Yves here. I hate to throw a spanner in the works, but as much as Varoufakis’ view may sound persuasive, I strongly suggest you read Andrew Dittmer’s translation of a very important paper by Claudio Borio and Piti Disyatat of the Bank of International Settlements, “Global imbalances and the financial crisis: Link or no link?”
Yanis Varoufakis is a Greek economist who currently heads the Department of Economic Policy at the University of Athens. From 2004 to 2007 he served as an economic advisor to former Greek Prime Minister George Papandreou. Yanis writes a popular blog which can be found here. His latest book ‘The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy’ is available from Amazon.
Interview conducted by Philip Pilkington
Philip Pilkington: In your book The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy you lay out the case that this ongoing economic crisis has very deep roots. You claim that while many popular accounts – from greed run rampant to regulatory capture – do explain certain features of the current crisis, they do not deal with the real underlying issue, which is the way in which the current global economy is structured. Could you briefly explain why these popular accounts come up short?
Yanis Varoufakis: It is true that, in the decades preceding the Crash of 2008, greed had become the new creed; that banks and hedge funds were bending the regulatory authorities to their iron will; that financiers believed their own rhetoric and were, thus, convinced that their financial products represented ‘riskless risk’. However, this roll call of pre-2008 era’s phenomena leaves us with the nagging feeling that we are missing something important; that, all these separate truths were mere symptoms, rather than causes, of the juggernaut that was speeding headlong to the 2008 Crash. Greed has been around since time immemorial. Bankers have always tried to bend the rules. Financiers were on the lookout for new forms of deceptive debt since the time of the Pharaohs. Why did the post-1971 era allow greed to dominate and the financial sector to dictate its terms and conditions on the rest of the global social economy? My book begins with an intention to home in on the deeper cause behind all these distinct but intertwined phenomena.
PP: Right, these trends need to be contextalised. What, then, do you find the roots of the crisis to be?
YV: They are to be found in the main ingredients of the second post-war phase that began in 1971 and the way in which these ‘ingredients’ created a major growth drive based on what Paul Volcker had described, shortly after becoming the President of the Federal Reserve, as the ‘controlled disintegration of the world economy’.
It all began when postwar US hegemony could no longer be based on America’s deft recycling of its surpluses to Europe and Asia. Why couldn’t it? Because its surpluses, by the end of the 1960s, had turned into deficits; the famous twin deficits (budget and balance of trade deficits). Around 1971, US authorities were drawn to an audacious strategic move: instead of tackling the nation’s burgeoning twin deficits, America’s top policy makers decided to do the opposite: to boost deficits. And who would pay for them? The rest of the world! How? By means of a permanent transfer of capital that rushed ceaselessly across the two great oceans to finance America’s twin deficits.
The twin deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and capital. While that ‘arrangement’ was the embodiment of the grossest imbalance imaginable at a planetary scale (recall Paul Volcker’s apt expression), nonetheless, it did give rise to something resembling global balance; an international system of rapidly accelerating asymmetrical financial and trade flows capable of putting on a semblance of stability and steady growth.
Powered by America’s twin deficits, the world’s leading surplus economies (e.g. Germany, Japan and, later, China) kept churning out the goods while America absorbed them. Almost 70% of the profits made globally by these countries were then transferred back to the United States, in the form of capital flows to Wall Street. And what did Wall Street do with it? It turned these capital inflows into direct investments, shares, new financial instruments, new and old forms of loans etc.
It is through this prism that we can contextualise the rise of financialisation, the triumph of greed, the retreat of regulators, the domination of the Anglo-Celtic growth model; all these phenomena that typified the era suddenly appear as mere by-products of the massive capital flows necessary to feed the twin deficits of the United States.
PP: You seem to locate the turning point here at the moment when Richard Nixon took the US off the gold standard and dissolved the Bretton Woods system. Why is this to be seen as the turning point? What effect did de-pegging the dollar to gold have?
YV: It was a symbolic moment; the official announcement that the Global Plan of the New Dealers was dead and buried. At the same time it was a highly pragmatic move. For, unlike our European leaders today, who have spectacularly failed to see the writing on the wall (i.e. that the euro-system, as designed in the 1990s, has no future in the post-2008 world), the Nixon administration had the sense to recognise immediately that a Global Plan was history. Why? Because it was predicated upon the simple idea that the world economy would be governed by (a) fixed exchange rates, and (b) a Global Surplus Recycling Mechanism (GSRM) to be administered by Washington and which would be recycling to Europe and Asia the surpluses of the United States.
What Nixon and his administration recognised was that, once the US had become a deficit country, this GSRM could no longer function as designed. Paul Volcker, who was Henry Kissinger’s under-study at the time (before the latter moved to the State Department), had identified with immense clarity America’s new, stark choice: either it would have to shrink its economic and geopolitical reach (by adopting austerity measures for the purpose of reigning in the US trade deficit) or it would seek to maintain, indeed to expand, its hegemony by expanding its deficits and, at once, creating the circumstances that would allow the United States to remain the West’s Surplus Recycler, only this time it would be recycling the surpluses of the rest of the world (Germany, Japan, the oil producing states and, later, China).
The grand declaration of 15th August 1971, by President Nixon, and the message that US Treasury Secretary John Connally was soon to deliver to European leaders (“It’s our currency but it is your problem.”) was not an admission of failure. Rather, it was the foreshadowing of a new era of US hegemony, based on the reversal of trade and capital surpluses. It is for this reason that I think the Nixon declaration symbolises an important moment in postwar capitalist history.
PP: The old banking proverb: “If you owe a bank thousands, you have a problem; owe a bank millions, the bank has a problem” comes to mind. Was this, then, the end of the hegemony of the US as lender and the beginning of the hegemony of the US as borrower? And if so, does this provide us with any insights into the financial crisis of 2008?
YV: I suppose that Connally’s “It’s our currency but it is your problem” turned out to be the new version of the old banking adage that you mention. Only there is an important twist here: in the case of the banks, when they fail, there is always the Fed or some other Central Bank to stand behind them. In the case of Europe and Japan in 1971, no such support was at hand. The IMF was, let’s not forget, an organisation whose purpose was to fund countries (of the periphery mostly) that faced balance of payments deficits.
Connally’s phrase was aimed at countries that had a balance of payments surplus in relation to the United States. Additionally, when a heavily indebted person or entity tells the bank that it is the one with the problem, and not the indebted, this is usually a bargaining ploy by which to secure better terms from the bank, a partial write down on the debt etc. In the case of Connally’s trip to Europe, shortly after the Nixon announcement, the United States was not asking anything from Europeans. It was simply announcing that the game had changed: energy prices would rise faster in Europe and in Japan than in America, and relative nominal interest rates would play a major role in helping shape capital flows toward the United States.
The new hegemony was thus beginning. The hegemon would, henceforth, be recycling other people’s capital. It would expand its trade deficit and pay for it via the voluntary flows of capital into New York; flows that began in earnest especially after Paul Volcker pushed US interest rates through the roof.
PP: And this new hegemony grew almost organically out of the preeminence of the dollar as a world reserve currency that had grown up in the post-war years, right? Could you say something about this?
YV: The ‘exorbitant privilege’ of the dollar, courtesy of its reserve currency status, was one of the factors that allowed the United States to become the recycler of other people’s capital (while America was busily expanding its trade deficit). While crucial it was not the only factor. Another was the United States’ dominance of the energy sector and its geostrategic might. To attract wave upon wave of capital from Europe, Japan and the oil producing nations, the US had to ensure that the returns to capital moving to New York were superior to capital moving into Frankfurt, Paris or Tokyo. This required a few prerequisites: A lower US inflation rate, lower US price volatility, relatively lower US energy costs and lower remuneration for American workers.
The fact that the dollar was the reserve currency meant that, in a time of crisis, capital flew into Wall Street anyway (as it was to do again years later when, despite Wall Street’s collapse, foreign capital rushed into Wall Street in the Fall of 2008). However, the volume of capital flows that had to flood Wall Street (in order to keep the US trade deficit financed) would not have materialised had it not been for the capacity of the United States to precipitate a surge in the price of oil at a time when (a) US dependence on oil was lower than Japan’s or Germany’s, (b) most oil trades were channeled via US multinationals, (c) the US could suppress inflation by raising interest rates to levels that would destroy German and Japanese industries (without totally killing American companies) and (d) trades unions and social norms that prevented a ruthless suppression of real wages were far ‘softer’ in the US than in Germany or Japan.
PP: You write in the book that US officials were actually not that concerned about the rising oil prices in the 1970s, why do you say this? And do you think that the recent speculative pressures on oil and food prices – emanating from Wall Street itself – have been largely tolerated by US officials for similar reasons?
YV: The reason is in the old joke that has one economics professor asking another “How is your wife?” and receives the reply: “Relative to what?” The whole point about attracting capital and gaining competitiveness over another company or, indeed, another country, is that what matters is not absolute but relative costs and prices. Yes, the US authorities were concerned about inflation and oil prices. They did not like their increases, especially when they could not control them fully. But there was one thing that they feared more: An incapacity to finance the growing US trade deficit (that would result if the returns to capital were not improving relative to similar returns elsewhere). It was in this context that their considered opinion was that a hike in energy prices, to the extent that it boosted German and Japanese costs more than it did US costs, was their optimal choice.
As for the comparison with the recent rise in oil and, primarily, food prices, I think this is quite different. For one, I do not see what US interests are being served by the ways in which derivatives in the Chicago marker are pushing food prices to a level that threaten the Fed’s quantitative easing strategy courtesy of the inflationary pressures they are causing. Additionally, back in the early 1970s, the US government was far more in control of financial flows and speculative drives than it is today. Having allowed the genie of financialisation out of the bottle, US authorities are watching it wreak havoc almost helplessly – especially given the inherent ungovernability of the United States, with Congress and the Administration locked into mortal combat with one another. In sharp contrast, back in 1971-73, the US government had a great deal more authority over the markets now.
PP: I’d like to move on to what I think is the key point of your book: namely, that the rest of the world is funding the US’s twin deficits – that is, the rest of the world is funding both the US trade deficit and the US government deficit.
When the twin deficits began to open up in the US there was a fundamental change in the nature of the US economy. Could you talk about this a little?
YV: The change was earth-shattering for America’s social economy. The strategy of allowing the deficits to expand inexorably came hand-in-hand with a series of strategies whose purpose was, quite simply, to draw into the United States the capital flows, from the rest of the world that would finance these growing deficits. In my book I tried to detail four major strategies that proved crucial in generating the capital tsunami which kept America’s deficits satiated: (1) a global boost in energy prices that would affect disproportionately Japanese and German industries (relatively to US firms), (2) a hike in America’s real interest rate (so as to make New York a more attractive destination for foreign capital), (3) a much cheapened American labour that is, at once, greatly more productive, and (4) a drive toward Wall Street financialisation that created even greater returns for anyone sending capital to New York.
These strategies had a profound effect on American society for a variety of reasons: To keep real interest rates high, the nominal interest rate was pushed upwards at a time that the administration, and the Fed, engineered a reduction in wages. The increasing interest rates shifted capital from local industry to foreign direct investment and transferred income from workers to rentiers. The cheapening of labour, which also necessitated a wholesale attack against the trades unions, meant that American families had to work longer days for less money; a new reality that led to the breakdown of the family unit in ways which had never been experienced before. The more family values were becoming the emerging Right’s mantle, the greater their destruction at the hands of the Global Minotaur that the Right was keenly nourishing.
The loss of wage share meant, moreover, that families had to rely more greatly on their home as a cash cow (using it as collateral in order to secure more loans) thus turning a whole generation away from savings and towards house-bound leverage. A new form of global corporation was created (the Wal-Mart model) which imported everything from abroad, used cheap labour domestically for manning the warehouse like outlets, and propagated a new ideology of cheapness. Meanwhile, Wall Street was using the capital inflows from abroad to go on a frenzy of lucrative take-over and merger activity which was the breeding ground for the financialisation which followed. By combining the domestic hunger for credit (as the working class struggled to make ends meet, even though they worked longer hours and much more productively than before), a link was created between financial flows built upon (i) the humble home of the bottom 60% of society and (ii) the financial inflows of foreign capital into Wall Street. As these two torrents of capital merged, Wall Street’s power over Main Street rose exponentially. With labour losing its value as fast as regulatory authorities were losing their control over the financial sector, the United States was changing fast, losing all the values and ditching all the social conventions that had evolved out of the New Deal. The world’s greatest nation was ready for the Fall.
PP: You mentioned the Wal-Mart model just now. In the book you make a good deal out of this model. Could you explain to the readers why you do and what the significance of it is for the broader economy?
YV: Wal-Mart symbolises a significant change in the nature of oligopolistic capital. Unlike the first large corporations that created wholly new sectors by means of some invention (e.g. Edison with the light bulb, Microsoft with its Windows software, Sony with the Walkman, or Apple with the iPod/iPhone/iTunes package), or other companies that focused on building a particular brand (e.g. Coca Cola or Marlboro), Wal-Mart did something no one had ever thought of before: It packaged a new Ideology of Cheapness into a brand that was meant to appeal to the financially stressed American working and lower-middle classes. In conjunction with its fierce proscription of trades unions, it became a bulwark of keeping prices low and of extending to its long suffering working class customers a sense of satisfaction for having shared in the exploitation of the (mostly foreign) producers of the goods in their shopping basket.
In this sense, the significance of Wal-Mart for the broader economy is that it represents a new type of corporation which evolved in response to the circumstances brought on by the Global Minotaur. It reified cheapness and profited from amplifying the feedback between falling prices and falling purchasing power on the part of the American working class. It imported the Third World into American towns and regions and exported jobs to the Third World (through outsourcing). Wherever we look, even in the most technologically advanced US corporations (e.g. Apple), we cannot fail to recognise the influence of the Wal-Mart model.
PP: Finally, where do you see us headed now as we emerge from the shadow of the Global Minotaur?
YV: The Minotaur is, of course, a metaphor for the strange Global Surplus Recycling Mechanism (GSRM) that emerged in the 1970s from the ashes of Bretton Woods and succeeded in keeping global capitalism in a rapturous élan; until it broke down in 2008, under the weight of its (and especially Wall Street’s) hubris. Post-2008, the world economy is stumbling around, rudderless, in the absence of a GSRM to replace the Minotaur. The Crisis that began in 2008 mutates and migrates from one sector to another, from one continent to the next. Its legacy is generalised uncertainty, a dearth of aggregate demand, an inability to shift savings into productive investment, a failure of coordination at all levels of socio-economic life.
A world without the Minotaur, without a functioning GSRM, but one that is ruled by the Beast’s handmaidens, is an illogical, absurd place. And who are the Minotaur’s surviving handmaidens? They are Wall Street, Walmart, Germany’s provincial mercantilism, the European Union’s absurd pretence that a currency union can prosper without a surplus recycling mechanism, the growing inequities within the United States, within Europe, within China, etc., etc.
The best example of our world’s inability to come to terms with its conundrum is the way in which public debate deals with the so-called global imbalances: the systematically increasing trade surplus of some countries (Germany and China are good examples), which are mirrored in increasing trade deficits in others. All commentators are now in agreement that increasing global imbalances are a terrible thing. One would, consequently, be excused for imagining that a reduction in global imbalances would have been welcomed. But alas, the opposite is the case. When the imbalances shrink (e.g. China’s trade surplus declines) this is a sign of trouble, rather than an improvement. The reason is that the cause of the imbalance’s shrinkage is not a better, a more productive recycling of surpluses, but rather a deepening recession in the countries that used to provide the demand for someone else’s net exports. So we are in the weird situation of exorcising global imbalances, while at the same time suffering when they diminish.
The West, caught in Bankruptocracy’s poisonous web, unable to rise to the challenges of the post-2008 world, will keep stagnating, losing its grip on reality, failing to match its outcomes to its capacities or to create new ‘realities’. As for the emerging economies, bristling with people ready to transcend constraints, to spawn new ‘realities’, to expand existing horizons, they will be caught in a trap of low overall demand for their wares. Unless a new GSRM materialises soon, the future of the global economy will remain bleak. What will it take to fashion a GSRM from scratch? One thing is certain: markets will not spontaneously generate one. A new GSRM must be the result of concerted political action. Just like Bretton Woods once was.