The Global Minotaur: An Interview with Yanis Varoufakis

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.

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  1. American Slave

    What will save us is renewable energy by providing good paying jobs and allow us to export our coal and gas by not having to burn it to make power which will earn tax income so they can lower taxes for everyone which is the purpose it serves best.

    1. RaiseYouTwo

      Great thesis, very well explained. A 2009 article by a law professor (!) J. Colares, explains this very same dynamic. Colares proposes a Keynesian-inspired global mechanism (a new international treaty) for balancing out trade flows. The scheme would work to reduce the financial sector’s pro-cyclical propensity to turn sterilized accumulated dollar and other hard currency’s reserves (by trade surlus countries) into ever newer types of financial bubbles. This would be accomplished by limiting countries’ abilities to run long-term trade surpluses (via a currency board mechanism that would hold a portion of trade surplus countries’ foreign currency in escrow, deducting a portion of such countries’ surpluses if they kept running surpluses for a number of years). Fascinating stuff, see . . . , but very doubtful in implementation since we know who owns our political class.

      1. jake chase

        I never heard of this Varoufakis but am running out to buy his book. All of you should buy it too. He echos all the things I have been trying to say for years while nobody was listening.

        I can’t wait to see him interviewed by those clowns on CNBC!

    2. James

      Renewables are little more than an extend and pretend mirage if you’re talking about powering a global industrial economy in the current manner. There is out there that addresses the economic impacts of cheap oil shortages. Why? Because there’s no other source of energy out there that packs so much energy in such a compact package.

      1. Purple Library Guy

        I don’t think an industrial policy backing the production of renewable energy will by itself solve our economic problems, although it certainly wouldn’t hurt.
        But James’ dismissal of renewables as a replacement for oil is overstated. Yes, the energy density of petroleum is superior, but the applications where that matters are limited. It’s hard to beat petroleum for such functions as long haul trucking, automobile road trips across the country, air travel and shipping. But most car trips are local, commuting and shopping and whatnot; electric power is fine for that. And trucking would mostly be more efficiently done by rail, which works fine by electrical power. Oceangoing cargo ships are potentially difficult, but Sweden has in fact produced modern container ships powered by wind and solar. Air travel may depend on petroleum, but that’s a very small part of total use (and all the more reason to conserve petroleum in other applications).
        In any case, renewable electricity production replaces coal and natural gas electricity production as much as it replaces oil. For that, energy density is irrelevant; it’s all the same juice in the power lines.

    3. i

      It would if there was a renewable energy source with a sufficiently high energy return, was scalable to current energy consumption levels and could be implemented quickly and at low cost. Currently, there’s nothing like that on the horizon. For a summary of the quantities involved, I suggest reviewing the information from the book, “Cubic Mile of Oil” summarized here:

  2. j

    I have long considered the US economy a Ponzi scheme. This article confirms my idea.
    Every Ponzi scheme will fall sooner or later and will bring crap for everybody involved. What will you do if the whole world was a victim; what will you do if the whole world depended on the scheme to move money around?
    It seems to me that money these days (if ever) means little more than trust between two parties. We all trusted the Ponzi too much, and because of that we neglected to build additional trust between each other.
    Now there is no way out but start to build new trust between each other. We will have to work for it. Sadly our financiers only have have experience in buying trust, which is unavailable since the crash. So it would seem that we will not move forward before we have got on our feet without the financing sector.

  3. j.grmwd

    Perhaps international trade should be settled with time-limited currency. Either complete the circuit in a reasonable time-frame or lose it forever.

    1. Tancred

      This would, of course, formally render official currency as “anti-money” by making it incapable of preserving value over time. With no basis for savings, there would be no basis for capital formation. Only debt. The banksters’ ultimate dream fufilled. Temporarily.

    2. j.grmwd

      Why do people think that money has to be primarily a “store of value”? There is no shortage of real things which store value. Factories. Land. Shares. Gold. For the man who works for a living and lives from paycheck to paycheck the true function of money is the mobilization of resources. Unfortunately the two functions are contradictory. Money mobilizes resources best when it constantly loses value.

    1. whitenoise

      In fact, Varoufakis was Papandreou’s advisor from 2004 to 2006. Papandreou became PM in October 2009.

      In my view, Varoufakis is the best analyst of the so-called “Greek crisis” since its “official” outbreak in late 2009-early 2010. His views have constantly been against the mainstream (but from a systemic enough viewpoint), and his predictions have come true one after the other.

  4. Philip Pilkington

    @ Yves

    Yes, the difference between the Borio paper and the savings glut thesis is that the Borio paper recognises that modern banks extend loans without requiring a stock of saving from which to draw.

  5. Jose L Campos

    Sometime I heard the in Capitalism there is an inherent tendency towards a constantly decrease of the rate of profit. Have you heard about it?

    1. Benedict@Large

      Marx said this. The idea is that as money becomes more concentrated, there is less of it in general circulation from which to draw profits. Marx postulates that as this becomes more severe, capitalism becomes increasing violent in order to achieve its profit demands. There’s clearly some evidence (e.g., Greece, et al) that this may be true. Marx views this as the force that eventually leads to a worker uprising (also, Greece).

      In the US, this has been somewhat mediated by deficit spending, which increases the supply of government money from which profits might be drawn. Also, the US “neutralzes” some of this profit push through its massive issuance of government bonds (“risk-free” annuities), which essentially takes some of the profit-seeking funds out of general circulation. With few profit opportunities at acceptable risk levels, the price of new bonds is thus driven up, and interest rates remain low in spite of heavy borrowing.

      1. Tancred

        “[…] capitalism becomes increasing violent in order to achieve its profit demands.”

        Marx’ pretty theories have worked out rather badly in the real world, not least because socialism becomes increasingly violent in order to achieve its minimum survival requirements. In the end, all unsustainable strategies have this Achilles’ heel. Doesn’t matter whether it’s crony socialism or crony capitalism. The end result will always be the same: poverty for the many to enrich the few.

        Capital comes from surplus (“prifit”) saved rather than consumed. Only savings create capital. Only societies persistently spending less wealth than they create can sustain savings, regardless of the particular ideological (thus superficial) features of their governance.

        1. Lidia

          Societies never create wealth: they only consume it. Sometimes in the process pushing it from one place to the other looks like wealth.

  6. Mark P.

    Excellent to see Varafoukis’s THE GLOBAL MINOTAUR featured here.

    It’s an comprehensive, easily-read book and — with respects to Yves and, for that matter, to Varafoukis — its central thesis, besides being one that I found absolutely persuasive, is anyway the same thesis that Michael Hudson first elaborated in his 1973 book, SUPERIMPERIALISM: THE ORIGIN AND FUNDAMENTALS OF U.S. WORLD DOMINANCE (new revised edition 2003) and further developed in GLOBAL FRACTURE: THE NEW ECONOMIC ORDER (1979 and 2005). content/uploads/2010/03/superimperialism.pdf

    Where Hudson’s books can be demanding going, with much economic history examined, Varafoukis’s GLOBAL MINOTAUR is a short, relatively vivid and quite straightforward.

    1. gepay

      To go along with the theory that the oil price hikes of the 70s were planned is:
      In his seminal A Century of War: Anglo-American oil politics and the New World War, F William Engdahl details what happened at Bilderberg 1973 in Sweden. An American outlined a scenario for an imminent 400% hike in the oil prices of the Organization of Petroleum Exporting Countries. Bilderberg did not prevent the oil shock; instead it planned how to manage with mega-profits – what Kissinger described as “recycling the petrodollar flows”. Everyone that mattered was present at this Bilderberg: oil majors and major banks. Engdahl’s conclusion:
      “What the powerful men grouped around Bilderberg had evidently decided that May was to launch a colossal assault against industrial growth in the world, in order to tilt the balance of power back to the advantage of Anglo-American financial interests and the dollar. In order to do this, they determined to use their most prized weapon – control of the world’s oil flows. Bilderberg policy was to trigger a global oil embargo, in order to force a dramatic increase in world oil prices. Since 1945, world oil had by international custom been priced in dollars, since American oil companies dominated the post-war market. A sudden sharp increase in the world price of oil, therefore, meant an equally dramatic increase in world demand for US dollars to pay for that necessary oil.”

      Then there is the fact that Kissinger is also instrumental in the opening up of China in this same time period. China was not opened up as a huge market for US products. It was opened up as a huge source of disciplined laborers necessary to break the unions in the US. The unions were responsible for the wage price inflation spiral causing the stagnation of to the 70s. Notice how one of Reagan’s first acts was the use of the military to break the air controller’s strike. Wage price inflation is just the workers recognizing the loss of purchasing power. Notice how this has been absent in this cycle of the FED creating trillions to stop the general disinflationary disleveraging. Without globalisation (especially China) of labor, the FED couldn’t have gotten away with its flooding of trillions causing runaway inflation.
      I imagine this is too “conspiracy theory” for most NC readers.

      1. Lidia

        Whether the 70s ME price spikes were planned, they gave rise to North Sea and Alaskan development that got us through the 80s and 90s.

        From a wider standpoint, it seems to me that China was opened because the exponentially growing and globalizing “free market” debt-money economy needed a new expansionist frontier in the absolute, whatever the details. With Russia and China, the final holdouts, now integrated into the Ponzi scheme that started up a few centuries ago, the endgame for debt money has necessarily been reached. The traditional money system can’t continue without a reset unless we find some alien planet to colonize. The euro was less a way to “harmonize” and cut trading costs than it was an essential (partial) reset of the global debt-money system which did buy some time. The particulars and the chit-chat surrounding these maneuvers are, in respect, noise, though, and the magnitude of the debt overhang, imo, is a pure reflection of the degree of consumption overhang beyond the planet’s capacity to fulfill our wants.

        The bottom line is that nobody has any more rabbits no matter whose hat they propose to pull them out of.

  7. Vikas Saini

    I also want to note the connection to Superimperialism — a remarkable book which captures the essence — the chapters on Britain’s currency dilemma and FDR’s dollar diplomacy are a great summary for the nonspecialist.

    1. Mark P.

      It’s in the book.

      Varoufakis stresses the role of Pentagon spending as, effectively, a surplus recycling mechanism between U.S. states within the U.S.

      Also, that such a mechanism was and is a recourse that elites in Europe refused to recognize they did not have available across the Atlantic from America. Varoufakis spends time talking about “minotaur envy” and is probably harder on European policymakers than on those in Washington and Wall Street. He has some admiration for how the more visionary American planners — from Acheson and Kennan through to Kissinger, Volcker, etc. — played their hand; far less for the Europeans generally. A fair assessment, I think.

  8. ebear

    A couple of major points missing from the analysis:

    Cold War/Arms Race – recycling of global surpluses in exchange for protection under US military umbrella. This was in place from 1945 to the collapse of the USSR in 1991, and while distributed amongst NATO members, the lion’s share was borne by the USA. Post 1991 this recycling, being well entrenched, continued under the rubric of globalization. I would also point to the Marshal Plan and its effect of obsolescing US production, especially in steel, as a major contributor to the decline in US global competitiveness and subsequent trade imbalances.

    In short, it’s not nearly as simple as this author presents.


  9. Fiver

    I’m not entirely confident (as in trust) what the BIS has to say about this kind of stuff, Yves. But anyway,

    I like a good portion of what he says, and didn’t read this from a strictly technical perspective.

    The BIS paper’s debunking of “excess savings” was welcome, but I find the argument re US/European financial/capital flows problematic, i.e., who knows how much of that is flying on its xth time around the Globe? Who knows how much “capital” is what the label says it is if it’s been leveraged too exhuberantly? I’d also ask how much that passes back and forth between the US and EU is each other’s offshore branches’ activity. Whatever, I just think financial activity at this pace and level of complexity, obscurity and lawlessness is bound to screw up no matter what – and virtually always in favor of the same cast of criminals who are totally implicated in either version presented.

    1. Fiver

      Should make it clear in the second sentence that by “his” I refer to the former Minister from Greece.

    1. RaiseYouTwo

      Great thesis, very well explained. A 2009 article by a law professor (!) J. Colares, explains this very same dynamic. Colares proposes a Keynesian-inspired global mechanism for balancing out trade flows. The scheme would work to reduce the financial sector’s pro-cyclical propensity to turn sterilized accumulated dollar and other hard currency’s reserves (by trade surlus countries) into ever newer types of financial bubbles. By limiting countries’ abilities to run long-term trade surpluses (via a currency board mechanism that would hold a portion of trade surplus countries’ foreign currency in escrow, deducting a portion of such countries’ surpluses if they kept running surpluses for a number of years). Fascinating stuff, see . . . , but very doubtful in implementation since we know who owns our political class.

  10. Linus Huber

    Just wondering, how long might it take, considering historical references and evidence, until this scam could collapse? Does it require a new consciousness and political change first or will it collapse under its own weight due to increasingly uncontrollable instability and as a consequence a new order will result?

    1. Mark P.

      Varoufakis believes that the scam _has_ collapsed effectively. Also, that our current problem is that the scam did work effectively though unfairly as a global surplus recycling mechanism (GSRM) and now the world has no effective replacement GSRM to replace it.

      This could be a highly inflammable situation internationally, he maintains, trending towards clashes between emerging nations speeding ahead economically and the old developed world, stagnating, but still maintaining a virtual monopoly of military power, the world’s reserve currency, and the planetary transnational institutions (the UN Security Council, NATO, the IMF and the World bank).

      Hard to argue with that last part.

      I am less convinced than Varoufakis that the scam is “broken.” For instance, the old Soviet Union and the Breshnev-Andropov “years of stagnation” show that a very large, stagnating social system can be pushed along for a couple of decades even after most people realize it’s a sham.

  11. Schofield

    It would seem reasonable to believe that a combination of some human being’s propensity to commit fraud (to free-ride on the backs of others) together with an over-reliance on skittish ( because of fraud incidence ) short-term borrowing for large borrowing demands will periodically result in global recessions. A logical answer would be for society to insist on long-term borrowing to fund large borrowing demands:-

  12. golly

    You are going to use a Greek financial “minister” to bash the USA economy? Too funny.

    This joker is just reguritating the stadard Marxist, tranzi hogwash against America.

    It is just a deflection of blame, The problems in Europe are the Europeans fault, not ours. Just where were “international capital flows” to go, Athens?

    We have been hearing this sort of claptrap out if Europena socialists for 60 years. Comically, some of you think that this is “cutting edge’ stuff. It is not; it is the same old anti-american nonsense, and the purpose it to deflect blame and to find scapegoats for the failure of post war European socialism.

    You people are so steeped in your casual, off-the cuff, “Blame America First”, hipster Marxism that you cannot not for even one second control your hatred for your own nation.

    You loathing for the nation takes such a bizarre form that you are going to let some Greek cryto-socialist tell you how the world works. Goodness, how gullible can you be.


  13. Pat

    An excellent analysis by Varoufakis.
    He neglects to mention two points, however.
    1) surplus recycling of money back into the US was not limited to Germany, Japan and China, but included OPEC (mostly Saudi Arabia) which was obligated to repatriate its profits back to the US, mostly by buying T-Bonds, in exchange for military protection. The Saudi/OPEC recycling has served two purposes: one, to finance the US deficit and supply capital and liquidity to the US financial markets, and, two, to maintain the dollar as the world’s reserve currency. Thus the US government did not, and does not, care if oil prices went up dramatically (since the excess profits would all eventually wind up going back to the US.)
    2) the US plan is perfectly logical, although morally deplorable. The US borrows present-money, which it uses for consumption, and pays it back in the future with a much-debased currency (from endless money-printing). The US inflates its way out of the debt problem.
    Like all other Ponzi schemes, this should end badly. But since the US is the world’s superpower, who can force them to stop printing money? Nobody.

    1. James

      Alas, rumors of the perpetual motion machine remain with us always, even as they are grossly exaggerated. So it is with the perpetual growth economy as well. Yes, the monetary scams will all seem to work for a while and the people will all be entranced at the magic of the financial wizards. But it WILL end one day the same way it always does. With yet another crash and burn, this time likely one of historical proportions. Should be quite a sight to see when it does. And the longer we remain in denial of its inevitability the worse it will certainly be.

    2. Geojos

      Some one help me here. In what way did we need someone to help us fund the trade deficit? Somebody buys the goods, and we export less than we import, thus a trade deficit on paper. In what sense is this deficit real, and who needs to pay what? ( almost an abbott and costello routine here). Are they referring to the need to some get money or credit into consumer hands as their wage earnin power has eroded?

      I am not saying his statement is wrong, but I don’t understand it. I have an economic knowledge defict.

      1. Min

        “In what way did we need someone to help us fund the trade deficit?”

        In the old days of the gold standard, a trade deficit meant that gold was leaving your country. Just like when banks issued money that could be converted to gold or silver, if they did not keep enough gold or silver in their vaults (usually in the form of coins), they could be embarrassed by people who wanted to covert their money into hard cash. Countries played that game with each other, so that gold flowed back and forth. They needed to finance their trade deficits with gold. You can find newspaper stories from the start of the Great Depression about ships carrying gold back and forth across the seas ( ). During the Great Depression countries went off the gold standard.

        Under Bretton Woods (IIUC) the U. S. pegged the US Dollar to gold (although US citizens could not convert their dollars) and other countries pegged their currencies to the dollar, which functioned as the world’s reserve currency. IIUC, during the Vietnam War De Gaulle launched a policy of redeeming dollars for gold, thus threatening to drain Fort Knox of US gold. That threatened the status of the US dollar as the world’s reserve currency, which was probably his aim. For the US to go off gold was in part a response to that. That meant that the U.S. no longer financed its trade deficits with gold. Neither did anybody else, but the idea that trade deficits needed to be funded remains. As Alan Greenspan has observed, after 1971 the world’s central bankers knew that nobody was on the gold standard anymore, but they pretended as though they were.

        One of the tragedies of the Euro is that it can act like a gold standard, but countries cannot go off it so easily.

  14. rapazinho









  15. Paul Tioxon

    I am not entirely surprised that Yves would make sure our heads don’t spin too far from the direction of the over-specialized business mindset that would seek to reduce everything to the dollar. What the conceptual message of this analysis is, and it is explicit in the last sentence: the new order of international capital flows was a POLITICALLY FABRICATED EVENT, setting the market to free up structurally to bring in foreign capital to finance the twin deficits of America, public and private.

    The new set up was forced upon the markets, not the markets forcing themselves upon the governments. Today’s situation see the deregulated financialized global capitalism running without the political command and control of either the restraining policies of the New Deal/Great Society or neo-liberal club of endless growth. The pieces of the international system set up after WWII, The Tri-Lateral World of the USA, Europe and Japan, have spun off on their own. Japan fostering the rise of the Pacific Rim and now, caught up in the massive pull of gravity of China and the USA re-configuring its geo-political stance to orient itself towards the Pacific and face the growing power there.

    When capital is deregulated and out of control, it is only through the deliberate political decisions that the social order can be maintained by, in the face of the unconscious parts of the former whole operating as it may for conflicting and sometime unknowable ends. If it were all a simple matter of accounting, of releasing from debt, bottomline, if it was only about managing money better than we have in the past, a technocratic fix would do. But as we have seen, the installation of unelected representatives with MBAs, economics degrees and the like, is no replacement for the sorting out, through a political process that engages all of the people in society, so they are thinking and talking about the changes in the world they will have to live with.

    People need time to relearn new behaviors. Forcing a new system via shocks is the neo-liberal formula which will not work well in the USA or Europe, as can be seen by the rebelling populace. If there is a muddling through towards solutions, this less efficient and dangerous process is still the only way that people can comfortably move from the world they came to count on now and accept a new system that they can count on. Socialization and being able to know what to expect does not come in the fashion of the command and control of a corporate business which tells you what to do and and how to do it or you can leave and get another job. We can’t leave this world and find another one. That is why politics is different from economics. And now that economics has failed, it needs to step back so we can review a new course of action, done through laborious discussion, debating, meeting, thinking and eventually, election by election voting. The alternative is too terrible to speculate.

    This is the political process, ending with the activity in the ballot box, sending people to government to control the mechanism of state in the best interests of society. Without the political process coming to the foreground, consciously and deliberately, putting the larger overview first and the grimy nuts and bolts of specific banking regs second, there will no great recycling mechanism, no great entrepot, no super powered metropole, just disintegration of the old order with its parts bumping and grinding into each other like dislocated cogs in a broken machine.

  16. Bam_Man

    Excellent interview containing many illuminating observations.

    I have long believed that it was no co-incidence that Nixon’s “opening” to China and the “closing” of the Gold Window took place within six months of each other.

  17. Susan the other

    Thanks Philip. I finally understand Petrodollars. I’m so ignorant. I just want to make some disjointed comments. Going over to Ditmer and Yves’ repost: “Financial markets have no equilibrium; no express role for credit; no role for banks; and no money.” This is because we have killed politics; these should all have been political decisions. And back to Varoufakis: what would have been the outcome of the cold war if we had lost? He doesn’t say. But he implies nothing could be worse than the mess we are in. A global death spiral. That is – we won the cold war by suicide: ZIRP, zero productivity, zero jobs and zero demand. (But we did win.) So my question is: What would a Global Surplus Recycling Mechanism look like now? Something tells me it would look like a global monetary base of 1.4 quadrillion. Is this what the freeflow of capital will come to mean? Plenty of money to go around, in an honest trade balance, with 5% set aside to keep the system in balanced trade? Then, please tell me, who pays the paranoid policeman? If that 1.4 Q. isn’t used for full employment, equitable distribution of goods and services and a clean environment, etc. it won’t work. These are all political questions. And at this new level they are all moral questions. This interview still leaves me wondering what Connally and Nixon thought they were going to accomplish in the end, or were they just trying to survive? Austerity style.

    1. Bam_Man

      Kissinger and Volcker (yes, Volcker) were the architects of the post-Bretton Woods monetary system. The imbalances were supposed to self-correct through currency value adjustments. Unfortunately these guys did not foresee the role of “activist” Central Banks would play in a global currency war.

    2. Jim

      Susan, I would recommend the Network boardroom speech, from the 70s!!!

      Jensen: You have meddled with the primal forces of nature, Mr. Beale, and I won’t have it!! Is that clear?! You think you’ve merely stopped a business deal. That is not the case. The Arabs have taken billions of dollars out of this country, and now they must put it back! It is ebb and flow, tidal gravity! It is ecological balance!


      It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today. That is the atomic and subatomic and galactic structure of things today! And YOU have meddled with the primal forces of nature, and YOU WILL ATONE!


    3. Robert Dudek

      And back to Varoufakis: what would have been the outcome of the cold war if we had lost?

      The cold war was about economies based on ingenuity versus a centrally-planned economy.

      It seems to me that the central planners are in full control, so did we really win the cold war?

  18. OldSkeptic

    Actually Yves there is no real conflict between this and the BIS findings.

    The way to look at it is that the changes undertaken at the end of Bretton Woods to recycle global imbalances, mostly caused by trade, created a system that got out of control. One that in the end was co-opted and dominated by the financial systems.

    A new environment that was conducive and fertile for speculation and infinite debt creation.

    Prior to this capital, etc, restrictions and controls meant that the huge interstate financial movements (of one kind or another) simply couldn’t have happened. Imagine issuing CDSs to fund your country’s mortgages that were bought by people all over the world in (say) 1980. Simply impossible.

    But to accommodate the ‘new reality’ these all those controls and checks and balances had to be swept away and new mechanisms created to handle the flows.

    This created an opening that was steadily exploited by the financial world to greater and greater extents. Until it dominated money flows. I knew the gig was up when financial flows overtook trade flows as the dominant source of international money exchange in the (from memory) early 1990’s. After that point it was matter of just waiting until it went under.

    Govts poured fuel on the fire of course. Despite warnings as early as the 80’s (I remember various commentators then) deregulated even more, accelerating the process. This carried on through the 90’s, etc (Big bang the ilk).

    Bit like being in a car heading for that big hole in the middle of the bridge, hammering down on the accelerator, cranking up the turbo boost and turning on the nitrous oxide boost.

    Some ride until it ends.

    1. Mark P.

      ‘there is no real conflict between this and the BIS findings’

      Correct. The post-Bretton Woods global environment created when Nixon and Kissinger “closed the gold window” in 1971 is the big picture context that allows situations like the one diagnosed in the BIS paper.

    2. Fiver

      Agree with a good deal of what you say, i.e., it’s more an evolution of financial “innovation” attempting to offset and mask the accelerating underlying asymmetries in production, distribution and consumption of goods and services of all kinds brought on by multinational corporate globalism with the fiction of a sort of formulaic equivalence of global assets ripe for monetization to be used for BS “risk free” debt securitization rather than deal with the total disaster the proto-WTO-style global corporate production/trade system had already become.

      It doesn’t work properly for anyone. Why should Chinese workers be outfitting every household in the developed world with a vast range of consumer goods via the Wallmart, Apple et al models and only receive a small fraction of the value created, and ALL of the environmental downside? Why should India or Vietnam or really the entire Third World be engaged in this absolutely ruthless global competition for relative crumbs from wealthy countries rather than developing sustainable models that better serve them? And of course, why wouldn’t US policy be to ensure its own workers don’t carry the can for the wage and environmental arbitrage differential?

      We need a plan that works for peoples, NOT finance/mulitnational corporatists – including captured government corporatists.

      1. gepay

        Fiver said,
        “Why should Chinese workers be outfitting every household in the developed world with a vast range of consumer goods via the Wallmart, Apple et al models and only receive a small fraction of the value created, and ALL of the environmental downside? Why should India or Vietnam or really the entire Third World be engaged in this absolutely ruthless global competition for relative crumbs from wealthy countries rather than developing sustainable models that better serve them?”
        This is why the Vietnam War was fought. It didn’t matter who won. The purpose of destroying the country so thoroughly that Ho Chi Minh’s version of communism didn’t have a chance to be a viable alternative was accomplished – the same with Sandinistas in Nicaraugua and many other places in the world -see William Blum “Killing Hope”.
        Academic economics as is noted here on NC doesn’t even have a place for debt much less covert political maneuvering. Actions designed to destroy alternatives to our now self devouring corpocracy.
        The politicians have been bought and now no longer care for the general good. Can you imagine the Clean Air Act or the Clean Water Act being enacted by the present US Congress?
        Another note on how high oil prices manufactured in the 70s helped make the globalization process turn out rigged for the powers that be – The debt engendered for any third world or developing country without its own energy sources (in order to pay for petroleum products) made them pawns of the developed countries – Look into what happened to Michael Manley’s vision of Jamaica.

        1. Fiver

          Good points. And in particular re Vietnam. It was destroyed to set an example for any country contemplating an independent course, just as Hiroshima was a demonstration shot aimed at Soviet sensibilities, not the means to end a war that was already over – skip along to Latin America, Angola, and of course Iraq – and if the neocons/Lobby get their way, Iran, which quite sensibly learned a very different lesson from Iraq than the one intended.

      2. readerOfTeaLeaves

        it’s more an evolution of financial “innovation” attempting to offset and mask the accelerating underlying asymmetries in production, distribution and consumption of goods and services of all kinds

        Consider that 1804 marked the first time there were a billion humans.
        That doubled by 1927 – a period of only 123 years.
        The next doubling was to 1960 (a period of 33 years).

        By 1974, the planet had about 4 billion humans.
        Today, it has over 9 billion.

        By the early 1970s, world fisheries, forests, minerals, and other basic resources were seriously impacted and under pressure – whether under capitalism, communism, or ‘mixed’ political economies.

        The asymmetries continue to escalate, and the institutions seem daily less capable of grappling with them.

        1. Lidia

          The cause of most economic “imbalances” is money itself. Interest-based money *impels* excessive, exponential extraction, whether populations are growing or not, and whether resources are keeping pace or not.

          It exacerbates the basic phenomena you rightly bring up. Nobody in their right mind would bottle water at point A and ship it to point B, and then ship water from point B to point A, were it not for money. It would be correctly viewed as insanity: a completely pointless waste of time and human energy, to say nothing of the wasted resources.

          Money makes psychotic choices appear normal. It’s truly Satanic.

      3. different clue

        If it creates a sense of “justice in the world”, consider that the mercury emissions from China blow all the way west to Western North America, and the carbon emmissions from China will Global Burn the West and not just the Rest. And some of the product from China has poisoned Americans directly (lead paint toys, poisoned toxic-waste antibiotic-laced honey, etc.) So there is that.

  19. Elizabeth Cook

    Maybe we don’t want a return to the old way, a remanufactured trad imbalance, or not, or some other capitalist contrivance. Perhaps we want environmental sustailability, and jobs and community that arise from that model that is much more decentralized. No thanks to a return or rebirth of the “old way”.

  20. Hugh

    Varoufakis tries to synthesize a global explanation to the events of the last 40 years. That is the right timeframe and the global approach is important in explaining how we got to where we are. His explanation on first reading sounds quite reasonable, except it lacks any real agency. There is the US hegemon, but what is that exactly? At various points, Varoufakis talks about Americans being hurt by it, and the Walmartization of the country. There are Nixon, US officials, Paul Volcker, and Wall Street, but he never explains how they all fit into the hegemon. And who is really pulling the strings and why.

    As a result, his explanation begins to unravel a little and spurs other questions. In his view, Varoufakis makes trade imbalances the dominant player. But as Yves points out, this is a recycling of Bernanke’s savings glut argument. Only Bernanke used it to place the blame on China while Varoufakis uses it to put the blame on the US. But not all trade imbalances are equal. Japan and Germany are US protectorates. So you can see how the US could force them to recycle dollars back to the US. But China is very much not a US protectorate so how does Varoufakis’ argument work with it? Taking a second look at Germany, most of its exports don’t go to the US so how can the recycling argument be made with regard to it?

    Now Germany has run a trade surplus with Varoufakis’ Greece. Both use the euro creating a de facto gold standard for Greece because it is Germany (the exporter) not Greece which effectively controls that standard. But this is the opposite of the case of the US (the importer) which has even greater control with respect to trade in dollars since the US is the fiat creator of the currency.

    Bringing up the gold standard is important because Varoufakis associates its loss and its replacement with the dollar as the world’s reserve currency as the motor for everything that followed. But Greece is living under a new gold standard in the euro and I don’t see how that standard has been helping it.

    Varoufakis also points to dollar recycling as necessary to finance US government deficits, but in a post gold standard world and with the US being a fiat issuer of its currency, financing its deficits via debt is a choice, not a necessity. Financing by T bills is a relic of the gold standard era. You would expect Varoufakis to know this and an MMTer like Pilkington to point it out. Financing US deficits with T bills in a post gold standard world simply is a subsidy to banks and other monied interests.

    So what on the surface looks like a wholistic approach and reasonable explanation on closer examine breaks down.

    1. alex

      Excellent points, particularly as regards the trade surplus countries being more than willing participants in the supposed US hegemony scheme.

      “Japan and Germany are US protectorates. So you can see how the US could force them to recycle dollars back to the US.”

      And in practice the US had to persuade them to _not_ recycle so many dollars back to the US. Hence the Plaza Accord. Or does Varoufakis think Reagan was less interested in US hegemony than other post-Nixon presidents?

    2. alex

      And a 5 minute review of the history reminds us that West Germany was the first country to leave the Bretton Woods system, and Switzerland the second. Much of the pressure on the dollar and US gold reserves was coming from France. Does Varoufakis think they were all assisting in America’s nefarious scheme to establish hegemony?

      1. Mark P.

        [1] No. The situation is both more starkly simple and has more ramifications than you guys may have understood.

        At the least, if central banks outside the U.S. let the U.S. payments deficit drag the dollar down, this gives U.S. exporters a price advantage. To protect their own producers and national GDPs, central banks elsewhere must support the dollar’s exchange rate by recycling their surplus dollars back to the United States. This compels them to buy U.S. Government securities, as American diplomats have made it clear that attempts to buy up U.S. companies wholesale or even to return to gold would be viewed as unfriendly acts.

        At worst, in the case of China, which at $3.18 trillion is the world’s largest holder of foreign currencies — and which IIRC currently has $1132.6 billion in U.S. treasury bills — its national wealth would be massively impacted were, say, the U.S. to announce it was officially defaulting on its debts.

        While that initially sounds ludicrous, in game theory terms a strategic U.S. default — if natural gas were really to provide the path to U.S. energy independence and replace oil imports — undertaken in the next 10-20 years while China has this vulnerability would possibly be a winning move for the U.S. geopolitically. China would take much more of a dent than the U.S.

        [2] ‘Does Varoufakis think they were all assisting in America’s nefarious scheme to establish hegemony?’

        Interestingly, as far there being a preconceived “nefarious scheme to establish hegemony,” Michael Hudson says that as best as he could judge, U.S. officials at State and the Pentagon didn’t seem to initially grasp the potential implications of the U.S. going off gold — though presumably Kissinger and Volcker at the top would have pondered what became reality as one possible scenario.

        Hudson, who in the 1970s was the first to come up with the analysis that Varoufakis is now presenting in THE GLOBAL MINOTAUR, claims that after he published his book SUPERIMPERIALISM in 1973 most of its initial buyers seemed to be at the DOD and State, and there seemed to be a period while this mass of officials absorbing the book’s policy implications. Then the next year, when he called back to State to get the most recent version of some balance of payments figures he had used for his book, an official told him they weren’t giving those figures out anymore because “some idiot had written a book that gave the game away.” Simultaneously, the book was effectively suppressed in Japan.

        1. Hugh

          The US has a fiat currency with its denominated in that currency so it never has to default. It would only default if it chose to. I’m not sure where your US as exporter argument leads seeing that the US is the world’s largest importer.

          Balance of payments is only one part of the puzzle. It is not the puzzle as Varoufakis would make it.

    3. DanAllen

      Global Minotaur is a reduction of the much more detailed and analytical Varoufakis book titled “Modern Political Economics.” We’re talking about a half a century here, so it’s no surprise that the details cannot be described succinctly.

  21. Murky

    The minotaur metaphor is an effective literary device for Varoufakis’s narrative, but it’s really not so great for an academic level of discussion. The Minotaur ate people, and so does the US financial services industry to Varoufakis’s thinking. I concur! But the minotaur is entirely mythological, not factually relevant for discussion of economic history. Irrelevance notwithstanding, Varoufakis gets a lot of milage out this metaphorical thinking; helps him make points about economic good and evil. I sense oversimplifications in Varoufakis’s world view, some tinge of Marxism too. But this ideological baggage may not be consequential. What matters to me is that Varoufakis is an original thinker with lively ideas, and for that he deserves to be read.

    1. sasori

      murky I think you misunderstand
      the story of the minotour is representative of the tribute economy of the ancient Aegean, in which surplus goods from various (subordinate) places were brought to the centre at Minos.
      In the same way, the bretton woods 2 system required surplus’ from subordinate economies to be brought to the us to be recycled.
      He’s not saying the us financial system is a ravenous, slobbering bull headed monster who would eat you as soon as moo at you (although that does sound about right)

  22. chas

    I read the whole paper by Claudio Borio and Piti Disyatat of the Bank of International Settlements, “Global imbalances and the financial crisis”, and it very easy reading. About 30 minutes. And I’m very far from being as sharp as Yves. I did recently read “Money, Bank Credit and Economic Cycles”, by Jesus’ Huerta de Soto.

    If you really want to see how incompetent & inept Mr. Bernanke really is, please read this paper. Mr. Borio & Disyatat knock the shit out of delusional Bernanke & as far as I know the stupid chairman or his stupider subordinates haven’t responded, since May 2011.

  23. Min

    I want to address what may be a minor point, having to do with the so-called twin deficits, the gov’t deficit and the trade deficit. Actually, there are three related deficits, as expressed in the following identity:

    (G-T) + (I-S) = M-X

    The gov’t budget deficit plus the private domestic deficit equals the current account deficit. The current account deficit is not exactly the same as the trade deficit, but as a rule, IIUC, the trade deficit is the major component of a current account deficit. By this identity, the current account deficit may be seen as composed of the other two deficits. The twin deficits are not independent.

    I find the following by Varoufakis more than a bit curious: “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.”

    The first thing that strikes me is that there is no mention of the Vietnam War. The “audacious strategic move” involved the U. S. ceasing to peg the U. S. Dollar to gold, something that gov’ts have often done in wartime. As I understand it, Milton Friedman recommended that move to Nixon. France, under De Gaulle, was putting pressure on U. S. gold reserves, as well, right?

    The second thing that strikes me is Vauroufakis’s talking as though the deficits were independent. “And who would pay for them? The rest of the world!” If the private domestic deficit remains the same (since the rest of the world is paying) then reducing one deficit reduces the other. Even if Varoufakis is not making a mountain out of a molehill, he is making two molehills out of one.

    The third thing that strikes me is the vacuum cleaner simile. For one thing, it goes against the principle that what goes around comes around. Maybe I am missing something, but he seems to be focusing only on two parts of the cycle. Indeed, the U. S. is trading U. S. dollars for foreign goods and services, on a persistent basis. (Something like imperial tribute in days of yore, I suppose.) Oil is a big import, OC. But what is this about the transfer of surplus capital? Isn’t that the aforementioned dollars coming home to roost? After all, only the U. S. makes the U. S. dollar. How did foreigners get the dollars to “finance America’s twin deficits”? By trading for them, right? What goes around comes around. :)

    The fourth thing that strikes me is the spin that Varoufakis puts on the U. S. deficits. As the term itself indicates, having a deficit has a bad connotation, while having a surplus has a good connotation. Yet Varoufakis turns that on its head. He makes it sound like when the rest of the world has a trade surplus with the U. S., that’s a bad thing for them! ;) And all the while debt/deficit hawks in the U. S. think that it is a bad thing for the U. S.! They can’t both be right, can they? ;)

    One more thing about the triple deficits. I found a chart at of the three deficits over time. It actually shows the gov’t deficit, but the inverse of the other two, so their interdependence is obscured. However, you can see that (G-T) and (S-I) are highly correlated. (Which finances which is another question.) You can also see that the U. S. did not start running a persistent current account deficit until 1983. It is true that Nixon changed the rules in 1971, but still the main relationship is between the gov’t deficit and net domestic saving. No sinister plot against the rest of the world is apparent. (I used to worry about the persistent trade deficit until it was pointed out to me that Great Britain ran a persistent trade deficit when it was the world’s richest country, too. That sort of makes sense, doesn’t it? When you are the world’s richest country, other people want to sell you things, don’t they?)

  24. Robert Dudek

    At various points, Varoufakis talks about Americans being hurt by it, and the Walmartization of the country. There are Nixon, US officials, Paul Volcker, and Wall Street, but he never explains how they all fit into the hegemon. And who is really pulling the strings and why.

    There doesn’t have to be any one person or group pulling the strings. US hegemonic policies are simply the groupthink of US elites. It is easy to see how this emerges without any particular agency: these people socialize with each other, help each other to reach positions of power, mavericks are ostracised. Is it any wonder they all come to think the same way?

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