The Minotaur in the room

My contention is that in 2008 the world lost a global surplus recycling mechanism (GSRM) which was keeping it in the precarious equilibrium that Ben Bernanke mistook for some “Great Moderation” and which caused Gordon Brown to think, calamitously, that the era of boom and bust had ended.    Grasping how this GSRM worked and why it perished is, I submit, a prerequisite for coming to terms with our current predicament.  Recycling surplus   The key to sustainable growth in a capitalist economy is the successful recycling of surpluses. Every nation, every trading bloc, every continent - indeed the global economy itself - is made up of deficit and surplus regions. California, Greater London and Germany will always be in surplus vis-a-vis Arizona, the north of England and Portugal. Given this chronic chasm, which market forces can never obliterate, the deficit regions are unable to maintain demand for the goods and services of the surplus producers. Thus, without surplus recycling, stagnation beckons for surplus and deficit regions alike.   Surplus recycling is commonplace at the national level (for example, in the United States military procurement often comes with the precondition that new production facilities are built in depressed states). However, it is at the global level that the issue of surplus recycling becomes more pressing and difficult to institute. The postwar era was remarkable in that two GSRMs saw to it that the world economy achieved unprecedented growth.    The first GSRM lasted from the late 1940s to the early 1970s. The US exited the war with enormous surpluses, which it quickly sought to recycle to the rest of the Western world in a multitude of ways (for example, the Marshall Plan of US grants to Europe, the wide-ranging support for Japanese industry, the endless backing of the European integration project), effectively functioning as a GSRM itself. Alas, this first postwar GSRM broke down, predictably, when America’s surpluses turned into deficits toward the end of the 1960s.    The loss of that GSRM threw the world into the 1970s crises, which did not subside until a new, most peculiar GSRM was put in place, again courtesy of the US. This time, America operated like a vacuum cleaner that absorbed the surpluses of the rest of the world (Germany, Japan, Middle East, China etc) while running ever-increasing trade and government budget deficits.    Those deficits were, in turn, financed by a tsunami of capital flowing into Wall Street, as the rest of the world recycled its profits by investing them in the US.    Ancient myth has it that preclassical Athenians maintained, in the name of peace and prosperity, a steady flow of tributes to the Cretan Minotaur. From 1980 onwards, the “rest of the world” sent a tsunami of capital to Wall Street by which to finance what I call a Global Minotaur: a GSRM that functioned as the “engine” pulling the world economy onto higher growth planes and giving the semblance of some “Great Moderation”.    Going toxic   Alas, built upon the Minotaur-induced mass capital flows into Wall Street, the world witnessed the most intense and profligate financialisation possible, spurring New York bankers to create all sorts of “toxic” financial instruments promising huge profits to millionaire investors and shareholders in hedge funds specialising in selling these exotic securities.   When the pyramids the latter built caved in, the Minotaur was mortally wounded. With it the capacity of the US deficits to recycle the world’s surpluses disappeared. Since then, the best-paid bailout plans of central banks, G20 nations, the IMF etc have failed to put back together the crude economic energy of the wounded beast.    To recap, without a functioning GSRM, the crisis that started in 2008 will continue to migrate across continents and sectors, regularly threatening us with imminent collapse. The trick is to design both within Europe but also globally a new GSRM; one that works just as well as the Minotaur did in its heyday but, at the same time, one that does not feed on increasing imbalances and destructive inequalities. Yanis Varoufakis is professor of economics at the University of Athens. His new book, The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy (London: Zed Books) will be launched on 1 September 2011 at Bookmarks Bookshop, London