J Is for Jubilee, K for Kleptocrats
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By Michael Hudson
This piece first appeared at University of Missouri, Kansas City economist Michael Hudson’s website. See the rest of the Insider’s Economic Dictionary here.
Jubilee Year: In Judaic Law (Leviticus 25) a Clean Slate to be proclaimed every 50 years annulling personal and agrarian debts, liberating bond-servants to rejoin their families, and returning lands that had been alienated under economic duress. Long thought to have been merely a literary religious ideal, the policy has now been traced back to royal proclamations issued as a matter of course in Sumer and Babylonia in the third and second millennia BC. (See Bronze Age.)
Junk bonds: High-interest bonds, developed in the 1980s primarily by Michael Milken at Drexel Burnham to finance corporate takeovers. Mr. Milken was sent to jail for securities fraud and Drexel was disbanded as a result of insider trading scandals, for which Ivan Boesky was convicted. The damage caused by junk bonds included widespread bankruptcies of savings-and-loan associations (S&Ls) and other creditors who bought such bonds.
The fiscal ruling that made junk bonds possible was that interest-payments to bondholders and bankers were tax-exempt, whereas stock dividends had to be paid after first paying income taxes. At a 50% income-tax rate, this meant that companies could pay out twice as much pre-tax income as interest than they could pay as dividends. The government lost an equivalent amount of taxes, contributing to the sharp rise in U.S. public debt in the 1980s, as high interest charges left little or no revenue left to declare as profits.
Junk bonds were economically destructive for a number of reasons. Bondholders were paid off not so much by operating companies more efficiently as by downsizing the labor force, outsourcing it, and breaking up the company and selling its parts off piecemeal. Even companies that were not taken over suffered, as prospective target companies were obliged to resort to poison pills, loading themselves down with debt (or undertaking mergers on their own) to make it uneconomic for raiders to take them over.
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Keynes, John Maynard (1883-1946): In the 1920s, Keynes became the major critic of the World War I legacy of international Inter-Ally debts and German reparations. Against the monetarist ideology that market prices and incomes would fall in debtor countries, supposedly enabling them to pay virtually any given level of debt, Keynes explained that there were structural limits on the ability to service debts. Accusing Europe’s arms and reparations debts of exceeding these limits, Keynes provided the logic for debt write-offs based on the ability to pay.
Keynes’s Treatise on Money (1930) developed a theory of money and credit as debt, and in 1936 as the Great Depression spread throughout the world, published his best-known work, his General Theory of Employment, Interest and Prices, which pointed out that Say’s Law had ceased to operate as savings were not spent, diverting payments away from markets for goods and services. Yet this book’s theorizing about saving did not address the tendency for debts to grow exponentially, in chronic excess of the economy’s ability to carry this financial overhead. He came to view savings simply as non-spending on goods and services, not as increasing the economy’s debt overhead by being lent out.
Kleptocrats: Members of Russian President Boris Yeltsin’s “family” and other biznezmen typically government bureaucrats or other insiders who stole public-sector assets for themselves after the demise of the Soviet state in 1991, simply by registering these assets in their own names or those of banks and other corporate shells they created with government acquiescence. (See Free Market, Privatization, Reformers and Washington Consensus.)
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