Yves here. Some readers saw and very much liked this discussion by Michael Hudson and Steve Keen with Nika of the David Graeber Institute on the terrible economic trajectory well underway.
As is my tendency, I do have a big quibble. Trump did not launch this war with economic objectives save perhaps regime-changing Iran and getting control over Iran’s oil. It has been widely reported how Zionists and Christian evangelicals have captured Trump cognitively and financially, even before getting to the fact that Netanyahu can contain his spectacular arrogance often enough to be able to play Trump like a fiddle. One of many examples: Max Blumenthal has reported that Mossad convinced Trump that Iran was behind the Butler assassination attempt and was still out to get him, to the degree that Trump was going to great length to hide how he traveled for the rest of the campaign.
Originally published by the David Graeber Institute
NIKA
Hello, everyone. We are very happy to invite back Michael Hudson and Professor Steve Keen to the David Graeber Institute. Steve Keen is an economist and author, one of the few who warned about the 2008 crisis in advance. He is known for his critique of mainstream neoclassical theory and his models of debt deflation and financial instability. Michael Hudson is an American economist and historian of debt at the University of Missouri, Kansas City. His work on finance, rent, and deindustrialization deeply influenced David Graeber’s own thinking on empire, tribute, and the politics of debt.
Today we will explore the deepening crisis and possible scenarios of how it might unfold, specifically in the context of the ongoing war, which increasingly resembles the Soviet invasion of Afghanistan — to me personally. My question to Michael and Steve is: inflation, hyperinflation, or deflation? Which scenario do they think will happen? We start with Michael Hudson.
MICHAEL HUDSON
If you look at the stock and bond markets today, the world is expecting that the war in Iran is not going to last more than a month or so. It’s a world war because the entire world is dependent on oil and liquefied natural gas — for fertilizer, energy, electricity, heating, cooking, glassmaking, and helium. Helium and natural gas were provided to much of the world by Qatar, as part of the Arab OPEC countries. But their billion-dollar installations to liquefy natural gas — which took four years to build — have just been bombed by Iran, because Qatar is hosting US military bases used to bomb Iran.
Iran has said: if you try to destroy our oil industry, we will make sure the entire world oil, gas, helium, and energy industry shuts down and causes a Great Depression — as a result of oil prices doubling. That will trigger a balance of payments crisis for America’s allies, not only in Europe, but in Korea, Japan, and the Philippines, which are already taking emergency measures.
Trump clearly intends to deliberately create a world economic crisis lasting at least four years — as World War I and World War II did. He thinks this will put America in the driver’s seat: America is self-sufficient in gas and oil. Other countries will have to buy from us. And if they do, we’ll require them to impose sanctions against Russia, Iran, and anyone else we’ve designated as an enemy.
Meanwhile, the ten-year US Treasury bond rate has gone over 4.5%, and the 30-year rate is over 5%. Wall Street has figured that if oil export prices double, that’s inflationary. But all of this is junk economics.
Of course oil prices are going up — so much so that Asia and the Global South will look like Germany after the US stopped it from buying Russian gas. Germany’s glass industry shut down. The fertilizer industry shut down. The automobile industry is cutting back — Mercedes and others are moving to China.
Trump’s tariffs on steel and aluminum are raising the price of agricultural combines and tractors. Farmers in the US face the same problem as farmers everywhere: higher fertilizer costs, higher harvesting equipment costs, higher gasoline costs.
What Wall Street doesn’t take into account: Yes, energy and energy-related prices are going up. But this will shut down industries and cause a huge depression. Layoffs. Governments will have to divert revenues to help families afford electricity and gas — which means cuts to social spending. Unemployment. People getting poorer and poorer. That’s not inflation. That’s deflation.
Prices will rise for oil, steel, aluminum, fertilizer, gas, and helium, while other prices in general fall. We’re facing the biggest collapse since the Great Depression. That is the deliberate aim of US foreign policy. They’ve gamed it out. They think that no matter how much this hurts the American economy, it will hurt labor by lowering its wages, by causing unemployment and making people desperate. It’s a godsend for the class war.
When companies have to cut production, how will they pay their debts? Workers — euphemized as “consumers” — are already paying over 30% interest on credit card fees and penalties. Student debt defaults are rising. Medical debt is the fastest-growing cause of bankruptcy in the United States. Mortgage rates have gone way up.
This is a new form of class warfare. It’s not employers against labor, because industry and labor are suffering together trying to survive. It’s the financial class against the rest of the economy. Finance, insurance, and real estate — the FIRE sector — is where almost all US GDP growth has occurred, while the real economy has shrunk.
Thisactually is a replay of debates from the mid-eighteenth century: How was Britain going to deal with the fact that creditors spend their money on luxury imports rather than domestic production? London was getting rich, not the rest of England.
NIKA
Michael, I want to include Steve. What do you think about Michael’s description?
STEVE KEEN
If there’s one person I agree with, it’s Michael. When you first asked me about this, I said: inflation initially, then deflation. Michael has given the historical context. Let me share some statistical elements.
The absolute foundation of the economy is energy. What I’m showing is energy use in petajoules on the left axis, and gross world product on the right. The two lines match almost perfectly. And crucially: it’s one-for-one. A 5% fall in energy produces a 5% fall in gross world product.
What’s happening now: roughly 20% of the world’s liquefied natural gas has been cut off. Together with the loss of oil from the Strait of Hormuz and other supply disruptions, we could be looking at something of the order of a 10% fall in global energy — which implies a 10% fall in GDP. My shorthand: labour without energy is a corpse; capital without energy is a sculpture.
Now, that collapse is going to raise oil prices — conventional thinking agrees on that. But we’re also in a financialized economy. And this is where Michael and I differ from mainstream economists, because they completely ignore private debt. They obsess about government debt. They don’t even look at private debt.
In America right now, private debt is around 140% of GDP — still enormous. That’s the burden Michael was talking about, on households and corporations. If they find they can’t make as much profit because of higher oil prices, if unemployment rises — they won’t be able to service that debt. And what you’ll likely see is the same as 2007-08, only on steroids: a complete collapse in credit-driven demand.
Workers can’t pass on oil price increases into higher wages. Industrial capitalists can’t necessarily pass them on either. So what happens? People cut their prices, hoping to keep customers. But their neighbour is doing the same thing. Everybody is trying to pay down debt — which destroys money, slows the economy, and causes deflation.
Irving Fisher said it beautifully in the 1930s — what I call Fisher’s paradox: the more debtors pay, the more they owe. The real burden rises as the price level falls. That’s what leads to Great Depressions.
And here’s the horrific part: if fertilizer supply falls by 20%, food production probably falls by more than 20% globally. That means enough food for about 6 billion people — and there are 8 billion. We may be looking at a global famine this year.
Just as the anarchist who pulled the trigger that killed the archduke had no idea what he’d set off — I think Trump is the same. He has no idea of the consequences. He’s behaving like a mafia boss, squeezing money from ups and downs in the market. But the rest of us will live with the unintended consequences.
And if any world leaders are watching this — which I doubt — get rid of Trump. Stop this. America has to concede defeat and step back, to give us a chance to rebuild the world’s physical infrastructure before global famine sets in.
MICHAEL HUDSON
I want to pick up on Nika’s question about hyperinflation, since deflation and hyperinflation may go together. When countries cannot pay their foreign debts — and the Global South has enormous foreign debts falling due, all in dollars — what do they do? The IMF says: impose austerity. Make labour poorer and poorer until you can pay the debts. That’s today’s junk economics, and it goes back to David Ricardo’s bullionism.
Every hyperinflation in history has been caused by the need to pay foreign debt. Germany’s hyperinflation in the 1920s wasn’t caused by government spending on labour or social programs — that’s the myth. It was caused by printing Reichsmarks to throw onto the foreign exchange market to pay reparations. Chile and France had the same hyperinflation pattern.
And this reality is not taught in academic economics. So the graduates who join central banks around the world don’t understand the difference between hyperinflation, regular price inflation, and deflation. Steve and I are essentially persona non grata in polite circles, because what we’re spelling out threatens a very large power grab being put in place much like the Asian balancne-of-payments crisis of 1997-1998.
NIKA
It’s interesting, Michael — I just realized Russia also owed a lot, because Yeltsin agreed to pay all the Soviet Union’s foreign debts. And oil was maybe $10 a barrel at the time. I never thought hyperinflation and deflation could happen simultaneously. But maybe that’s exactly what was going on in Russia in the nineties.
STEVE KEEN
Yes — Russia didn’t have much domestic debt, but had enormous foreign debt. And there are arguments — which I haven’t fully researched — that the Weimar hyperinflation was partly deliberate: it wiped out the debt that American speculators had bought in German bonds. So it had a horrific cost, but a beneficial side effect: Germany’s foreign debt was eliminated.
And one thing Michael and I keep having to correct: people say the Weimar inflation caused Hitler. No. Hitler was in jail during the Weimar inflation. He came to power ten years later. What brought him to power was deflation — the cascading collapse of 1932-33, when prices were falling 10% a year. That’s what leads to social breakdown.
We are going to see a catastrophic year. Even setting aside the debt dynamics, losing 10% of global energy alone implies a 10% fall in GDP. And people are going to starve, because you aren’t eating vegetables — you’re eating oil. The Haber-Bosch process, invented in World War I, uses petroleum to create nitrogen fertilizers. Without it, the planet’s carrying capacity is about 1-2 billion people. We currently have 8 billion. If we lose 20% of global fertilizer production, we lose food for 20% of the planet. We have never seen a global famine before. We’ve seen localized famines. This would be something else entirely.
MICHAEL HUDSON
To clarify the chronology Steve mentioned: the financial economy collapsed in 1929. The world moved into depression by 1931. In 1931, the world finally declared a moratorium on Europe’s allied debts to the United States and on German reparations. That moratorium — the recognition that the debts couldn’t be paid — came before Hitler came to power. The deflation that followed was what created the political conditions for his rise.
STEVE KEEN
And this connects to what neoclassical economics gets fundamentally wrong. They model the economy as a single good, produced by combining labour and capital — with no natural resources, no energy input at all. They’re not even aware that you cannot produce output without energy. They don’t know that helium can’t be stored — it evaporates through any container in a month or two. So as soon as that supply is cut, those industries break down.
Forty or fifty years ago, even the economists we criticized for their equilibrium fetish at least had input-output matrices. They understood: to produce this, you need these inputs. The morons who took over since — with their Dynamic Stochastic General Equilibrium models — have a single-good, no-natural-resources model of reality. They don’t know that going to war over the Strait of Hormuz cuts off a third of the world’s fertilizer supply. They’re finding out the hard way.
This is why I think it’s idiocy rather than conspiracy. The people making these decisions don’t realize you need physical inputs from the natural world to produce goods and services.
MICHAEL HUDSON
Any economic theory has a political implication. Equilibrium theory serves those who want government to play no role: let the financial sector regulate markets, let wages fall to whatever equilibrium the one percent demands. The reason Steve and I support debt cancellation isn’t abstract — it’s because canceling the debts cancels the savings of the creditor class. It ends the financial class’s stranglehold on the economy.
China has done what the West failed to do. It treats money and credit as a public utility. Almost 80% of credit in the US and Britain is created to buy real estate — inflating asset prices, inflating debt, enriching mainly the financial class. China’s People’s Bank creates money to finance infrastructure, industrial investment, high technology. It doesn’t have a financial class. That class fled to Taiwan or the West after Mao’s revolution.
The historical precedent goes back three thousand years. From Sumer, Babylonia, the ancient Near East — the Bronze Age to the first millennium — when debts couldn’t be paid, they were canceled. The laws of Hammurabi ruled that if there’s a flood or drought and crops fail, agricultural debts are canceled. Because the alternative would have been that the debts accumulate to a creditor class that becomes an oligarchy foreclosing on the land and reducing the population to debt bondage. That’s what happened to Rome. And that same dynamic is what the world is entering now.
That’s what my book The Collapse of Antiquity is about. China has managed to avoid letting a financial class take over.
STEVE KEEN
And one reason is that China learned from Marx, not from neoclassical junk. Marx, in Volume III of Capital, chapter 33, described the financial class as “roving cavaliers of credit” who pay high interest out of other people’s pockets while living in grand style on anticipated profits. He described the credit system as giving this class of parasites “the fabulous power not only periodically to spoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it.”
That awareness has seeped into the bones of the Chinese Communist Party. Because the neoclassical theory completely ignores finance, the West has let the financial system take over the economy. That’s why Western economies are in the state they’re in.
MICHAEL HUDSON
And Marx was anticipated by Ricardo, who showed that if landlords take all the rent, there will be no profits left for industrialists — because they have to pay workers enough to buy food whose price is inflated by rent. Marx extended this concept from land rent to monopoly rent to financial rent. That was the analytic and fiscal project of classical economics: to identify and eliminate unearned income. Adam Smith and John Stuart Mill have been called socialists for wanting to prevent a financial oligarchy.
Then at the end of the nineteenth century came the counter-revolution. Neoclassical economics denied the very concept of economic rent — because rent, in the classical sense, is income without playing a productive role. Neoliberalism was built on this denial that rentier income was unproductive. And so today we have economists who don’t even include debt in their models — because, they say, “one person’s debt is another person’s asset.” What they don’t say is: the debts of the 90% are the assets of the 10%. And that 10% of credit grows exponentially, regardless of the economy’s ability to produce anything or pay anything back. That’s the blind spot of academic economics.
And yet China still sends students to the United States to study economics. Michael taught at Peking University for two years. His students told him: the government and companies prioritize hiring economists trained in the United States over those trained in China. That’s the contradiction China still hasn’t fully resolved.
NIKA
But how is China different? They were stockpiling everything — oil, grain. They have electric vehicles. They’re in a very different position. Michael, how do you think China will benefit from this crisis? Might they simply take over?
STEVE KEEN
China apparently has one and a half years of grain in reserve. So even if there is a global famine — and I think there will be — China can still feed its people. They’ve also put more energy than any other country into transitioning away from fossil fuels: solar, nuclear, wind.
And there’s a deep cultural reason for all this preparation: every Chinese schoolchild learns about the Opium Wars. They know that Britain, unable to produce anything China wanted, forced China to import opium to balance trade — and that this humiliation defined the nineteenth century. Chinese children learn that. American children don’t even know what the Opium Wars were. So China’s drive for self-sufficiency isn’t just policy — it’s a multigenerational response to colonial exploitation. Because they’ve made that preparation, they may avoid much of what’s coming for the rest of the world.
NIKA
Can you explain — in words that I can actually understand — how deflation and inflation can happen at the same time? I think many people find this genuinely confusing. Especially when one part of the world, China, looks like it will do much better than everyone else. Suddenly we don’t have a connected world anymore. We have this split. And in our part, we’ll have this strange beast — deflation and inflation together.
STEVE KEEN
The basic point is this: mainstream economics doesn’t understand the economy’s dependence on energy. Destroying energy supply, fertilizer, and critical production inputs will cause a plunge in global physical output — that alone. And they don’t understand private debt. They obsess about government debt. By ignoring private debt, they can’t see the deflationary follow-through — when so many people and corporations are unable to service their debts, that destroys money, shrinks the economy, and pushes prices down.
I have to run — third podcast of the day. Great to see you, Michael.
MICHAEL HUDSON
Steve has said it exactly. Deflation and inflation at the same time. What’s being inflated is energy prices. What’s being deflated is the rest of the economy — which needs that energy, and can no longer afford to operate.
NIKA
Looks like a scary year ahead. Thank you both for coming. We had about 250 people watching live on Twitter — that’s good. Thank you so much, Michael. Can we continue talking after this?
MICHAEL HUDSON
Yes, yes. We just ran out of time.
Excellent article. I think the other thing that wasn’t necessarily discussed here was the role of AI in the coming economic crisis. The firms that don’t go out of business entirely will probably shed staff in a cost-cutting measure. It will then ask the current staff to get by using AI to fill the gap. If that ends up being successful, those original workers are not gonna be hired back if/when the economy recovers.
In other words, it will be a chance for AI to show if it can really boost productivity so that employers can get by without X % of the workforce. And it will give employers a chance to discover the value of X while having a different excuse as a cover.
On the ‘AI’ front, I’m expecting the helium shortage and the ensuing impact on chip production will kick in well prior to any energy market component. From the recent Ed Zitron posts, most of what Nvidia has sold is warehoused, waiting for data centers to be built. By the time that happens, they’ll be 2+ years out of date. The industry is a bubble propped up by the chip sales and resulting circular financing of compute-deals. If Nvidia can’t keep selling chips at the same rate, even just to throw in a closet somewhere, it’s impossible to keep all the plates spinning.
I think you’re correct insofar as firms will still cite AI’s impact on productivity as a reason for shedding jobs bc it sounds better than having to cop to canning folks due to reduced demand, but that will be a harder line to sell when the bottom has fallen out of the AI industry writ-large.
Just to add, I don’t think it will be just the workers let go. If there’s any one job AI can do very well, or at least not worse, and in many cases better, it’s the execs – the S, SV and C-suites. At these higher levels they are fed summaries and highlights and powerpoints and if a decision is required will be informed by these. AI has the logic capabilities to do this aspect.
Having ruled that corporations are persons, the next logical step is for the courts to rule that AI are persons for the purposes of managing and representing corporations.
Thanks for sharing, and this comment from Steve Keen has had me thinking all morning:
I read this article first, then saw the news about the Teva pharmaceutical factory in the Iran War post. That was probably on someone’s bingo card…but what other future, unknowable Black Swans await us?
Big thanks to Yves for excerpting the relevant portion. In the full video, Michael goes on for quite a long while before Steve pipes up and the discussion really gets to this section; while I always find Michael’s perspective enlightening, he can be rather longwinded, so this is a great help!
As Steve Keen says, people are going to starve. And the comment from curious brings up AI which will demand large amounts of energy, and make more humans redundant. The dystopian elements of this are not pretty. And the other factors are fresh water access and availability, environmental destruction, etc.
A side note, I agree with Yves, but ‘m not sure where the big quibble comes from, judging from what Steve and Michael said.
I would also say our dear leader has experienced serious cognitive decline. His statements have become more contradictory, reckless and irrational. His campaign promises were all lies (but that’s what politicians do) A chicken in every pot and two cars in every garage blah blah. We have no way of knowing for sure, but the circumstantial evidence would point to serious Epstein kompromat on the Mad Emperor.
In addition, he has taken 100s of millions from Adelson and other Epstein Class Zionist oligarchs. Reportedly, Rubio was appointed on the direction of Adelson, The DTs performance last year at the Israeli Knesset was getting close to a form of treason: boasting about selling US foreign policy for the interests of Israel.
The reasons for the emperor’s behavior are likely cognitive decline, kompromat, and corruption. Some of that is speculation, but… Time will tell, but most of us will suffer the consequences regardless.
I’m guessing Yves was quibbling with Hudson’s hypothesis that the Iran war is part of Trump’s grand economic class war design. I too had a problem with that part and so did my friend P. Hudson has made similar arguments since fairly early last year in the Alkorshid/Wolff/Hudson sessions on Dialogue Works.
In terms of aesthetics and rhetoric Trump seems radically anomalous, especially to liberal educated people like me, but in the grand scheme of American politics I think he’s only a little bit more than we should have expected given the prior patterns. Observe the greatest of American dances: Bipartisan Ratchet Two Step. Every step to the right is a big thrusting jump in the appearance of stupidity and towards privilege for the wealthy at the expense of everything else (working people, environment, peace, liberty, equality etc). Every step to the left is an elegant pirouette in which the appearance of stupidity is reduced and environment, liberty, idpol etc. are back on the agenda even if not much gets done about them. Nixon, Reagan, Bush, W, Trump, Trump. And between the last two what did the elegant pirouette really look like?
Since Reagan, war with Iran has been on the bipartisan Washington agenda. Who in Washington politics is genuinely against it on moral grounds? Idk but it’s not enough to make any difference. Those against are either being pragmatic or they want the other team to get the blame if it goes badly. But war with Iran has always been on the bipartisan wish list.
So now along comes Trump. He’s the next step in the Ratchet Two Step. A bit more stupid and vainglorious, surrounded by staffers a bit more stupid and brownnosing, he doesn’t read and can’t absorb reasoning more than a couple of sentences long. So now we finally do it. Bonanza! The military types get to shoot off the greatest firework show in history (“Cool! What’s G-13 do?” Bill Hicks. NSFW YouTube) and defense contractors’ order books will be full unto the end of the republic, if not beyond. As usual there will be no punishment for the wicked in this crime.
No doubt other factors played into this. Yves mentioned Max Blumenthal’s hypothesis in the intro. I can easily believe Netanyahu, the Zionists and Israel lobby encouraged him and fed him mis/dis/malinfo, e.g. it would be quick and easy. After starting the year on a high with Venezuela Trump must have got a bit bummed out about the fiascos of Mpls and Greenland and wanted to restore his manhood. There are lots of things like that. But those are, I believe, secondary to the fact that Washington DC has always wanted war with Iran.
Watched this podcast last night. Steve Keen’s main point of concern was that energy is the basis for all, and with a 20% reduction in world energy, that’s 20% reduction in things like food, meaning possible global famine.
Second point that they both seemed to agree on was that there is likely going to be deflation from private debt obligations not being able to be met. The financial class won’t want to lose their power and debt won’t be forgiven or restructured in a meaningful way to support the upcoming private credit crisis.
I really hope Western economies get their heads together and don’t raise interest rates because of inflation here. I think we need to maintain credit creation combined with governments creating demand through projects – hopefully green projects to transition from these God forsaken fossil fuels
I agree with you Yves that Michael is a bit off his rocker re: the deliberate nature of this affair.
I’m not sure why he feels compelled to opine that this is some manufactured crash when the more straightforward answer is the US is a dying Empire and as such lashes out in ways that are antithetical to its material interests.
If anything I feel like these events do more damage to the hydrocarbon economy the US depends on for hegemony. Time will tell.
Many have one or two perceptual biases that are connected:
1. Wanting to see that there are plans or designs behind events. It’s more comforting to see someone or something as in charge, even if that means they are malign.
2. Not wanting to see how path dependent things are. Some event or action occurs, which creates possibilities that were not there before
I knew this discussion would be a rough-ride the minute I saw Michael Hudson’s and Steve Keen’s facial expressions. They both appeared to be in a bleak mood. After listening to the discussion I too became much more bleak in looking forward to the next several years, and I was already deeply concerned before I listened to this concentrated hour of wisdom and perceptive analysis.
Based on Yves’s discussion and analysis of the war for today and considering her earlier war posts I worry for how many ways Trump and Israel could make things ever worse than they already are. I cannot understand why no one — who can, if there is anyone or any group who can — has stepped in to stop their stupidity and utter madness. Trump did not launch this war with economic objectives. Trump’s actions have been so erratic and ill-considered or unconsidered I have trouble attributing objectives to explain what he’s doing.
I thought it was a great (if sobering) discussion of how this will play out.
There were oil analysts who made very similar forecasts at the start. One estimated mid-April as the final drop dead date when damage would start to become visible in the US. So I don’t think Marxist analytical tools are required, just an understanding and willingness to look at second and third order effects and some knowledge about how the physical economy actually works.
On the other hand, even today, so-called stock analysts on CNBC are telling people that energy is only 3% of the S&P so no big deal. I don’t think that will age well.