Friday 30th September 2011
By Yanis Varoufakis
With the roar of volatile markets in our ear, it is time to take pause to ask a simple question: Why is the global economy finding it so hard to regain its poise after the Crash of 2008?
In 2008, the world lost not just many billions of paper wealth but, more crucially, a Global Surplus Recycling Mechanism (GSRM) which was keeping it in the precarious equilibrium that Ben Bernanke mistook for some ‘Great Moderation’, and which gave Gordon Brown the illusion of an era free of boom-and-bust. Grasping how this GSRM worked and why it perished is a prerequisite for coming to terms with our current predicament.
The key to sustainable growth 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-à-vis Arizona, the North of England and Portugal respectively. Market forces can never obliterate these chronic imbalances. Without some surplus recycling mechanism, stagnation beckons for surplus and deficit regions alike as the deficit regions will prove unable to maintain demand for the goods and services of the surplus producers.
Surplus recycling is commonplace at the national level. However, it is at the global level that the issue of surplus recycling becomes more pressing and difficult to institute. The post-war era was remarkable in that two GSRMs saw to it that the world economy achieved unprecedented growth.
The first GSRM began just after the war when America emerged with enormous surpluses which it quickly sought to recycle to the rest of the Western world (for instance, the Marshall Plan, wide-ranging support for Japanese industry and endless backing of the European integration project). Alas, this first post-war GSRM broke down, predictably, when America’s surpluses turned into deficits toward the end of the sixties.
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 United States. This time, America operated like a vacuum cleaner that absorbed the surpluses of the rest of the world, running ever increasing trade and government deficits. Those deficits were, in turn, financed by a tsunami of capital flowing into the United States, as the rest of the world recycled its profits by investing them in Wall Street.
Ancient myth has it that Athens maintained a steady flow of tributes to the Cretan Minotaur in the name of Peace and Prosperity. 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 GRSM that functioned as the ‘engine’ pulling the world economy onto higher growth planes and giving the semblance of some ‘Great Moderation’. Financialisation was merely a by-product of the mass capital flows into Wall Street. When the pyramids the latter built caved in, the Minotaur was mortally wounded and America’s capacity to recycle the world’s surpluses disappeared. Since then, the best paid plans of Central Banks’ — G20 meetings, the IMF, for example-have failed to put back together the rude energy of the wounded beast.
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 once, one that does not feed on increasing imbalances and destructive inequalities.