Excellent piece on Prof Michael Hudson’s blog, which shows that someone can be a Nobel prizewinner and still be a gold-plated, copper-bottomed prat.

Whom else could we be referring to but Paul Krugman?

Mr Krugman – get this – really, honestly believes that banks only lend out money against deposits that they hold.

He refuses to acknowledge that banks create money out of thin air by issuing interest-bearing debt. But that would ascribe ultimate power to the banks, whereas Mr K is a Friend of the Government and therefore in the business of maintaining the illusion that power rests in Washington rather than Wall Street.

All kinds of consequences fall out of the banks’ effective monopoly on money creation; one of the main ones being that they and their Friends in the Finance, Insurance and Real Estate business own your ass, my ass and the Government’s ass.

Because they own the Government’s ass (by making sure it can only borrow money at interest and not issue its own interest-free version), the banks effectively decide how the West’s debt deflation crisis will be resolved – i.e. that the many will be crucified to preserve the privileges of the few.

Don’t be tempted to feel sorry for George Osborne as he contemplates the impasse facing the UK Coalition. He may be powerless as Chancellor but, as a Friend of the Banks in his private capacity, he very much owns his own ass.

Getting back to Krugman, Hudson says that his:

“…failure to see today’s economic problem as one of debt deflation reflects his failure (suffered by most economists, to be sure) to recognize the need for debt writedowns, for restructuring the banking and financial system, and for shifting taxes off labor back onto property, economic rent and asset-price (‘capital’) gains.”

On tax, I’m with Prof. Mary Mellor, who sees it as the means by which Governments withdraw ‘used’ money from circulation to balance ‘new’ money issued by those same Governments to lubricate the economy for the benefit of the populace as a whole.

Hudson concludes:

“The problem with Mr. Krugman’s analysis is that bank debt creation plays no analytic role in Mr. Krugman’s proposals to rescue the economy. It is as if the economy operates without wealth or debt, simply on the basis of spending power flowing into the economy from the government, and being spent on consumer goods, investment goods and taxes – not on debt service, pension fund set-asides or asset price inflation. If the government will spend enough – run up a large enough deficit to pump money into the spending stream, Keynesian-style – the economy can revive by enough to “earn its way out of debt.”

. . . .

“In fact, how can wage earners even afford to buy what they produce? The problem interfering with the circular flow between producers and consumers . . . is debt payment. And unless debts are written down, the U.S. economy will shrink just as will the economies of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity.”

Of course, the Washington Consensus of neoliberal austerity is exactly what Mr Osborne is prescribing for the rest of us in the UK on behalf of his Friends.