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This is not a blog which expresses instant opinions on current events. It rather uses incidents, books (old and new), links and papers as jumping-off points for some reflections about our social endeavours.
So old posts are as good as new! And lots of useful links!

Saturday, June 9, 2012

Good old political economy

Yanis Varoufakis’ recently published The Global Minotaur – America, the true origins of the financial crisis and the future of the world economy arrived here in the mountains a few days ago and has provoked a lot of thoughts. 
First about the light which such a political economic (and historical) approach throws on the matter – an honourable American elite which had experienced the financial breakdown of 1929 and the savagery of the 2nd World War was determined to create the conditions to ensure it never happened again. 
Most of us (think we) know about the 1944 Bretton Woods Conference and its institutions and the Marshall Plan. Not so well-known is the (behind-the-scenes) American role in establishing the Coal and Steel Community (leading to the EU); and in setting Japan on its path to post-war success. 
And, until I read this book, I had, frankly, not really understood the significance of the 1971 American decision to break the dollar link with gold. As the Far East has supplanted the US and Europe as the productive powerhouse, the American deficit (and capital inflow) has mounted to stratospheric proportions – thereby creating the conditions for new and toxic financial mechanisms. 

At the heart of Varoufakis’ writing (including his incisive blog) is the danger of a common currency (whether at global or european level) without a recycling mechanismThere are quite a few summaries and interviews in the internet about the book – eg this one from Naked Capitalism - 
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: 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 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 reining 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.
Immediately after reading the book, I turned to Howard Davies' earlier (2010) book The Financial Crisis; who is to blame? which looked (briefly) at 39 different explanations of the global crisis. Astonishingly - although that book's opening pages mention (positively) the 1980 Brandt Commission's call for reform of the monetary system and other critiques of growth and neo-liberalism, they are then put to one side with the comment that "those arguments go beyond the scope of this book"!!! 
Of course root-and-branch critiques are more difficult to translate into the instantaneous and headline-grabbing policy-making political elites now seem to require. But for someone of Davies' calibre to dismiss proper analysis in this way is quite shocking - and tells us so much about the "commentariat" on whom we depend for our understanding. 
There is, perhaps, a lot to be said for elite, behind-the-scenes manoeuvring!! Except that all elites have their snouts in the swill.

The Global Minotaur makes us think about the different ways we try to make sense of the world; how seldom we change our thinking; and what it takes to make us do that. It will be interesting to see how seriously his analysis is taken by other economists or whether (as I suspect) he will be written off as a .....Greek....bearing intellectual gifts....

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