Today's Stories

December 23, 2008

Michael Yates
The Tombstone Economy

December 22, 2008

Pam Martens
Madoff's Money Trail Leads to Washington

Gary Leupp
Base Alienation: Obama's Team of Rivals

Mike Whitney
Bail Out the Economy? More Pay is the Only Way

Karl Grossman
Lost in Space: NASA at 50

Niall Meehan
Conor Cruise O'Brien: Historian, Politician, Censor

Steve Conn
Where Would Larry Summers Dump the Guantanamo Mess?

Uri Avnery
Israeli Elections: Spot the Difference

Corey D. B. Walker
The Politics of Freedom

David Swanson
The Purloined Constitution

Worthy Group of the Day
Socialist Worker

December 19 - 21, 2008

Alexander Cockburn
An Ethnic Cleansing in America

Jeffrey St. Clair
Salazar and the Tragedy of the Common Ground

Paul Craig Roberts
Country Without Mercy

Patrick Cockburn
The Baathist "Coup Plot"

Felice Pace
Green Myopia: Obama's Appointments Reveal What's Wrong with the Environmental Movement

Diane Farsetta
The Pentagon's PR Slush Fund

George Ciccariello-Maher
By the Time I Get to Arizona: ICE Raids and Resistance in Flagstaff

Eric Bergoust
Extinct Lifestyles: Redefining Prosperity

Marjorie Cohn
Torture Without Regrets: Cheney's Unrepentent Confession

Stan Cox
Clothes and Commentaries That Don't Fit

Michael Donnelly
Clinton III: Continuity We Can Believe In

Robert Weissman
The Auto Bailout

Ralph Nader
Excluded Democracy: Scholastic and the Two Party System

Alan Farago
Shock and Awe Economics

Sam Smith
Not All Public Work is the Same

Timothy G. Hermach
What Happened on the Way to the Inauguration?

Seth Sandronsky
Who's Not Getting By and Why

Rannie Amiri
All Quiet on the Gazan Shore

David Yearsley
Bach as Jihadi

Martha Rosenberg
Wyeth's Pay-to-Play

Dave Lindorff
White House Lied About Iraqi Yellowcake Buy (But That's Not the Biggest Scandal)

Christopher Brauchli
Weekend at Bernie's: the Confinement of Mr. Madoff

Missy Beattie
President Meathead

Richard Rhames
Corporatizing the Kids

Stephen Martin
Full-Spectrum Dominance of the Big Lie

Paul Krassner
Milk and Twinkies

Lorenzo Wolff
Does Coldplay Give a Shit Anymore?

Poets' Basement
Kathwari, Halling and Payne

Worthy Group of the Weekend
Heartwood

December 18, 2008

Phillip Doe
The Man in the Hat: Salazar and the Status Quo

Ronnie Cummins
Vilsack: Another Shill for Monsanto

Jesse Sharkey
No School Left Unsold: Arne Duncan's Privatization Agenda

Saul Landau
Postcard from Venezuela

Peter Morici
What's Next for the Fed?

Dave Lindorff
Prosecuting Bush and Cheney for Torture

Panos Petrou
Days of Rage in Greece

Jeff Cohen /
Norman Solomon
The 2008 P.U.-litzer Prizes: the Stinkiest Media Performances of the Year

Worthy Group of the Day
Organic Consumer Alliance

December 17, 2008

Peter Lee
Pushing Pakistan Over the Edge

Conn Hallinan
Angels and Demons in Mumbai

Mike Whitney
Bernanke's Fatal Flaw

Jeff Halper
Obama and the Israel-Palestine Conflict

Alan Farago
The Audacity of Parkland

Peter Morici
The Big Hole

Norm Kent
Obama Lights Up

Col. Douglas MacGregor
The Price of Expediency

Margaret Kimberley
Blacks and Gay Rights

Ron Jacobs
The Myth of the Good Guy: Waiting on a President to Do the Right Thing

Worthy Group of the Day
Campaign to End the Death Penalty

December 16, 2008

Vicente Navarro
A Forgotten Genocide: the Case of Spain

Patrick Cockburn
Each Shoe was Worth a Thousand Words

Thomas Michael Power
Back to the Pump: an Economic and Environmental Dead End

Jason Hribal
Orangutans, Resistance and the Zoo: the Story of Ken Allen and Kumang

Farzana Versey
Straw Warriors and the Pantomime of Patriotism

Wajahat Ali /
Ahmed Rashid
Indian Muslims: Defining Their Loyalty

Mats Svensson
The Order to Destroy has been Given

Paul Fitzgerald /
Elizabeth Gould
Mumbai Terror's Afghan Roots

David Macaray
Workplace Violence and Termination Etiquette

Howard Lisnoff
Left Control of Academia? The Case of William Felkner

Worthy Group of the Day
AWR: the Last, Best Hope for Saving the Big Wild

December 15, 2008

Andy Worthington
Hit Me Baby One More Time: a History of Music Torture in War on Terror

Franklin Lamb
Why Hezbollah Stiffed Carter

Karl Grossman
Dr. Chu's Nuclear Prescription

Brian Cloughley
Land of the Free (To Torture and Imprison Without Trial)

Mary Lynn Cramer
Stiglitz's Foolishly Flawed Morality

Steve Early
From Nicky Pockets to Blago: Why Pay-to-Play is Bad for Labor

Thomas Christie
Pentagon Train Wreck Awaits Obama

Ken Paff
Remembering Ron Carey: a Great Labor Leader

Niranjan Ramakrishnan
What is India to Do?

Dave Lindorff
A Hero of Our Time: Muntadar al-Zaidi

Alan Farago
The Artless Dodger

Worthy Group of the Day
Davis-Putter Scholarship Fund

December 12 / 14, 2008

Alexander Cockburn
Hail to Chicago, Beacon of American Values

Michael Hudson /
Jeffrey Sommers
The End of the Washington Consensus

David Price
The Leaky Ship of Human Terrain Systems

Jeffrey St. Clair
Nukes Up the Hudson

Frank Barat
An Israeli in Gaza: an Interview with Jeff Halper

John Ross
Writing a Thesis in Blood

Binoy Kampmark
Humanitarian Imperialism: Obama and the Genocide Task Force

David Macaray
Killing the Auto Bailout: a Dagger to the Heart of Organized Labor

Ralph Nader
Antidotes to Plunder: a Holiday Reading List

Eamonn Fingleton
Whatever Happened to Iris Chang?

Lawrence Velvel
Why Blagojevich Might Be Acquitted

Behzad Yaghmaian
The Housing Crisis: a Timebomb China Can't Defuse

Sam Husseini
Putting the Pro in Protest

Tom Barry
Incentives to Detain: How Immigrants Drive Prison Profits

Howard Lisnoff
Why I Went to Jail

Laura Carlsen
Mexico's Immigration Problem

Raj Patel
The WTO and Other Fairy Tales

Ron Jacobs
The Manufacturing of History

Paul Watson
Risky Business Down Under

David Yearsley
They Also Serve Who Only Pull or Tread

Lorenzo Wolff
So You Want Be a Rock 'n' Roll Star...

Kim Nicolini
Finally, a Vampire Movie You Can Sink Your Teeth Into

Susie Day
Proposition 1984: the Problem with Heterosexuals

Poets' Basement
Gibbons, Lerch and Crete

Worthy Group of the Weekend
Energy Justice

December 11, 2008

Patrick Cockburn
Total Defeat for U.S. in Iraq

P. Sainath
After Mumbai

Vicken Cheterian
The Zarqawi Generation

Ray McGovern
Will Obama Buy Torture-Lite?

Dedrick Muhammad
Post-Racial Racism at the Post: the Undying Obsession with Black Family Values

Lee Sustar
Victory at Republic

Peter Morici
The Big Drag

Ayesha Ijaz Khan
Must They Hate Us So?

George Wuerthner
Another Subsidy to Big Timber?

Christopher Brauchli
Mr. Berg's Strange Obsession

Worthy Group of the Day
Animal Balance

December 10, 2008

Ismael Hossein-Zadeh
Whose Interests Will Shape Obama's Change?

Mary Lynn Cramer
The Multi-Trillion Dollar Question

Manuel Garcia, Jr.
Nuclear Weapons Obsolescence

Joshua Frank
Breaking the Stranglehold on Middle East News Coverage

Jack Ely
Stop Sobbing About Free Music Downloads: a Message to the Music Industry from the Lead Singer of the Kingsmen

Steve Conn
An Obama Public Works Program?

Lee Sustar
Republic Workers Target Bank of America

Glen Ford
The Die is Cast

Stephen Lendman
The Persecution of Syed Fahad Hashmi

Nadia Hijab
The Face of America

Dave Lindorff
We All Need a Union

Website of the Day
This One's For You, Senator Dodd

December 9, 2008

Mike Whitney
Card Check

Fawzia Afzal-Khan
Us vs. Them

Ghada Karmi
The UN Resolution That Time Forgot

Dave Lindorff
A Car Dealer Explains Why the Bailout is a Raw Deal

Steve Breyman
Notes on a Green Economy: Managing Stuff in the 21st Century

Lee Sustar /
Nicole Colson
Raising the Stakes at Republic

Rev. William E. Alberts
God of Our Fathers

Martha Rosenberg
Bill Richardson: Secretary of Bloodsports

Sam Husseini
How Holbrooke Lied His Way Into a War

David Macaray
The UAW in Peril

Website of the Day
This Toxic Life

December 8, 2008

Steve Early
Is Obama Backing Off a Crucial Pledge to Labor?

Michael Hudson
Obama's Favoritism: Wall Street, Not the Auto Industry

Patrick Cockburn
Talking to a Lashkar Militant

Diane Farsetta
An Officer and a Conflicted Man: McCaffery, the Pentagon and Fleishman-Hillard

Paul Craig Roberts
Chapters in Imperial Hypocrisy

Daniel Gross
The Chicago Sit-Down Strike

Saul Landau
To Bail or Not to Bail?

Harvey Wasserman
Why John Bryson is Unfit for Energy Secretary

Mike Ferner
The New Generation of "Non-Lethal" Weapons

Norman Solomon
The Silent Winter of Escalation

David Michael Green
The Other Foot

Website of the Day
The Remains of Detroit

December 5 / 7, 2008

Alexander Cockburn
Honeymoans From the Left

Brian Cloughley
Shambles in Afghanistan

Paul Craig Roberts
Muslim Revolution: How Washington Arrogance Helped Drive the Mumbai Attacks

Liaquat Ali Khan
Mumbai and the Kashmir Tinderbox

Farzana Versey
Mumbai's Charge of the Lightweight Brigade

Peter Lee
Pakistan Nears the Breaking Point

Peter Morici
Slouching Toward a Depression?

Ralph Nader /
Toby Heaps
Junk Cap-and-Trade

Yinon Cohen /
Neve Gordon
Obama Could End the Israeli-Palestinian Conflict: Will He Meet the Challenge?

Wajahat Ali
Perverse Justice: the Holy Land Foundation Convictions

Johnny Barber
Aswad's Story: Illegal Detention and the Declaration of Human Rights

Alan Farago
Fallout from the Pass-Through Economy

Jeremy Scahill
Obama Doesn't Plan to End Occupation of Iraq

Mike Whitney
Powergrab in Ottawa

Ranjit Hoskote
Jahiliyya Versus Jihad

Carl Finamore
Thank God I'm an Atheist! (Or Boy is Bill O'Reilly in for a Big Surprise)

Marjorie Cohn
Obama and Women's Rights

Norm Kent
Tommy Chong, the Unanticipated Warrior

Missy Beattie
What Lies Ahead

Binoy Kampmark
Committing Suicide On-Line: the Briggs Case

David Macaray
The Best and the Brightest Redux: Too Many Brains, Not Enough Humility

Nancy Stohlman
Relational Activism

Ron Jacobs
Irreverent Politics Then and Now

David Yearsley
Thematics From the Golden Past

Lorenzo Wolff
Troubled Songs of Home and War

Poets' Basement
Orloski: The Door Opener

Website of the Weekend
In Prison My Whole Life

December 4, 2008

Ece Temelkuran
Inside the Ergenekon Case

Ralph Nader
Turning Crisis into Opportunity: Who Will Seize the Moment?

Harry Browne
The Bush-Obama National Security Strategy

Eamonn Fingleton
The American Car Industry: a Riposte to the Knockers

Conn Hallinan
The Syria Attack

Mike Whitney
Fiasco in Somalia: Another CIA Cock-Up

Stewart J. Lawrence
Obama and Latinos: Richardson, Alone, is Not Enough

Paul Fitzgerald /
Elizabeth Gould
Message to Obama: Stop Killing Afghanis

Karyn Strickler
Show Us the Green, Before We Show You the Money

Jennifer Matsui
Obama-Cola: the Great National Temperance Beverage

Website of the Day
"He Ain't Got Laid in a Month of Sundays..."

December 3, 2008

Andrew Cockburn
What's Wrong with the U.S. Military

Sheldon Rampton
Mormon Homophobia: Up Close and Personal

Robert Weissman
Nationalize GM

Yifat Susskind
From Mumbai to Washington

William Blum
The Obama Bummer: Vote First, Ask Questions Later

Alan Singer
The Ghost of the Defunct Economist

David Macaray
Trampled Under Foot at Wal-Mart

Martha Rosenberg
Born With a Statin Deficiency? Line Forms to the Left!

Mats Svensson
The Crimes Have No Period of Limitations

Website of the Day
Why Bill Richardson's Nomination Should be Opposed

December 2, 2008

Jeremy Scahill
Obama's Kettle of Hawks

Paul Craig Roberts
The New Arms Race

Ayesha Ijaz Khan
The Mumbai Terror Attacks: Is Pakistan to Blame?

Sarah Anderson /
John Cavanagh
Skewed Priorities: How the Bailout Dwarfs Spending on Other Global Crises

William Blum
The Mythology of the War on Terrorism

John Ross
Mexico's Drug War Goes Down in Flames

Dave Lindorff
A Tale of Two Terror Attacks

Nicola Nasser
A Peace Process That Makes Peace Impossible

Steve Conn
Operation Redskin Removal

Robert Bryce
Coal Hard Facts

Website of the Day
Country, Funk, Soul

December 1, 2008

Patrick Cockburn
From Baghdad to Mumbai, by Way of Pakistan

Damien Millet /
Eric Toussaint
Obama's Economic Team: Records of Failure

Vijay Prashad
The Fires in South Asia

Deepak Tripathi
Obama's Foreign Crises

Joshua Frank
Madam Secretary Clinton and the Middle East

P. Sainath
The Unlikely Martyrdom of Free Market Jihad

Alan Farago
The Right's War on Regulators

Binoy Kampmark
Sydney's Ball and Chain

Chris Genovali
Silent Fall

David Michael Green
Hope You Die Before You Get Old

Stephen Martin
The Chinese are Coming, the Chinese are Coming!

Website of the Day
Robert Rubin: Coward, Liar or Both?

November 28-30, 2008

Alexander Cockburn
In Time of Trouble

Mike Whitney
The Obama "Dream Team": Rubin Clones and Other Fakers

Ted Honderich
What is the Meaning of Obama's Election?

Tom Kerr
Preserving Filthy Lucre (Or Becoming My Dad)

Mike Ely
The Conquest of New England

David Yearsley
Hymns of the Conquest

Deepak Tripathi
Uproar in Police-State Britain

Sonja Karkar
Gaza's Death Throes

Ramzy Baroud
Salvation in a News Broadcast

Robert Weitzel
Israel's Settlement on Capitol Hill

Robert Roth
Can We Create a Movement for Change?

Carlos Fierro
Obama and the End of Racism?

David Macaray
How to Kill a Union

David Rosen
A New Sexual Agenda

James Cockcroft
Indigenous People Rising

Stan Cox
The Most Disappointing Gift

Steve Conn
Talking Turkey About College Basketball

Stephen Martin
The Electromagnetic Pulse and Economic Warfare

Richard Rhames
Busty Bimbettes, Bombs and Brand Obama

Kim Nicolini
Women as Products and Cannibalistic Achievers

Lorenzo Wolff
A Battle Cry for the Confused and Vulnerable

Poets' Basement
Woods, Harrison and Corseri

December 23, 2008

And God Created Bernie...

The Ponzi Paradigm

By MICHAEL HUDSON

Last week the Good Lord evidently realized that not enough people had been reading Hyman Minsky’s explanation of how financial cycles end in Ponzi schemes – the stage in which banks keep the boom going by lending their customers the money to pay interest and thus avoid default. So He sent Bernie Madoff to dominate the news for a week and give the mass media an opportunity to familiarize newspaper readers and TV watchers with just how Ponzi schemes work. What Mr. Madoff did was, in a nutshell, what the economy as a whole has been doing under the moniker “wealth creation.”

If the media were able to wait until as late in the financial collapse as last week to provide helpful diagrams about how Ponzi schemes need to keep on growing exponentially, it is simply because bad foreign financial news is not deemed newsworthy in North America. But Europe has been having its own run-throughs, headed by Spain – which by no coincidence is now experiencing the biggest real estate bust outside of the post-Soviet economies.

The best case study occurred two years ago. On May 9, 2006, Spanish police raided 21 homes and offices of Afinsa Fienes Tangibles SA, the world’s largest postage-stamp dealer, and rival firm, Forum Filatélico. They charged eleven men with running a $6.4 billion pyramid scheme that (and Afinsa)took in some 343,000 investors – 1 per cent of Spain’s entire population, making the fraud one of the largest in Spanish history.

An economy either is in trouble or has lost its sense of balance when investors shy away from tangible capital formation in favor of buying postage stamps and similar collectibles. Unlike machinery and technology, stamps do not produce real goods and services. They have long since been printed and sold by the government, and will never be used actually to mail letters. However, stamps have shown themselves to be a great vehicle to attract savers who think that buying them can produce an exponential earnings growth – or more technically, “capital” gains, if we can stretch economic terminology far enough to call a stamp collection “capital.”

If value resulted merely from scarcity, then postage stamps, coins and master paintings all would seem to increase almost automatically over time, just like most land does. But these trophies of wealth do not promote rising production, consumption or living standards. As stamps do not earn money by employing labor to produce goods and services, their price gains are neither profit nor capital gains as classically understood. They are what economists call a windfall.

The Spanish postage-stamp scheme seems to have taken off in 2003, the year in which Spain’s free-market conservative government deregulated public insurance and oversight for non-financial investment funds. Afinsa Group bought two-thirds control of the New Jersey stamp and coin auction house Greg Manning and merged it with the Spanish auctioneer Auctentia to create Escala as the world’s third largest auction house (after Sotheby’s and Christie’s). Escala moved its operations to New York City and listed its stock on the Nasdaq over-the-counter market. Despite the stock market’s lethargic trend, the company’s earnings showed such rapid growth that in just three years its share price soared from under $5 to $35, tripling in 2005 alone.

Afinsa’s purchases accounted for 70 per cent of Escala’s profits, thanks largely to the fact that as its Spanish parent’s sole supplier, Escala marked up its stamps by a reported 1,150 per cent, out of all proportion to the usual 25 per cent. Afinsa thus was carrying stamps for which it paid 58 million euros on its books at €723 million, over ten times their catalog values – which are fictitiously high in any case, being published mainly for the benefit of stamp dealers to give their customers the idea that they are getting a good buy. But as Forum Filatélico’s chairman, Francisco Briones, explained to a reporter from London’s Financial Times: “It was ‘normal’ to charge clients such inflated prices because of the services provided . . . including the custody and conservation of stamps.”

Afinsa paid its stamp investors an annual rate of 6 to 10 per cent interest, beating most competing yields as the global financial bubble was pushing interest rates steadily downward. (Spanish government bonds paid only 3.5 per cent.) To build up trust, Afinsa gave its clients post-dated checks for the gains that were promised. It also promised to buy back the stamps it sold, at the original price. This gave an appearance of liquidity to the normally illiquid market in stamps, fine arts and other collectibles, where 25 per cent commissions to auction houses are normal. These ploys convinced the majority to simply re-invest the money to buy yet more stamps, which the company held in its offices ostensibly for safekeeping and preservation.

Money poured in, giving stock-market investors in Escala much higher returns than the stamp-buying customers nominally were receiving. As one news report remarked, why buy stamps and coins when you can invest in companies dealing in them? But within a week of the arrests, Escala’s stock plunged below $4 a share.

The denouement came shortly after Lloyd’s of London withdrew from a €1.2 billion policy to insure Afinsa’s stamps. One of its experts noticed that if $6 billion really had been invested, it would have bought up all the investment-grade stamps in the world many times over. The fact that stamp prices did not reflect any such extraordinary buying implied that few bona fide stamp transactions occurred at all, and there had been a massive over-billing.

As matters turned out, most of Afinsa’s stamps had no investment value. This explained why there were no receipts for transactions with Escala. The police found €10 million in €500 banknotes (worth about $650 each at the exchange rate of $1.30 per euro) by breaking open a newly plastered wall at the Madrid home of Afinsa’s main stamp supplier, Francisco Guijarro. What they could not find were any receipts for the stamps that he allegedly bought. And despite the remarkably high markups charged for curating the stamp collection, it was rife with phonies, as Lloyd’s had suspected. Concluding that the bills Senor Guijarro had sent to Afinsa were just a cover for a money laundering operation, the prosecutors charged the family members and officers who controlled Afinsa with embezzlement, money laundering, tax evasion, fraudulent bankruptcy, breach of trust and forgery.

The arrests recalled memories of a more famous U.S. fraud involving postage stamps some 86 years earlier, in 1920, by Charles Ponzi – the man who bequeathed his name to history in the form of Ponzi pyramid scheme. He is reported to have arrived in Boston in 1903 with only $2.50. Not speaking much English, he took menial jobs. Fired as a waiter for shortchanging customers, he moved up to Montreal and became an assistant teller in an Italian immigrant bank. It grew rapidly by paying double the normal 3 per cent rate of interest on savings accounts, but failed when its real estate loans began to go bad. The bank’s attempt to give the impression of solvency seems to have given Ponzi the idea of paying interest out of new deposit inflows rather than actual earnings. As long as clients felt they were receiving interest regularly, they tended to be calm about the principal balance.

Ponzi was sent to a Canadian prison for forgery, and then was jailed in Atlanta for trying to smuggle Italian immigrants into the United States. After his release he moved back to Boston and got a job selling business catalogs. A Spanish customer sent him a postal reply coupon, which allowed its holder to buy stamps in foreign countries for return mail rather than using domestic currency to buy a stamp.

Prices for these coupons were long out of date, having been set in 1907 by the International Postal Union. World War I drastically shifted exchange rates, enabling buyers to pay a small amount in Britain – or even less in Germany with its depreciated currency – and obtain a return stamp order that was good in the United States.

The markup on these tiny postal orders was large. An American penny could buy foreign stamp orders that could be converted into six cents in U.S. stamps, for a 500 per cent profit. The problem was that it would take a truckload of such postal orders to make serious money. A million-dollar investment would involve a hundred million penny coupons – which then would have to be converted into stamps and sold in competition with the U.S. Post Office, presumably at a discount, mainly in immigrant neighborhoods.

Focusing on the principle of arbitrage rather than such laborious implementation, Ponzi explained that he could make a 400 per cent gain after expenses. He promised that investors could double their money in 90 days, pretending to take due account of the costs and shipping time from Europe to America. When his Securities Exchange Company paid early investors the high returns he had described, they spread the word to others. Ponzi’s inflow of funds rose from $5,000 in February 1920 to $30,000 in March, and $420,000 by May. By July an estimated $250,000 a day was flowing into his firm, mainly from small investors who let their book credits build up rather than taking out their money. Some people put their life savings into the plan, and even borrowed against their homes.

Ponzi spent most of the money on himself, buying a mansion and bringing his mother over from Italy. The financial reporter Clarence Barron (publisher of Barron’s) noted that if he really had invested the money as he told his investors he had done, Ponzi would have had to purchase 160 million postal reply coupons. Yet the post office reported that few were being bought at home or abroad, and only 27,000 were circulating in the United States.

Federal agents raided Ponzi’s offices in August, and did not find any postal reply coupons, just as Spanish police did not find investment-grade postage stamps in the scheme’s 2006 replay. Ponzi was sentenced to prison yet again, but jumped bail and tried to make some quick money selling Florida real estate. He soon was recaptured, and was deported back to Italy upon his release in 1934.

What Ponzi sold was hope, pandering to peoples’ unrealistic desire to believe that a new way to make easy gains had been discovered, with no visible upper limit as to how long gains can persist in excess of the economy’s own rate of growth. It is a measure of how much harder it is to make returns in today’s world – and hence, how little hope needs to be excited – that whereas Ponzi promised to double his investors’ money every three months, the Spanish stamp scheme paid only a 6 to 10 per cent annual return. Neither fraud actually made any trading gains or profits, but simply paid investors out of new money coming in from fresh players. New inflows were treated as earnings. That’s how pyramid schemes work.

It was almost as if the Spanish operators had read one of the biographies of Ponzi that began to appear as observers noticed the common denominators between the global financial bubble of the 1990s and earlier bubbles. These bubbles provide a classic contrast between the real wealth of nations and what the business press these days calls “wealth creation” that simply takes the form of rising asset prices – “capital gains,” most of which are land-price gains.

No doubt stamp collectors would have viewed the bidding up of stamp prices as wealth creation if it actually had occurred. But all it would have achieved was to inflate the price of old stamps, much as the world’s growing ranks of billionaires were bidding up prices for master paintings and modern art, designer furniture and beachfront homes. If all the economy’s savings went into Rembrandts and Picassos, their price obviously would soar, just as putting $6 billion into postage stamps would have established higher plateau levels for stamp prices.

The flow of funds into any category of assets bid up their prices. This is true most of all for land, one of the most universal economic needs and conspicuous-consumption status measures. But does this really “create wealth”? Do market prices reflect use values, living standards and the progress of civilization?

The requisite characteristic for such price gains is indeed scarcity, but not so much that there is not enough for large numbers of buyers to make a market. If psychological utility is the key, “scarcity” has value only as a compulsive acquisitive character – wealth addiction. It means having what other people lack, with connotations of denial. Most money in search of mere scarcity is not going into trophies of the nouveau riches, but into the world’s most abundant yet also most universal scarce resource: land. Nature is not making any more of it. Yet everyone needs land to live on, making it the object of personal and business saving par excellence. Even in today’s postindustrial economies, land and its subsoil wealth represent the largest components of national balance sheets.

But inasmuch as land cannot be manufactured, savings cannot increase its supply by active investment. This poses a traumatizing problem for economists. National income statistics count any money spent that is not consumed as saving. Following John Maynard Keynes, they define saving as equal to investment. This sows the seeds of confusion with regard to the character and preconditions of economic growth. Can we really call it “wealth creation” when society directs its savings merely into speculation rather than into building up productive powers or living standards?

Classical economists vacillated over treating land as a factor of production or as a legal property right to extract a tollbooth around a given site and levy an access charge much like a user-tax. A factor of production contributes to production and income as more income is invested in it. A rent-yielding property reduces the economy’s flow of income. In the latter case land is part of the institutional property system, not the technologically based production sector of the economy.

What is beyond dispute is that real estate is highly political at the local level. Urban development tends to be shaped by insider dealing and public infrastructure spending to increase local property prices and lobbying to obtain low tax appraisals. It is axiomatic that the more economically powerful a source of wealth becomes, the greater its political power to lobby for special tax advantages. At the national level, real estate uses part of its revenue to back politicians who give it a widening wedge of special income-tax favoritism.

In the financial sphere, every bubble has been led by governments. Bubbles need to be orchestrated by opinion makers, topped by public officials giving a patina of confidence. The “madness of crowds” is a euphemism designed to divert blame away from governments onto the public. In the United States, Alan Greenspan played the role of public bubblemeister similar to that which Walpole had played in England’s South Sea bubble and John Law in France’s Mississippi bubble nearly three centuries ago, in the 1710s.

Today’s balance sheets confuse bubble wealth with real capital formation. “Investment” has become whatever accountants say they are. So have asset and debt values, given today’s leeway for financial fiction. The practice of “marking to market” permits accountants to project hypothetical gains at astronomical rates of interest, or trivializing by discounting, applying purely mathematical functions that have lost all connection to realistic rates of growth. The result is that the financial sector itself has become decoupled from the “real” economy.

The tragedy of our time is that saving today is being diverted in ways that are decoupled from real capital formation, but merely add to the economy’s debt and property overhead.

Suppose that Ponzi actually had bought International Postal Orders, and that the Spanish stamp companies actually had invested $6 billion in rare philatelic items and coins, driving up their price to create paper gains for the investors. To whom would they sell, in order to take their gains? (This is the proverbial “greater fool” problem.) More to the point, how positive would have been the broad economic effect of such asset-price inflation?

The recent stock market and real estate bubbles are much like pyramid schemes in the sense that what is bidding up stock and property prices is an exponential inflow of new money from pension plans and mutual funds (for shares) and bank credit (for real estate). Venture capitalists are “cashing out” while corporate managers exercise their stock options.

Suppose that mortgage-packaging companies are honest in their appraisals of current price trends. The real estate bubble is nonetheless speculative and postindustrial. The analogy is found when financial managers endorse government policies that encourage the inflation of price for stocks and bonds, stamps and coins, Rembrandts and modern art by claiming that this creates wealth and hence, by definition, pulls living standards and culture onward and upward.

What is wrong with this picture? For starters, it fails to define value as distinct from price, windfall and capital gains as distinct from earned income. It also neglects the fact that market prices rise and fall, but the debts remain in place. And when debts cannot be paid, savings are wiped out.

On May 9, 2006, the price of Escala shares fell by half as news of the police raids spread. By Friday its stock was down almost 90 per cent. On Monday it jumped by 50 per cent, from $4.34 at Thursday’s close to $9.45 a share. Hedge funds were making and losing money hand over fist, dwarfing the gains and losses made from stamp trading. A veritable market in crime, punishment and beating the rap was in play.

What does this have to do with true capital formation? Individuals are getting rich while the economy is polarizing between creditors and debtors, property owners and rent-payers. Unproductive investment occurs when it takes the form of windfall “capital” gains, and when it involves going into debt for real estate, stocks or bonds, or “collectibles.” Unproductive credit occurs when commercial banks make loans that merely finance the purchase of property, companies or financial securities already in place.

Two centuries ago, French followers of Count Henry St. Simon outlined an industrial system that was to be based mainly on equity financing (stocks) rather than debt (bonds and bank loans). Their idea was to make industrial banking a kind of mutual fund, so that claims for payment (and hence, the value of savings) would rise and fall to reflect the economy’s earning power. The industrial banking that developed largely in Germany and central Europe differed from the short-term Anglo-American collateral-based trade credit and mortgage lending. But since World War I, global financial practices have been more extractive than productive.

The consequence has been that debts on the economy-wide level have grown more rapidly than the ability to pay. Instead of reducing this debt overhead by earning their way out of debt, economies have sought to inflate their way out of debt. However, the mode of inflation is not the familiar rise in consumer prices, much less wage inflation. Rather, it is asset-price inflation, emanating largely from the United States. Since the gold-exchange standard gave way to the paper dollar standard in 1971, the U.S. economy has become unique in being able to create credit – and foreign debt – without constraint. The result has been an unparalleled growth in debt relative to income, production and wages. This “debt pollution” has been likened to environmental pollution.

We have entered an era in which financial markets resemble the stamp-buying funds. Governments have replaced industrial growth with purely financial wealth creation in the form of a real estate and stock market bubble. This has turned the economic universe upside-down relative to what the classical writers expected to result from the technological progress unleashed by the Industrial Revolution and its parallel agricultural, commercial and financial revolutions. Property and credit have become costs instead of a benefit, institutional forms of rent- and interest-extracting overhead rather than helpful inputs.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

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