The World Economy Post 2008

Yves here. This is a wide-ranging, high level discussion about the structural issues facing the world economy. US-based cynics may be amused by the question that expresses skepticism about recent US growth figures.

By Yanis Varoufakis, a professor of economics at the University of Athens. From an interview with the Institute of Regulation & Risk. Cross posted from his website

Since the demise of Lehman Brothers in September 2008 and ensuing great financial crisis (GFC), it would seem rather obscenely that central bankers and monetary policy has been obsessed with “deflation”, rather than remedying the actual causes of the crisis itself. Is this a fair analysis?

Central bankers and policy makers were obsessed not so much with deflation but with transferring the losses of financial institutions onto the shoulders of citizens. When this transfer produced deflationary forces only then did they enter into QE territory in an attempt to stem them. Since then they have been trying to contain deflation without doing anything that might restore a modicum of bargaining power to labour or income to the dispossessed.

Given collapsing oil prices, an emerging car loan subprime crisis brewing in the USA, slow down in China, continued economic woes in Japan and fears over Greece igniting another round of sovereign debt crisis in the EU, is it fair to say we may be entering a perfect storm again and a repeat of events similar to those in the GFC?

Whether the next phase of the global crisis will take the form of a major ‘discontinuity’ or a slow burning, ever increasing loss of socio-economic potential is not something that we can predict. What is clear is that, under the current policy mix, the world is facing either what Summers described as secular stagnation or another Lehman moment. Not a great set of options…

Turning to the EU and euro zone itself, would it be prudent for the European Commission and ECB to countenance the rapid introduction of a two-tier Euro, specifically a “hard” Euro zone with Federal Germany at its helm, and a “soft” Euro Zone with France at its helm?

If Europe continues the way it is now going, there will be no soft and hard euro. The euro will disintegrate, the result being a Deutsch mark zone east of the Rhine and north of the Alps and an assortment of national currencies everywhere else. The former zone will be gripped by deflation and the latter by stagflation.

With reference to the second question, together with your reply, is it correct, as many allude, that the economic and social ramifications of the 2008 GFC are greater in many G20 nations today than conditions during the Great Depression in the 1930’s?

It is not useful to make such comparisons. While it is true that the crisis transmission mechanisms are more poignant now than then, let us not forget that 1929 set in train the process leading to the carnage of the 2nd World War: hardly a minor repercussion.

Back to Europe and the development of a nascent banking union within the EU members states. Do you believe it wise of political and economic policymakers to concentrate on a “banking union” when centrifugal forces within the EU are growing, rather than dissipating presently?

A banking union would be a godsend. It would break up the death embrace between insolvent banks and insolvent states. Alas, we created a banking union in name so as to ensure it never happens in practice. And so the said death embrace continues.

The recent US unemployment figures (December 2014) and third quarter 2014 GDP growth figure of 5% seems a little unbelievable, particularly given most statistical analysis that demonstrates all gains and more since the “supposed” US recovery have accumulated within the top 5% at the expense of the average Joe on Main Street?

If you look at the US labour market closely you find that the number of Americans wanting a full time job and not having it has remained more or less constant over the last few years. Employment growth has not kept up with labour supply which, in the United States, rises faster than in Europe. As for income growth, it is no great wonder that, courtesy of low investment and QE, asset price increases and share buybacks boost the top 1%’s income further while wages are languishing on a filthy floor. And so macrodata prosper while most people suffer.

Since late 2014, and continuing during the first weeks of 2015, we have Cassandra’s warning about a Greek exit from the Euro Zone should left of centre political parties gain power in January’s election. Is this view overstated and fear mongering no less?

It is pure fear mongering for the purposes of dissuading Greek voters from voting for SYRIZA. It is that cynical. The powers that be know that Grexit would unleash destructive powers that they cannot control. So they are bluffing, hoping that Greeks will fall for this piece of terror a second time – after 2012. It looks as if they cannot fool the Greek voters twice.

An economically prosperous EU would seem essential for the wellbeing of the global economy, given this assumption, what exactly are EU policymakers and the constituent member national governments thinking about by hailing austerity as a panacea, rather than a massive fiscal expansion similar in impact to Marshal Aid nearly 70 years ago?

You are making the wrong assumption that EU officials are in the business of promoting shared prosperity. I wish that were true. No, they are in business for perpetuating their bureaucratic authority within an institution that was designed as a democracy-free zone and as a mediator between various powerful, oligopolistic vested interests for whom austerity is a golden opportunity to maximize their social power over the rest of society. And if gigantic unemployment and a humanitarian crisis is the result, so be it…

A new Bretton Woods agreement and re-imposition of capital controls would seem more beneficial, rather than all the supposed “free trade” malarkey we keep hearing about from both sides of the Atlantic. Would you agree?

Capital controls have even been adopted, of recent, by the IMF as essential shock absorbers and stabilisers. A new Bretton Woods would need to configure what I call a global surplus recycling mechanism that prevents bubble-creating financial flows during the ‘good’ times and limits the extent to which the burden of adjustment falls on the shoulders of weaker nations and citizens during the ‘bad’ times. Politically, the trouble is that, unlike in 1944, today there exists no equivalent to the United States then to convene such a conference and underpin the resulting agreement. Only the G20 can do this collectively. But with Europe in a state of comic idiocy and with the United States ungovernable, the prospects are dim.

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  1. Christopher Dale Rogers

    Best I keep my mouth shut on this one I suppose – and very surprised Yanis posted this on his site, apart from the fact that I wish I’d penned a few more questions, if only to kill space in my own rag.

    Many thank’s for posting.

  2. stephen

    “with Europe in a state of comic idiocy and with the United States ungovernable”.
    – Says it all.

      1. James

        They’ve fallen prey to their own propaganda, aka: “It’s different this time.” A meme we Americans have surely perfected, if not originated. I have a distinct feeling that it’s time we all begin praying for us and ours, and I’m by no means religious. It’s feeling more and more like midnight on the deck of the Titanic.

  3. Jef

    “You are making the wrong assumption that EU officials are in the business of promoting shared prosperity. I wish that were true. No, they are in business for perpetuating their bureaucratic authority within an institution that was designed as a democracy-free zone and as a mediator between various powerful, oligopolistic vested interests for whom austerity is a golden opportunity to maximize their social power over the rest of society. And if gigantic unemployment and a humanitarian crisis is the result, so be it…”

    This is the crux of the situation and is indeed Global. The only problem with this statement is what is left out.

    Having previously been married into a 3 generation top political family I know for a fact that politicians and the “various powerful, oligopolistic vested interests” have the best and most accurate information available in the world, contrary to how the blog rolls love to depict TPTB. I am not saying they all understand and/or accept that information but it is and has always been there for them.

    “They” understand that broad Global economic recovery is not possible, not an option which explains WHY they act the way are. It is silly to say they act this way simply because they are, pinky to the corner of the mouth, EVIL.

    This is also why there is so much propaganda and actions designed to make certain that the general public does not understand that humanity faces serious constraints that limits wealth creation and opportunity. Economic growth will always be just about to take off as soon as some of these brilliant economist figure out the right tweaks right?

    Cheers to Yanis for keeping it real…ish.

    1. Jeremy Grimm

      The powers that be “have the best and most accurate information available”. They may not understand or accept that information. They understand a broad Global economic recovery is not possible.

      I’m not at all sure how to piece together your premises to arrive at what I must guess (?) are your conclusions:

      — that the powers that be are somehow working for the common good by passing income and wealth to the wealthy, spreading and maintaining unemployment and squeezing social safety nets to make the downturn truly painful to the impoverished masses they’re helping with their policies?
      Therefore the powers that be are not “pinky to the corner of the mouth, EVIL” or at least not EVIL or not just EVIL but acting based on their greater knowledge of the limitations of exponential growth as Christopher Dale Rogers suggested.
      and or
      — that the powers that be and their far greater knowledge and perhaps an implied or inferred wisdom support austerity and transfers of wealth and income to the wealthy for the betterment of mankind and the future of the world?
      and or
      — that questioning the powers that be is like Job’s questioning the whirlwind? Just how good is the “best and most accurate information available in the world?”

      I’m really not sure what to understand from your comment. I thought austerity was tried as a response to the great depression and failed. I thought it’s been tried for a very long time as a response to this depression with the results bemoaned in this post.

      As for the assertions about the impossibility of a Global economic recovery, I thought yesterday’s post addressed the absurdity of responding to Global Warming without growth in the economy. I’m guessing this is part of your concern about exponential growth ? What exactly do you mean by Global economic recovery? Do you really believe the way the powers the be are handling the current depression as they are because it’s not an option to act otherwise?

      Based on your assertions, I’m tempted to conclude that the powers that be, given access to “best and most accurate information available in the world,” must be evil or at least bent and stupid, no offense to your in-laws intended. Rather than suggesting the political class is EVIL, the bloggers on this site have clearly indicated the political class has been captured by the moneyed class. Greater knowledge of the extent of that capture is knowledge I will credit to the political class. The bloggers on this site have clearly identified Corporations as unmoral creations that do great EVIL in the world. The bloggers on this site identify the monied class as out-of-touch and largely self-interested to the point of psychopathy and sociopathy. Whether that characterization equates to their being EVIL, “little finger to the corner of the mouth,” it certainly comes close.

      1. Jef

        !00 points for wit… -101 for comprehension.

        “I thought austerity was tried as a response to the great depression and failed.” you conveniently forget about all the big projects spending billions on jobs and building infrastructure. Why do you suppose that is not even talked about.

        “They” are perhaps evil, certainly self-serving, but their evil has an excuse and a purpose, “They” are not just being evil for no reason as this post and most others imply.

        Stop pretending to be confused and pay attention.

        1. Jeremy Grimm

          If you like take -1000, or -10000 for comprehension. I pretend to neither wit nor confusion. I do not understand what point your comment would have me take away. If you like, I might understand your comment to mean:

          The political class having “the best and most accurate information available in the world” is acting on this information when they do what they have been doing and what is bemoaned in the post. They act to do what is most expedient based on this special information and act with intentions such that we ought not regard them as EVIL.

          Global economic recovery is not possible because “the best and most accurate information available in the world” says so.

          Here I really run into trouble. The penultimate paragraph of your comment is especially difficult to grasp as a corollary. Are you suggesting the political class is deliberately creating and promoting “propaganda and actions designed to make certain that the general public does not understand that humanity faces serious constraints that limits wealth creation and opportunity?”

          If I understood correctly I am truly confused by your applaud for Yanis in the last paragraph unless I read a great deal into your “ish” at the very end.

          Did I comprehend your comment correctly?

          1. Jef

            I never said nor implied “…we ought not regard them as EVIL.” What I DID say is there is a knowable reason WHY they act evil.

            Yes, I am in fact suggesting the Oligarchy including the political class aka, TPTB is deliberately creating and promoting “propaganda and actions designed to make certain that the general public does not understand that humanity faces serious constraints that limits wealth creation and opportunity. Where have you been? The mistruth, misdirection, and outright lies are exposed everyday. Read much? Comprehend much?

            Why do they do that? No one talks about that except to imply that they are just evil/greedy.

            Here is a what if for you. If you were sitting in the very center of the packed theatre with your family and you got a text saying there was a bomb in the theatre about to go off. Would you stand up and yell “theres a bomb about to go off” or would you grab your family and head for the exit? Don’r bother answering because everyone knows the answer already.

            1. Yves Smith Post author

              The political classes believe orthodox economists whose work has repeatedly been shown to fatally flawed.

              Therefore they do not have the best information in the world.


              More generally, having consulted for three decades to very large organizations, I can tell you it is routine for critically important information not to get to the people at the top. First, they often lack the skills to interpret it so it must summarized/massaged/dumbed down by experts. That entails information loss and allows underlings to skew information to their advantage or hoard it to increase their power. Second, information is often hidden or skewed (as in withheld or spun as hard as possible to the experts who make the interpretations) because its revelation would reflect badly on the parties involved. Third, most people are incapable of absorbing information if it conflicts with strongly-held prior beliefs.

              I could go on.

  4. Chrstopher Dale Rogers


    What you yourself have eluded too, is that in a finite society one cannot have perpetual or infinite growth, for as we all know it breaches the Second Law of Thermodynamics and entropy entails, as witnessed by the 2008 crash, which itself resulted at about the time actual “peak oil” was reached – not a coincidence – so, you are correct, its actually quite impossible to have a growth-led recovery, however, redistribution of existing wealth offers a way out for the many, but the “Masters” will not let go their grip, despite the fact they know global warming is a reality and not a fiction of the imagination.

    Prof. Steve Keen is actually touching upon this is work he’s undertaking presently, he’s got a paper appearing on Forbes shortly, its on the State-debt/surplus side of the equation, and he’s summed it up in 150 words here:
    Another paper will be appearing in my own rag at the month’s end, regrettably I usually don’t link my own stuff to the website I’m allegedly linked with, but the book itself is free to DL on Scribd

    1. Mel

      More homo-antonyms: “eluded too” ≠ “alluded to”. Context doesn’t clarify here. Le fondement vous eschappe.

    2. Jef

      Rodgers – you can not redistribute what does not exist. It is widely talked about here and elsewhere about how there are perhaps 10 times maybe more claims on real resources (aka. wealth) than actually exists. Any attempt would shine the light on the Ponzi and all would come crashing down.

      That is why I say “They” must keep the ball rolling in order to maintain their wealth.

      1. James

        I think you captured it in a nutshell there Jef.

        I might add, and reiterate what I think you said above, the game being played is therefore not so much “evil,” as it is simply self-serving. Which I think is also understandable, in that no matter what we “po’ folks” imagine ourselves doing in their shoes, it would more than likely be a variation on the same. Which is an all the more terrifying indicator of our predicament. It would be nice to think that we only had a few psychotic nutjobs to eliminate to correct our current situation. Quite a bit more daunting indeed to think that the rich who are causing all our distress are basically just like us, only more so.

      2. Fiver

        Too easy. While purely financialized ‘wealth’ in excess of something like a normal valuation can be designated ‘absent’ there is also a yawning into the horizon chasm of disparity on the ground, in real time, the result of a highly organized, determined, luxuriously financed, 30-year effort to convince people nothing can be done but crush the incomes of well over half the population by exporting capital and production on a global scale while allowing both the entire real economy and built environment to slide into ever-greater disrepair.

        I fully understand the ‘limits’ argument, but am far more concerned with environmental limits and fundamental damage to the biosphere of another explosion of the sort of thoughtless ‘growth’ we’ve seen for so long in the US and Canada. Resource limits and environmental/planetary limits can both be addressed, and on a global scale with the right set of policies – but it certainly means that chasm becomes a gulley.

  5. /lasse

    And now Gazprom declare that the Ukraine gas route will be closed when the Turkish pipeline is finished. If Europe want the 67 billion cubic meters that was the intention of South Stream it have to build a pipeline to Turkey.

    1. ambrit

      Oil and gas being fungible commodities, the new pipeline route gives cover to blending Iranian, Syrian and Kurdish gas supplies into the Russian product stream. I would look for signs of anti air defenses being built at a compressor station in Northwest Iran. That would be the logical place to start any pipeline from the Nonaligned Petrostates to the Blue Stream pipeline terminal in Samsun Turkey.
      The Great Game is alive and well.

  6. /lasse

    Soviet had five year plans, EU have ten year plans. The Lisbon strategy was from 1990 – 2010 and failed miserably, the 2020 strategy from 2010 – 2020 have the same chance as a snowball in hell to succeed. And still the people in southern EU is die hard Euro/EU proselytes.

  7. susan the other

    It looks like “nothing is getting done” but lets take a closer look at that. Oil is being consolidated in a blitzkrieg. Russia is not against us, Russia is with us – they have done a massive trade deal with China and now India, which means there will be an Asian trading block and it will be much reduced. We gave Russia Crimea; they gave us Cuba (which has a big oil field). Russia complied with our demand that they not run their pipeline into Europe, so they ran it to Turkey and told the EZ to build their own pipeline. Pretty short notice. The Saudis appear to be promoting terrorism, but in fact they are fooling their own discontented citizens who are soon going to be much poorer. It looks like all of the big producers are coming together in the Middle East and will align with North America. So control of oil is virtually accomplished. Manufacturing and the use of coal are both way, way down. Commodities are not worth mining. Central banking has taken over every market and is manipulating everything just to keep up appearances. Some commerce is happening – but it is completely controlled by bigger global forces. Because finance is now governing the world. The myth of independent central banking is no longer believable. As dear Stanley (Fischer) mildlly put it, We are just one decision away from not being independent (we being the Fed). The fact is, central banks are the only government left. The US can’t govern its way out of a cardboard box and neither can the EZ – they don’t even have sovereign constitutions! Whereas we have one but it’s a joke. World Economy? What world economy?

  8. Jim Haygood

    Whoops, I thought this post was a summer rerun from 2008 (i.e., need a hyphen in ‘post-2008’).

    ‘What is clear is that, under the current policy mix, the world is facing either what Summers described as secular stagnation or another Lehman moment.’ — Yanis V.

    There is a Third Way, comrade:

    ‘Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed.’ — Anatole Kaletsky

    One interpretation of the SNB’s capitulation and today’s subsequent rally in Eurozone stocks is that Sr. Draghi is going to print, print, print during the window of months while the question of the legality of OMT grinds through both the EU and German constitutional courts.

    ‘Move fast and break things’ [such as currency pegs], as the tech boffins say in Silicon Valley. Seems hardly European, don’t it?

  9. Christopher Dale Rogers


    Just to put the record straight, the post Yanis has put up is actually “un-subbed”, i.e., it has not gone through my Editor yet, for the obvious reason that she does not start until next Monday – Yanis jumped the gun with this, and, I could and should have asked 12 questions – in mitigation, he’s busy with the election and I did not wish to take up much of his time. And further, more consideration was required from me on the issues I raised, but its all water under the bridge now.

    1. Yves Smith Post author

      It was published on his website and I have permission to cross post from his site. I did not jump any gun, nor did I get any note to that effect from Yanis. You need to take any issues up with him rather than attack this site. We did nothing wrong.

      1. Christopher Dale Rogers

        Who’s grumbling, I’ve merely stated its “un-subbed” copy, whilst its easy to change on a blog, you cannot change it if its “printed” material, hence, we get subbed, and this is, or will be “printed” material at the months end – with a nice photo attached.

        I’m just ‘surprised” it was posted, and rather than take exception, was quite taken-aback given the haste required to shoot-off some quick questions and hit a strict deadline – so, thank you very much for cross-posting.

        I’m also expecting “fireworks” in London when hosting the Fed and ECB, not from the panelists, but from the invited audience – which I’m reliably informed is “top notch”, but that would be blowing my own trumpet. Just hope its as informative as some of the dialogue here on Naked Capitalism, in which case, I’m a happy chappy.

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