step in at any time to save anybody. I don’t know that Congress, even has a say in it. What do you think?
Michael Hudson: [00:06:30] I think that’s right. I’ve talked to Paul Craig Roberts and we discuss whether they can just keep on keeping these zombie banks alive. Can they keep the over-indebted zombie economy alive by the Federal Reserve manipulating the forward stock and bond markets to support prices? It doesn’t actually have to buy stocks and bonds beyond the $4 trillion it’s already put into Quantitative Easing. It can simply make manipulate the forward market. That doesn’t really cost any money until the big crash comes. So I think one should have a discussion over what President Trump says is a boom that that he’s created, with the stock market going up. Does that mean that the economy is getting richer? Are we fine with commercial banking the way it is, so that we don’t need public banking?
I think you have to expose the fact that what’s happened is artificial state intervention. What we have in the name of free market support of the banks is not a free market at all. It’s a highly centralized market to support the predatory financial sector’s wealth against the rest of the economy. The financial sector’s wealth takes the form of credit to the rest of the economy, extracting interest and amortization, while making loans simply to increase asset prices for real estate and financial securities, not put new means of production in place to employ labor. So you have to go beyond the public banking issue as such, and look at the political context. Ultimately, the way that you defend public banking is to show how the economy works and how public banking could play a positive role in the economy as it should work.
Ellen Brown: [00:08:14] Can you explain what you meant by forward lending? I mean, they don’t have to …
Michael Hudson: [00:08:19] It’s not forward lending, it’s buying long. For the stock market’s Dow Jones average, they’ll contract to buy all its stocks or those in the S&P 500 in one month, or one week or whatever the timeframe is, for X amount – say, 2% over what they’re selling today. Well, once the plunge protection team issues a guarantee to buy, the market is going to raise the bid prices for these stocks up to what the Fed and the Treasury have promised to pay for them. By the time the prices go up, the Fed doesn’t actually have to buy these stocks, because everybody’s anticipated that the Fed would buy them at this 2 percent gain. So it’s a self-fulfilling prophecy. We’re dealing with a government run by the banks and the creditor powers to artificially raise asset prices, on credit. This has kept alive a system that represents itself as creating prosperity. But it’s not creating prosperity for the 99 Percent. Public banking would aim at prosperity for the 99 Percent, not just for the One Percent.
Ellen Brown: [00:09:46] I’m writing about Mexico’s AMLO, who is now who has just announced in January that he will be building 2,700 branches of a public bank in the next two years. He’s expecting 13,000 branches ultimately, so it will be the largest bank in the country. His reasoning is just what you’re saying, that the banks have failed and have not serviced the poor. His mandate is to help the poor, and he can’t do that if they don’t have banking services.
Michael Hudson: [00:10:17] Is that national?
Ellen Brown: [00:10:18] Yes, all across the country.
Walt McRee: [00:10:22] “Loprabrador”, AMLO. So we know that a public monetary source is a public utility. Our vision is to create a network of local and state public banks. That leads us to the view that what we really need to be targeting is the Federal Reserve, to ultimately turn it into a publicly-owned entity. Is that folly or …
Michael Hudson: [00:10:55] I think the way to get people to support this is if they understand how the Federal Reserve was created. A few years ago I published an article in an Indian economic journal (I think it’s on my website), about how the Federal Reserve was created.[1] There was a fight by Wall Street led by J.P. Morgan. America had a central bank until 1913 – the Treasury. Until 1913 the Treasury was doing everything that the Federal Reserve began to do. The idea of creating the Federal Reserve was to take power away from the Treasury. The Treasury wasn’t even allowed to be on the board as an owner of Federal Reserve stock. The idea was to take decision-making away from Washington, away from democratic politics, and insulate the financial system from the democratic political system by turning control over to the corporate financial centers — Wall Street, Chicago, and the other Federal Reserve districts. They were the same districts as those that the Treasury already had divided the country into. Remember, these were the decades leading up to World War I when there was a social democratic revolution from Europe to the United States. A guiding idea was to democratize banking.
Wall Street very quickly developed a counter strategy to this. And the counter strategy was the Federal Reserve. You’re welcome to republish my article on your site. You and I both aim to reverse the counterrevolution mounted against classical economics and social democracy. The entity you’re talking about would probably be under the aegis of the Treasury. You’d be putting the economy back in the direction that the world was moving before World War I derailed these efforts.
You talk of nationalizing the Fed. I know people don’t like the word nationalizing. How about thing de-privatizing or de-Thatcherizing the Fed? You have to represent the Fed as having stolen economic and financial policy away from the public domain. It became part of the neoliberal project taking form in Austria in the 1930s. You’re trying to restore the classical economic vision of productive versus unproductive credit, productive versus unproductive labor, and public money as opposed to private money. These distinctions were erased by the censorial neoliberal counter-revolution.
It’s not that you’re radical, that these people had a radical revolution to carve away the financial system from democracy. And you’re restoring the classical vision of democratizing, re-democratizing finance and banking.
Walt McRee: [00:14:12] I want to thank you for saying that, Michael, because de-privatizing the Federal Reserve is so much more accurate and powerful. You’ll recall that we kind of exchanged a phrase when I said “institutionalized deception.”. I think that’s really important. But let’s say that prior to that, Stephanie Kelton gets in there, or somebody from the MMT crowd gets into a new administration prior to de-privatizing the Fed. Does MMT have a place to play or to emerge in that environment?
Michael Hudson: [00:14:55] Of course, and here’s the role: You can leave the commercial banks to do what they’re doing, but you’re not going to provide Federal Reserve credit for them to load down the economy with unproductive debt. The question is, if you’re going to create real community banking via a public banking sector, where will it get the money to lend out? How do we provide money to the red-lined areas of the economy to actually finance tangible capital investment and people’s living needs, not just predatory lending? The way that MMT comes in is much like the Chicago plan for one hundred percent reserves. These community banks will need Treasury-created depository credit beyond the deposits they raise in their local areas.
They need more money. MMT will provide credit to these banks in exchange for their loan originations of a productive character, on terms that borrowers can afford, with realistic mortgages also to build public housing. The new Fed that we’re talking about will be a major depositor and will provider of the capital deposits and reserves to the banks. Right now, it has provided $4 trillion of Quantitative Easing credit to the banks, not to put into the economy but only to inflate the stock and bond market and make housing more expensive. Wouldn’t it be much better to provide credit to community banks that actually would make credit available for productive economic purposes – and not for takeover loans, stock buybacks and asset speculation?
Productive credit was what everybody expected banking to develop in the late 19th century. Germany and Central Europe were leading the way. It was called Middle Europa banking, as opposed to Anglo-American banking. (I discuss this contrast in Killing the Host.) That was essentially following the classical model, as everybody expected banking to evolve prior to World War I.
Ellen Brown: [00:17:29] Cool. That’s totally what I also wrote about in my latest book. The Federal Reserve is where you should be getting credit, so you don’t have to borrow it from somewhere else. Everybody thinks this whole repo thing is so contrived. It’s re-hypothecated. One party owns the collateral at night, the other party owns it during the day. It’s all just bluff to make it look like they borrowed something that wasn’t really there. So let’s just acknowledge that all money is just credit. And like you say, if you have a good loan, a good project to be monetized, that’s the whole point of a bank. It will turn your future productivity into something you can spend in the marketplace. And the central bank is there to provide the credit.
Michael Hudson: [00:18:21] That’s right.
Ellen Brown: [00:18:22] Turn it into dollars.
Michael Hudson: [00:18:24] That’s right. My way of describing it is to look at history, to show that this is not a utopian idea. It is what made German and Central European banking so much more productive in the decades leading up to World War I. So we actually have historical examples of good banking versus bad banking. But the predators won in the end.
Ellen Brown: [00:18:53] Well, regarding this whole repo thing, one big problem we have with our public banks is the 110 percent collateralization requirement in California. How is a bank supposed to make loans if it has to use its deposits to buy securities – something safe and yielding low interest to back the deposits? It seems to me that what the big banks do – and I think we could do it, too – is to take those deposits and buy federal securities at 1.5 percent, and then they turn around and use the securities as collateral in the repo market, where they pay 1.5 percent. In other words, they earn 1.5 percent and they pay 1.5 percent. So it’s a wash. They get their money for free. I think we could do that, too. Or are only certain players allowed to play that game, and we can’t jump in?
Michael Hudson: [00:19:50] Well, you’re the lawyer. Of course they could do it. I think one of the things that you and other progressives have recommended is that the Fed should stop paying money to the banks for their reserve deposits. Stop giving them the free giveaway. If you want to say, “We’re against the largest welfare recipients in the country. They’re not the people you think. They’re the Wall Street banks. These hypocrites want to cut back Social Security to balance the budget. They want to cut back medical care and social services, and make themselves the only welfare recipients.”
Ellen Brown: [00:20:30] Right, agreed. But if we just stand on our high horse and say this has to change, nothing will happen. We could do it ourselves and just show what you’re doing in contrast to what they’re doing …
Michael Hudson: [00:20:44] You’re asking for symmetry. They’re making us carry a big load on our back, that they don’t have to carry. They’re loading the dice in their own favor. You want to unload the dice and stop the insider favoritism. You correctly represent the banks as being insiders. You have to say, “Look, these insiders are trying to keep a monopoly.” You could use the anti-monopoly legislation that’s been on the books since Teddy Roosevelt’s time. You have a lot of legal power to break up the big banks. You could treat them like I think they could treat the pharmaceutical companies if Bernie gets in.
Walt McRee: [00:21:44] Monopolies are being challenged by the shadow banking industry. New forms of payment exchange technologies seem to be eating away at that singular source of credit. What’s your prognosis for how that’s going to evolve? Will the big banks find a way to clamp down on that ultimately?
Michael Hudson: [00:22:05] Are we talking about cryptocurrency?
Walt McRee: [00:22:07] That would be one example, yes.
Michael Hudson: [00:22:10] Well,. you can’t stop people from gambling. People think that buying a cryptocurrency is like buying an Andy Warhol etching. Maybe it’ll go up in price if a large number of people want it. But basically, it’s junk. It’s very speculative. It’s certainly not stable. It goes up and down. One day there may be a solar flare that’s going to wipe out all the bank records for these things. But there is no way to stop people from doing something that seems to be silly or gambling. You certainly will not insure them. So you will not give them any protection against loss. You also will want to insulate the economy from having any transactions in crypto, in these alternative money things that pose a big threat of loss. They are not real money, because the government will not accept payment of cryptocurrencies as taxes or for public goods and services. The government will only accept specified forms of money. You can create any kind of swap or bet. If you want to create the equivalent of a racetrack on horses. You can do it, but that’s a financial racetrack. I think there may be taxes on racetracks. They were unregulated for a long time. But Hollywood movies showed that there’s a lot of criminalization going on there.
Walt McRee: [00:23:59] We were all amused, well, maybe a little wondering about Max Kaiser. Ellen and I and Tyson Slokum had some time with him over there just before you were at his Brooklyn studio, but Max is into Bitcoin in a big way, and he sees it as the new gold.
Michael Hudson: [00:24:20] He told me that a lot of people watch his show because they’re gold bugs or they are interested in Bitcoin. I think he’s tried to take a neutral view of it, certainly in our personal conversations. He’s not a gold bug and he’s not a Bitcoin or other bug. But he said that a lot of people want to find out about it, so he has guests on his show telling people, “Here it is, take your choice.” It’s part of the new speculative financial landscape, just like swamps are part of landscape for Florida real estate. So he’s going to cover the whole spectrum. Reuters produces his shows, and the audience wants to hear about this. So he talks about what they want to hear.
Ellen Brown: [00:25:20] I think he actually does promote Bitcoin. He’s heavily invested in it and he was one of the originals, so he’s obviously made a lot of money on it.
Michael Hudson: [00:25:29] Okay.
Ellen Brown: [00:25:29] I think he agrees that it can’t be a national currency. It’s too slow, too expensive, and too environmentally unfriendly. But like you say, it has been a good investment, just like fine art or something that, if people want it, the value goes up. Plus, there’s a big black market for it, for trading and things that you don’t want the government to know about.
Michael Hudson: [00:25:57] It’s a real phenomenon. I know people who benefited from Andy Warhol. So he saw the phenomenon and he seems to have made money, but when Steve Keen and I and others got together with him for a couple of days two months ago, the topic never came up in discussion.
But gold did. I wonder where the gold of Libya went, for instance. Apparently it was all taken and I understand the US gave it to ISIS. Hillary said it had to go to ISIS to act as our Foreign Legion. We gave them Libya’s weapons. Some of the gold must have just been taken by the CIA and State Department for dirty tricks for its black operations. Certainly, America wants to prevent any other country or large gold possessor from having enough gold to try to reinstate it as a means of settling balance-of-payments deficits. America runs a large military deficit, so at a certain point, the more money it spends abroad for its 800 military bases, the more gold it would lose. Just like in General de Gaulle’s time during the Vietnam War, although actually Germany was taking more gold than France. So America wants to keep the dollar at the center of the world financial system. That really was why it went to war with Libya, because Libya was one of the first countries to de-dollarize and move its currency toward gold. So you’re having a group of countries – Russia, China, Iran and others – add gold to their reserves instead of dollars. You’re having a de-dollarization move throughout the world to break free from the US ability to do what it did do Iran.
When Iran borrowed in dollars under the Shah, it used Chase Manhattan Bank as its paying agent. It put enough money into the account to pay its foreign debts service. But then the State Department told Chase to screw Iran and refuse to turn over the payment. Now that the Shah wasn’t running Iran, once Chase refused to turn over the payment and froze Iran’s account, that meant that Iran went into default on the entire dollarized foreign debt. It was liable for a huge amount of capital.
That was a warning for the rest of the world that no government could safely put its money in an American bank or an American bank branch, or in a British branch that would act as a subsidiary of the Pentagon. Because if you do, the bank can simply force you into default at any time, just like the US CIA can come in and use electronic weaponry to destroy your bank payment-clearing system. That’s why the threat of cutting Russia and China and other countries off from the Swift Interbank Clearing System led Russia to develop its own clearing system. With a flick of a switch it can begin to work anytime United States tries to cut Russia off from the SWIFT payments system. So you’re having the whole world de-dollarize very quickly. And right now the question is what Europe will choose. Are Germany and other countries going to become part of the de-dollarized system, or remain part of the dollar area?
This is part of the fight against using the IT chips and the communications chips from Huawei. Huawei did not put US spyware into the system. The United States says that if it can’t have a phone system and communications system that it can control by spyware and use to blow up your economy, your public utilities, your electrical systems, then you’re our enemy, because we feel insecure without this control. When President Trump said that Huawei was a threat to US national security, he meant that we don’t feel secure unless we have the power to destroy any economy that acts in any way that is independent of the United States – because you might do something we don’t like. This is the most aggressive concept of security that one could imagine. So of course the rest of the world is seeing its own national security as having a financial dimension. The financial dimension is to create a monetary and financial system that minimizes connections to the dollar except to the extent of having to buy and sell dollars to stabilize foreign exchange rate.
Ellen Brown: [00:31:31] There’s a lot of talk, even among central bankers, that we need to get off the dollar as a global reserve currency. But it seems to me that gold is also manipulatable. I mean, it’s not the ideal I had envisioned a system where instead of reserves being a thing, like dollars or gold that you can actually trade, it would just be a measure, like a yardstick. You would be able to compare one currency to another according to what you could buy with it. Like you’d have a whole basket of things that everybody uses in every country. And now that they report that kind of stuff, it wouldn’t be all that hard to get the figures and, you know, just compare and say, well, your dollar will be worth so many pesos in Mexico or whatever. That was my idea, but what do you think?
Michael Hudson: [00:32:27] That would meet one of the criteria of money, which is as a measure of value, but it would not do at all for international money. You have to have some means of constraint. In other words, suppose the United States continued to run another military budget deficit like it did in the Vietnam War. There is no way that you could use the balance of payments as a constraint on the policy of deficit countries, which are usually the military aggressors. The whole idea of going off gold was that under the gold standard no country can afford to make war, because if you go to war your currency collapses. In 1976, Herman Kahn and I went to the Treasury and – this is to answer your question. He put up a map of the world and said, “These are the countries – Scandinavia, Western Europe, the United States – that don’t believe in gold. They’re all politically stable social democratic countries. They have faith in government. No look at these others … here’s the rest of the world – India, South America, Africa and most of Asia. these are people that believe in gold. Why do they believe in gold, but not the Protestant cultural area? Well, they don’t have faith in government. They don’t trust governments. They want some option that is independent of government. Gold is not only to bribe the border guards if they’re escaping from somewhere. They want to be free of governments that have been captured by anti-democratic, predatory forces.”
He said if you tried to think of what you would make that is an alternative to the dollar that people could understand, well, for thousands of years, people have decided that gold and silver. (I’m sure that you could add platinum and palladium.) So they have been the ultimate means of settlement, and hence of international monetary constraint.
Gold isn’t to be used as money. It’s not to be used as a normal means of payment. What it is to be used for is as a balance-of-payments constraint on the ability of countries to run up chronic deficits that are mainly military in character. So I called our presentation “Gold: the Peaceful Metal.” Well, needless to say, the Treasury didn’t go for that, because they said that we had just explained how super-imperialism works via the dollar. So they didn’t go back to gold. We lost that argument.
Ellen Brown: [00:35:34] Isn’t the reason we went off gold standard, though, that there simply isn’t enough gold and that we wound up leveraging it, and …
Michael Hudson: [00:35:42] No, there’s plenty of gold. There wasn’t enough gold to pay for the military deficit. Every month the dollars we spent in Vietnam would be turned over to the banks in Indo-China. They were French. They’d turn the dollars over to Paris and General de Gaulle would turn in these dollars for gold. We had to pay in gold for the military deficit, which was the entire source of the US balance-of-payments deficits in the 50s, 60s and into the 70s. America went off gold so that it could afford to wage war without the constraint of losing its control over the international monetary system.
Ellen Brown: [00:36:29] We went after gold domestically because it didn’t work. I mean, you had to use fractional reserve lending …
Michael Hudson: [00:36:35] Yes, of course gold doesn’t work domestically. It’s certainly not an appropriate domestic money supply. I’m only talking about it for settlements among central banks internationally.
Ellen Brown: [00:36:49] But you said it’s not to be traded. But if you don’t, how do you settle your balance of payments?
Michael Hudson: [00:36:53] It can be traded. There is a market. And you began by saying, quite correctly, that gold prices are manipulated. Well, right now the US and the central banks are manipulating its price to keep it low, in the same way that they’re manipulating the stock and bond market by buying forward. Except in the case of gold, they’re selling forward. If they keep agreeing to sell gold at a very low price, people will see that if they can buy gold at this low price, why should they buy it at a higher price today, as the price will fall and be driven down. So, yes, gold is manipulated downwards today by the U.S. – essentially the plunge protection team acting internationally to keep the price of gold down to discourage other countries and populations from buying it is protection against collapse of the financial system.
So we’re back to the fact that the financial system is dysfunctional. In a functional financial system, you wouldn’t need domestic reference to gold. You’d have a domestic financial system that works fine without gold. Gold is what you have when the financial system becomes dysfunctional and there’s a breakdown.
Ellen Brown: [00:38:21] Well, it almost seems like you need some sort of global regulator. But that’s like a one-world government, which we all freak out about.
Michael Hudson: [00:38:28] You certainly don’t want a one world government. Right now all the plans for world government are neoliberal. They aim essentially to limit, to break up democratic government regulation of corporate business, mining and monopolies. The idea of a one-world government is to destroy any democratic government’s ability to make its own laws in the interests of labor or society. You would have a parallel government of wealth, government of property. It’s what the University of Chicago calls the Law and Economics regime. And this is, this is fascism on an international scale. And there is a wonderful book by Quinn Slobodian in 2008, Globalists: The End of Empire and the Birth of Nationalism, showing how these plans were developed by fascists in the 1930s and by the fascist promoters at the University of Chicago. The fascist promoters were people like Hayek and von Mises and the Geneva economists around the League of Nations. So when they say they’re anti-government, they’re really anti-democracy. They’re for an iron-fisted government by big business, big mining and big oil – and most of all, by big banks. That is the reason why people don’t trust an international government. It would be an international iron fist of fascism, the way the current maneuvering of the financial classes and the rentierclasses and the neocons have arranged things.
Ellen Brown: [00:39:56] Well, I totally agree. It’s quite frightening. We want sovereignty for all our little nations, and even our little cities, states and so forth. But it seems to me, how do you get everybody to work together? For example, Venezuela has the debt problem that any country has that’s heavily in debt to foreigners, or to vulture funds or whatever. There’s not a universally recognized court that you can go to. And, you know, everybody agrees. It does seem like on some level we need some sort of collaborative effort where we all agree on the rules.
Michael Hudson: [00:40:33] Absolutely right. Now, of course, the United States would not recognize any international court. So, again, you’d have all the rest of the world belonging to the court, and the United States as the outlier. It’s like you’re the healthy body and we want to parasitize you. And it will not recognize the court. My Super-Imperialism reviews the history of this policy.
But you’re right: There should be a court that would recognize such things as odious debt for governments. Venezuela’s problem is that under the dictators that the Americans had installed by assassination and force, Venezuela had pledged its oil reserves as collateral for its international bonds. That gives a vested interest in the creditors to make it default and grab its oil reserves and its investments in the United States, the oil distributors it bought. So, yes, you do need a set of international rules for writing down bad debts. That means an alternative to the IMF. You need an anti-IMF. Instead of acting on behalf of the creditors imposing austerity on countries, you should create an organization representing society. And s the interest of society is to grow. Instead of promoting austerity like the IMF does, it would promote prosperity. Instead of financing the US government dollarization and giving US control, it would be part of the de-dollarization group.
So you’d have a pro-growth group of nations – of the world economy – using finance for growth and development with productive credit. You’d also have the United States providing predatory credit, austerity, cutting back Social Security, cutting back Medicare and having a polarizing economy that is shrinking and will end up looking like Greece or Argentina. The rest of the world would follow more productive and less oligarchic financial policies. That should ultimately be our global dream. But there’s been little preparation for that. The financial sector’s neoliberals have o put together an almost conspiratorial Law and Economics lobbying group to promote the Trans-Pacific Partnership and World Trade Organization rules blocking governments from imposing anti-pollution fines or regulating monopolies or closing tax havens. If you fine an oil company for polluting, the government is obliged under this international law to pay the oil companies what they would have earned if they would have continued to poison the environment. This is …
Ellen Brown: [00:43:41] Shocking.
Michael Hudson: [00:43:41] Definitely. This is an international deathwish.
Ellen Brown: [00:43:45] Agreed. Totally agreed.
Walt McRee: [00:43:47] We’ve been speaking with economist Michael Hudson. Our thanks to him for being on this program again. And you’ll be hearing more from Michael on future editions of It’s Our Money.
Walt McRee: [00:43:59] Well, that’s it for this edition of It’s Our Money with Ellen Brown. Thanks to our guests or sponsors, Public Banking Associates, and to you for listening. Be sure to check out Ellen’s latest writings on the economy and the changing world of money by visiting ellenbrown.com. And for more information on public banking, visit PublicBankingInstitute.org. For information on how local and state governments can obtain professional insight and council about public banks from key national experts, visit PublicBankingAssociates.com. I’m Walt McRee. See you next time on It’s our Money with Ellen Brown.
Notes
[1] “How the U.S. Treasury avoided Chronic Deflation by Relinquishing Monetary Control to Wall Street,” Economic & Political Weekly (India), May 7, 2016. Available on Naked Capitalism an michael-hudson.com.


russia-insider--2020-03-19--Is $10 Oil on The Horizon?

Is $10 Oil on The Horizon?

According to a number of cognitive scientists , mankind uses its unique ability to reason primarily for justifying pre-held convictions , rather than for forming convictions .
It is of critical importance for strategists to understand and acknowledge this human tendency , as it causes one to easily fall prey to a number of cognitive biases , which prevent one from seeing things how they really are , and more important for the strategist , how they are likely to become .
One of the most famous cognitive biases is confirmation bias .
As we prefer to be proven correct @ @ @ @ @ @ @ confirms our views and try to ignore or reason away information that does not .
This tendency was on full display before , during and after the 2008 Global Financial Crisis .
At that time most analysts were continuously behind the facts , consequently underestimating what would happen next , because reality went against ideas and conviction that had become loved in the financial community , such as the perfect market theory and the idea that through derivates risks could be managed away .
For most financial strategists , it was simply too @ @ @ @ @ @ @ were incorrect ( or at a minimum : contained serious flaws ) , even though the evidence was there , which would eventually lead Queen Elizabeth to ask them “ Why did no one see this coming ?
” .
Of course , not everyone didn ’ t see it coming .
Those who were able to manage their confirmation bias either made a lot of money or became famous… Now that the world is battling another unprecedented crisis in the coronavirus , the biggest risk for energy strategists is to fall prey @ @ @ @ @ @ @ their forecasts would be about what they would like to see happen , rather than about what is likely to happen .
This article is an attempt at forecasting the impact the coronavirus will have on crude oil demand while avoiding such biases .
First reports of the coronavirus came from China .
The first person known to have fallen ill due to the virus was in Wuhan , on 1 December 2019 .
By the end of that month , the Chinese government realized it was dealing with an epidemic .
On @ @ @ @ @ @ @ first measures to bring the epidemic under control , which was a quarantine of the affected area .
Ever since additional steps have been taken to fight the virus , such as prohibiting large public gatherings , closing schools and universities , and severely restricting travel .
Rather than the virus , it is the measures to contain it that are having a massive impact on global oil demand .
As people are forced to stay at home , economic activity essentially comes to a halt .
A decline in demand for goods @ @ @ @ @ @ @ ability of companies to meet the remaining demand for goods and services , affects almost all sectors of the economy .
Specifically for crude oil , as demand for transportation-related refined fuels – gasoline , diesel , jet – craters , refineries slowdown or shutdown , which affects crude oil demand .
In the case of China , the impact of the slowdown caused by the measures to combat the coronavirus has been estimated to be in the 25 percent to 50 percent range .
China ’ s measures against the spread of @ @ @ @ @ @ @ effect , as during March 2020 the number of daily new cases dropped to below ten , most of these being people returning to China from outside , rather than infections caused by a spread of the disease inside China .
Consequently , after almost 3 months focusing on stopping the spread of the disease , the Chinese government has switched attention to ramping up the economy again .
However , the virus has spread to other countries .
South Korea and Japan reported cases early on .
Ever since the epicenter of @ @ @ @ @ @ @ Over 80 countries have now reported coronavirus cases , with over 118,000 people affected , forcing the United States also to implement measures to contain a further spread of the disease inside its borders .
The Best-Case Scenario assumes the impact of measures to combat the coronavirus is limited , in the sense that they affect the economy while they are in place but not thereafter .
Once the measures are lifted , the economy returns to normal .
Since it took China approximately 3 months to bring the virus under control , @ @ @ @ @ @ @ well will require 3 months .
As far as Europe is concerned , it appears to lag China by about 2 months .
In most European countries the first cases were reported end-February / early-March , and the containment measures that affect economic activity are currently being ramped up .
In the Best-Case Scenario , therefore , Europe should suffer a 25 percent to 50 percent drop in economic activity during March , April , and possibly May .
The return to normal would begin end-May , early-June .
The United States is @ @ @ @ @ @ @ cases , numbers of tests performed , and also the implementation of virus containment measures .
In the Best-Case Scenario , therefore , the United States should suffer a 25 percent to 50 percent drop in economic activity during April , May and possibly June .
The return to normal would begin end-June , early-July .
What this means is that in the Best-Case Scenario , the worst is yet to come for global crude oil demand .
Ceteris paribus ( all other things equal ) , the price of crude oil would @ @ @ @ @ @ @ another 2 to 3 months .
$ 20 or even $ 10 per barrel is a real possibility .
Because the response of the industry to the impact of the coronavirus on the economy is not immediate let alone pre-emptive ( that is a cognitive bias in action again , “ it won ’ t be so bad ” ) , inventories tend to fill up as the economy slows down .
During ramp-up of the economy following containment of the epidemic , these inventories will need to be drawn down first , @ @ @ @ @ @ @ normal .
For the Best-Case Scenario , this means that crude oil demand will remain affected by the coronavirus containment measures during the third quarter of 2020 also .
The earliest possible return to normality globally would be the fourth quarter .
What the fourth quarter would look like for the crude oil price depends on the outcome of the current Supply War between ( primarily ) Saudi Arabia and Russia , and the impact of the lower price environment on US Shale production .
The Best-Case Scenario assumes the major producers do @ @ @ @ @ @ @ increase production but do not agree on an extension of the 2018 production curtailment either , while US Shale growth shifts in reverse as drilling plans are cut and smaller operators go bankrupt .
This would mean approximately 1 to 2 million barrels of additional crude oil supply to the market , compared to 2018 .
Or , in other words , a return to the pre-2018 production curtailment environment when WTI crude oil hovered in the $ 45 to $ 55 per barrel range .
In the Worst Case-Scenario , the measures @ @ @ @ @ @ @ have secondary and tertiary effects .
In other words , not only will the economic activity be impacted 25 percent to 50 percent , but this drop will cause bankruptcies , which in turn will cause further bankruptcies .
In China , millions of companies find themselves on the verge after 3 months of coronavirus .
Most at risk of bankruptcy are small and medium-sized enterprises , as these usually have less of a financial buffer and more limited access to capital .
Especially the hospitality and tourism sectors are exposed .
In @ @ @ @ @ @ @ greatly affected , in particular the sectors that are about discretionary spending ( spending that can easily be delayed without major consequences ) and require travel , such as the car sector and real estate – people are delaying the purchases of new cars and homes because they can ’ t travel to the required location or are fearful to do so .
The worsening outlook for these sectors can have an immediate impact as rating agencies lower their assessment of companies ’ creditworthiness , which often triggers clauses in debt agreements causing @ @ @ @ @ @ @ .
A drop in the share price of a company , caused by the pricing of the financial market in the worsening outlook , can have a similar effect .
In the Worst-Case Scenario , therefore , the measures to combat the coronavirus cause a wave of bankruptcies , which causes an increase in unemployment .
This would limit the ability of the economy to return to normal once the virus containment has proven to be effective .
In this case , there is no return to normal during the third quarter of @ @ @ @ @ @ @ throughout 2020 , and quite possibly 2021 as well .
How much exactly economic activity would remain depressed , and for how long exactly , depends on the measures taken by governments and central banks .
The impact of the coronavirus on the economy is not due to a sudden drop in spending power in the economy .
It is due to an inability to spend , or unwillingness to spend for fear of catching the virus .
While containment measures remain in place neither governments nor central banks can do anything to @ @ @ @ @ @ @ is to offer support to affected businesses , to help them avoid bankruptcy .
Effective measures for this would include delaying the due date of taxes or offering financial compensation to affected businesses , possibly on condition they do not lay off staff .
The central bank could push for delays in payment of interest on debt and debt repayments .
A lowering of the interest rate would be largely ineffective as it won ’ t drive demand up nor drive companies ’ cash payment out down .
Because global debt is essentially @ @ @ @ @ @ @ of the 2008 Global Financial Crisis , helping companies to avoid bankruptcy will be no small task .
The governments of a number of countries around the world will simply be unable to provide the necessary support , either for a lack of funds or for a lack of ability to manage the task .
Equally , delaying the payment of interest on debt and debt repayments will not be an easy thing to achieve because of the implications for the balance sheets of banks .
The Worst-Case Scenario , therefore , assumes @ @ @ @ @ @ @ to pre coronavirus levels during 2020 .
This means that the crude oil market does not return to the pre-2018 environment as global demand will be lower than it was during 2017 when WTI crude oil hovered in the $ 45 to $ 55 per barrel range .
In the Worst-Case Scenario , similar to the Best-Case Scenario crude oil drops further during the second quarter of 2020 when the coronavirus containment measures peak in Europe and the United States .
Thereafter there will be a slight recovery , as economic activity increases @ @ @ @ @ @ @ assumed in the Best-Case Scenario , as the global economy deals with a wave of bankruptcies .
The Worst-Case Scenario assumes that the major producers do execute their stated intention to increase production – Saudi Arabia by 2 million barrels per day , Abu Dhabi by 1 million and all other OPEC members a further 1 million barrels – while US Shale holds out as long as its crude oil price hedges last and maintains current production .
In this case , demand for crude oil will not only remain down by year-end @ @ @ @ @ @ @ higher , which could well cause crude oil to hover in the $ 20 per barrel range by year-end ( it is trading with a $ 24 handle this morning ) .
The worst thing oil companies can do in the current environment is to assume that things will soon return to normal , and thus continue normal operations .
Whatever the 2019 business plans for 2020 said , they are unlikely to have been based on the current market reality and need to be ignored .
New short-term operating plans need to @ @ @ @ @ @ @ assuming a further decline in the oil price possible to as low as $ 10 per barrel .
Capex plans are to be reviewed on a similar basis .
Looking for cuts in the price of services from the oilfield service sector to offset the reduction in revenues is essentially pointless at this stage , as after some 4 years of continuous cuts these companies are lean to the bone .
A slowdown in both operational and project activity could , however , warrant a reduction in headcount in order to bring costs @ @ @ @ @ @ @ however , should come from a reduction in dividend payments and share buy-back programs .
Increasing debt to maintain dividends would be eating into the future , so while liked by the financial markets , it does not make sense from the long-term perspective of the oil company .

According to a number of cognitive scientists, mankind uses its unique ability to reason primarily for justifying pre-held convictions, rather than for forming convictions. It is of critical importance for strategists to understand and acknowledge this human tendency, as it causes one to easily fall prey to a number of cognitive biases, which prevent one from seeing things how they really are, and more important for the strategist, how they are likely to become.
One of the most famous cognitive biases is confirmation bias. As we prefer to be proven correct, we naturally incline towards information that confirms our views and try to ignore or reason away information that does not.
This tendency was on full display before, during and after the 2008 Global Financial Crisis. At that time most analysts were continuously behind the facts, consequently underestimating what would happen next, because reality went against ideas and conviction that had become loved in the financial community, such as the perfect market theory and the idea that through derivates risks could be managed away. For most financial strategists, it was simply too painful for many to acknowledge these ideas were incorrect (or at a minimum: contained serious flaws), even though the evidence was there, which would eventually lead Queen Elizabeth to ask them “Why did no one see this coming?”. Of course, not everyone didn’t see it coming. Those who were able to manage their confirmation bias either made a lot of money or became famous…
Now that the world is battling another unprecedented crisis in the coronavirus, the biggest risk for energy strategists is to fall prey to cognitive biases, in which case their forecasts would be about what they would like to see happen, rather than about what is likely to happen. This article is an attempt at forecasting the impact the coronavirus will have on crude oil demand while avoiding such biases.
The Current Situation
First reports of the coronavirus came from China. The first person known to have fallen ill due to the virus was in Wuhan, on 1 December 2019. By the end of that month, the Chinese government realized it was dealing with an epidemic. On 23 January 2020, it implemented its first measures to bring the epidemic under control, which was a quarantine of the affected area. Ever since additional steps have been taken to fight the virus, such as prohibiting large public gatherings, closing schools and universities, and severely restricting travel.
Rather than the virus, it is the measures to contain it that are having a massive impact on global oil demand. As people are forced to stay at home, economic activity essentially comes to a halt. A decline in demand for goods and services, and limitations on the ability of companies to meet the remaining demand for goods and services, affects almost all sectors of the economy. Specifically for crude oil, as demand for transportation-related refined fuels – gasoline, diesel, jet – craters, refineries slowdown or shutdown, which affects crude oil demand. In the case of China, the impact of the slowdown caused by the measures to combat the coronavirus has been estimated to be in the 25 percent to 50 percent range.
China’s measures against the spread of the virus appear to have had an effect, as during March 2020 the number of daily new cases dropped to below ten, most of these being people returning to China from outside, rather than infections caused by a spread of the disease inside China. Consequently, after almost 3 months focusing on stopping the spread of the disease, the Chinese government has switched attention to ramping up the economy again.
However, the virus has spread to other countries. South Korea and Japan reported cases early on. Ever since the epicenter of the outbreak has spread to Europe. Over 80 countries have now reported coronavirus cases, with over 118,000 people affected, forcing the United States also to implement measures to contain a further spread of the disease inside its borders.
The Best-Case Scenario
The Best-Case Scenario assumes the impact of measures to combat the coronavirus is limited, in the sense that they affect the economy while they are in place but not thereafter. Once the measures are lifted, the economy returns to normal.
Since it took China approximately 3 months to bring the virus under control, Best Case Scenario assumes other countries as well will require 3 months. As far as Europe is concerned, it appears to lag China by about 2 months. In most European countries the first cases were reported end-February / early-March, and the containment measures that affect economic activity are currently being ramped up. In the Best-Case Scenario, therefore, Europe should suffer a 25 percent to 50 percent drop in economic activity during March, April, and possibly May. The return to normal would begin end-May, early-June.
The United States is behind Europe, in terms of confirmed cases, numbers of tests performed, and also the implementation of virus containment measures. In the Best-Case Scenario, therefore, the United States should suffer a 25 percent to 50 percent drop in economic activity during April, May and possibly June. The return to normal would begin end-June, early-July.
What this means is that in the Best-Case Scenario, the worst is yet to come for global crude oil demand. Ceteris paribus (all other things equal), the price of crude oil would continue to go down for at least another 2 to 3 months. $20 or even $10 per barrel is a real possibility.
Because the response of the industry to the impact of the coronavirus on the economy is not immediate let alone pre-emptive (that is a cognitive bias in action again, “it won’t be so bad”), inventories tend to fill up as the economy slows down. During ramp-up of the economy following containment of the epidemic, these inventories will need to be drawn down first, before economic activity can really return to normal. For the Best-Case Scenario, this means that crude oil demand will remain affected by the coronavirus containment measures during the third quarter of 2020 also. The earliest possible return to normality globally would be the fourth quarter.
What the fourth quarter would look like for the crude oil price depends on the outcome of the current Supply War between (primarily) Saudi Arabia and Russia, and the impact of the lower price environment on US Shale production. The Best-Case Scenario assumes the major producers do no actually execute their stated intention to increase production but do not agree on an extension of the 2018 production curtailment either, while US Shale growth shifts in reverse as drilling plans are cut and smaller operators go bankrupt.
This would mean approximately 1 to 2 million barrels of additional crude oil supply to the market, compared to 2018. Or, in other words, a return to the pre-2018 production curtailment environment when WTI crude oil hovered in the $45 to $55 per barrel range.
The Worst-Case Scenario
In the Worst Case-Scenario, the measures to combat the coronavirus are assumed to have secondary and tertiary effects. In other words, not only will the economic activity be impacted 25 percent to 50 percent, but this drop will cause bankruptcies, which in turn will cause further bankruptcies. In China, millions of companies find themselves on the verge after 3 months of coronavirus.
Most at risk of bankruptcy are small and medium-sized enterprises, as these usually have less of a financial buffer and more limited access to capital. Especially the hospitality and tourism sectors are exposed. In China, other sectors also have been greatly affected, in particular the sectors that are about discretionary spending (spending that can easily be delayed without major consequences) and require travel, such as the car sector and real estate – people are delaying the purchases of new cars and homes because they can’t travel to the required location or are fearful to do so.
The worsening outlook for these sectors can have an immediate impact as rating agencies lower their assessment of companies’ creditworthiness, which often triggers clauses in debt agreements causing immediate cash shortages at highly leveraged companies. A drop in the share price of a company, caused by the pricing of the financial market in the worsening outlook, can have a similar effect.
In the Worst-Case Scenario, therefore, the measures to combat the coronavirus cause a wave of bankruptcies, which causes an increase in unemployment. This would limit the ability of the economy to return to normal once the virus containment has proven to be effective. In this case, there is no return to normal during the third quarter of 2020. Economic activity would remain depressed throughout 2020, and quite possibly 2021 as well.
How much exactly economic activity would remain depressed, and for how long exactly, depends on the measures taken by governments and central banks.
The impact of the coronavirus on the economy is not due to a sudden drop in spending power in the economy. It is due to an inability to spend, or unwillingness to spend for fear of catching the virus. While containment measures remain in place neither governments nor central banks can do anything to push up demand. Their only option is to offer support to affected businesses, to help them avoid bankruptcy. Effective measures for this would include delaying the due date of taxes or offering financial compensation to affected businesses, possibly on condition they do not lay off staff. The central bank could push for delays in payment of interest on debt and debt repayments. A lowering of the interest rate would be largely ineffective as it won’t drive demand up nor drive companies’ cash payment out down.
Because global debt is essentially double what it was at the start of the 2008 Global Financial Crisis, helping companies to avoid bankruptcy will be no small task. The governments of a number of countries around the world will simply be unable to provide the necessary support, either for a lack of funds or for a lack of ability to manage the task. Equally, delaying the payment of interest on debt and debt repayments will not be an easy thing to achieve because of the implications for the balance sheets of banks. The Worst-Case Scenario, therefore, assumes that the global economy will not return to pre coronavirus levels during 2020.
This means that the crude oil market does not return to the pre-2018 environment as global demand will be lower than it was during 2017 when WTI crude oil hovered in the $45 to $55 per barrel range. In the Worst-Case Scenario, similar to the Best-Case Scenario crude oil drops further during the second quarter of 2020 when the coronavirus containment measures peak in Europe and the United States. Thereafter there will be a slight recovery, as economic activity increases once measures are relaxed but less than assumed in the Best-Case Scenario, as the global economy deals with a wave of bankruptcies.
The Worst-Case Scenario assumes that the major producers do execute their stated intention to increase production – Saudi Arabia by 2 million barrels per day, Abu Dhabi by 1 million and all other OPEC members a further 1 million barrels – while US Shale holds out as long as its crude oil price hedges last and maintains current production. In this case, demand for crude oil will not only remain down by year-end, but supply will also be substantially higher, which could well cause crude oil to hover in the $20 per barrel range by year-end ( it is trading with a $24 handle this morning ).
Strategic Implications
The worst thing oil companies can do in the current environment is to assume that things will soon return to normal, and thus continue normal operations. Whatever the 2019 business plans for 2020 said, they are unlikely to have been based on the current market reality and need to be ignored.
New short-term operating plans need to be developed with the greatest urgency, assuming a further decline in the oil price possible to as low as $10 per barrel. Capex plans are to be reviewed on a similar basis.
Looking for cuts in the price of services from the oilfield service sector to offset the reduction in revenues is essentially pointless at this stage, as after some 4 years of continuous cuts these companies are lean to the bone. A slowdown in both operational and project activity could, however, warrant a reduction in headcount in order to bring costs down.
The biggest cash-saving measure, however, should come from a reduction in dividend payments and share buy-back programs. Increasing debt to maintain dividends would be eating into the future, so while liked by the financial markets, it does not make sense from the long-term perspective of the oil company.