A world without the Global Minotaur: Why is the world economy failing to recover?

Almost two years have passed since the first edition of The Global Minotaur was written. Its prognosis for our tormented beast was not good. Have events since confirmed that the Global Minotaur’s wounds were too deep to allow it to continue to perform its miraculous global surplus recycling? Is this still the best explanation available as to why the American, the European and, indeed, the global economies are stuttering? Of why generalised insecurity has become the ‘new normal’? These are the questions posed by the book’s Second Edition….

To be worthy of serious consideration, a theory of what went wrong with the global economy must not only offer a logical explanation of the past but, also, it must describe the future developments that would falsify it. Would the argument that was the kernel of this book’s first edition pass such a test in the light of the last two years? Before addressing the question, it may be helpful clearly to restate (and with the help of a diagram) the book’s overarching ‘Global Minotaur Hypothesis’. Once the reader is reminded of the hypothesis, a series of ‘facts’ that would have falsified it will follow. As I hope to show below, the original explanatory thrust, the ‘Global Minotaur Hypothesis’, survives the empirical test of falsifiability rather well. And, in so doing, it illuminates usefully the current policy debates unfolding on the drama’s three parallel stages: America, Europe, and China.

The Global Minotaur Hypothesis: a summary[1]

Since the 1970s, the United States began absorbing a large portion of the Rest of the World’s surplus industrial products. America’s net imports where, naturally, the net exports of surplus countries like Germany, Japan and China; their main source of demand. In turn, the profits earned by the surplus nations’ entrepreneurs were returned, daily to Wall Street, in search of higher payoff. Wall Street would then use this influx of foreign capital for three purposes: (a) to provide credit to American consumers, (b) as direct investment into US corporations and, of course, (c) to buy US Treasury Bills (i.e. to fund the American government deficits).

Central to this Global Surplus Recycling Mechanism, which I have likened to a Global Minotaur, were the two gargantuan deficits of the United States: the trade deficit and the federal government budget deficit. Without them, this book argued, the global circular flow of goods and capital (see diagram below) would not have ‘closed’, destabilising the global economy.

This recycling system broke down because Wall Street took advantage of its central position in it to build colossal pyramids of private money on the back of the net profits flowing into the United States from the Rest of the World. The process of private money minting by Wall Street’s banks, also known as financialisation, added much energy to the recycling scheme, as it oozed oodles of new financial vitality, thus fuelling an ever-accelerating level of demand within the United States, in Europe (whose banks soon jumped onto the private money-minting bandwagon) and Asia. Alas, it also brought about its demise.

When, in the Fall of 2008, Wall Street’s pyramids of private money auto-combusted, and turned into ashes, Wall Street’s capacity to continue ‘closing’ the global recycling loop vanished. America’s banking sector could no longer harness the United States’ twin deficits (trade and budget deficits) for the purposes of financing enough demand within America to keep the net exports of the Rest of the World going (a financing process that, until the Fall of 2008, tapped the Rest of the World’s surplus profits which these net exports produced). From that dark moment onwards, the world economy would find it impossible to regain its poise – at least not without an alternative Global Surplus Recycling Mechanism (GSRM) that replaces the wounded Global Minotaur.

This was, in brief, the central hypothesis of the book’s first edition. Did it stand the test of history?

The Minotaur is dead! Long live America’s deficits!

Had the global economy found its feet without some GSRM to replace the Minotaur, there would have been no second edition of this book (since an apology for the first one would have sufficed). Similarly, if the Eurozone had bounced back, on the strength of its austerian policies, or if China had discovered some inner force by which to arrest the declining rate at which its people consumed, the book’s central pillar would have lain in ruins. Sadly, this is not what transpired: the world continues its journey in the uncharted waters of a dark ocean whipped up continually by the evil winds of dread and fear.

The fact that recovery has not spread its soothing wings over us is, of course, no proof that the ‘Global Minotaur Hypothesis’ holds. To reach the conclusion that the last two years have kept it alive and potentially insightful, we need to state carefully and in some detail its predictions and then to compare those with the facts. So, let us begin: What observations would we have to make over the past two years or so to conclude that the Global Minotaur Hypothesis was flawed?[2]

Suppose we observed that, despite the Crisis, America’s deficits remain high but that they continue to absorb the net exports of both goods and capital from the Rest of the World, and at a pace not too dissimilar to that of the pre-2008 era. If this is what we observed in 2009 and beyond, then the Global Minotaur Hypothesis would be refuted: for it would then be impossible to claim (a) that the Global Minotaur is kaput, and, (b) that its demise must be blamed for the world’s economic continuing woes.

So, let’s look at the facts: The first observation worth noting is that America’s twin deficits are alive and kicking. At the height of the Minotaur’s reign, in 2005, the US Federal government posted a deficit of $574 billion. In the same year American consumers and firms absorbed a staggering $781 billion of net imports from the Rest of the World. Almost 70% of the profits that the non-American producers of these goods made returned to Wall Street. Once in the bankers’ hand, they were turbocharged (through so-called ‘financial engineering’) and, thereby, financed the US deficits, with the residual being exported the remainder to the four corners of the globe (were it helped build a variety of bubbles).

Following the 2008 catastrophe, America’s deficits diverged massively. As all sorts of incomes (from labour, capital and rent) collapsed, asset values fell through the floor, home foreclosures and the ranks of the unemployed burgeoned, it was inevitable that Americans would reduce drastically their consumption of imported goods. Indeed, in 2009 the trade deficit fell from $781 billion in 2005 to $506 billion. However, in the same year, the US federal deficit shot up (from $574 billion in 2005) to $1400 billion, as government strove to prop up Wall Street and stimulate Main Street. By 2011 the trade deficit had recovered to, more or less, its 2005 level (reaching $738 billion) while the budget deficit stabilised at the historically gigantic $1228 billion mark.

Granted that the Crisis did not dent America’s deficits (indeed, it boosted their sum), the pertinent question is this: Did the United States manage, post-2008, to continue recycling other people’s surplus goods and profits at a pace that, judging from the pre-2008 period, is necessary to keep world total demand for produced goods buoyant? The answer that surfaces upon close inspection of official statistics is unambiguously negative. In brief, the facts confirm the hypothesis that the Global Minotaur is now defunct. Two pieces of data confirm this.

First, America has lost its capacity to recycle the Rest of the World’s net exports at the pre-2008 pace. More precisely, in 2011 America was generating 23.7% less demand for the Rest of the World’s net exports than it would have been without the Crash of 2008. (See Figure 1 where it is evident that in 2011 the United States was absorbing almost 24% fewer of the main exporters’ net exports than their underlying trend value).

Secondly, and at the same time, America was failing to attract (through Wall Street) the level of capital flows which would be necessary to maintain the pre-2008 pace of investment into its private sector. In particular, by 2011 the United States had lost 28.6% of the assets held by foreigners compared to the (trend) level that would have been had the Crash of 2008 not happened (see Figure 2). Additionally, and indeed crucially, foreign net capital flows that ended up as loans to US corporations fell precipitously from around $500 billion in 2006 to -$50 billion in 2011 (see Figure 3).

In conclusion, a crystal clear picture is emerging: the Crisis did not alter the deficit position of the United States. The federal budget deficit more or less doubled while America’s trade deficit, after an initial fall, stabilised at the same level. However, the US deficits are no longer capable of maintaining the mechanism that keeps the global flows of goods and profits balanced at a planetary level. Whereas until 2008 America was able to draw into the country mountains of net imports of goods, and a similar volume of capital flows (so that the two balanced out), this is no longer happening post-2008. American markets are sucking 24% fewer net imports (thus generating only 66% of the demand that the Rest of the World was used to before the Crash) and are attracting into the American private sector 29% less capital than they would have had Wall Street not collapsed in 2008.

In short, of the mighty Global Minotaur, the only reminder that remains is the still accelerating flows of foreign capital into America’s public debt (see Figure 4), evidence that the world is in disarray and money is desperately seeking safe haven in the bosom of the reserve currency in this age of tumult. But as long as the Rest of the World is reducing its injection of capital into America’s corporate sector and real estate, while America is reducing its imports of their net exports, we can be certain that the beast is dead and nothing has taken its place with a capacity to re-start the essential process of surplus recycling. Thus the sad cry: The Global Minotaur is dead! Long live America’s deficits!

Figure 1

Figure 2

Figure 3
Figure 4
(To be continued)

[1] Most of the data used in the first edition ended in 2009. This edition was written with the benefit of data including the financial years 2010, 2011 and the first three quarters of 2012.


[2] For the full story the reader is advised to re-read Chapter 6 of the book’s first edition.

29 thoughts on “A world without the Global Minotaur: Why is the world economy failing to recover?

  1. Pingback: Links 11/11/12 « naked capitalism

  2. Pingback: Links 11/11/12 « naked capitalism

  3. Dear Yanis,

    I watched your recent talk at the Seattle Town Hall on CSPAN while I was in the US over the holidays. I am fascinated by your theory of financial surplus recycling and would like to read your book to learn more. I just have a simple question.

    I would like to purchase the most up-to-date version of the book (the 2nd ed., as referenced above); however, I can only seem to find the 1st edition (from 18 August 2011) when I search online – in either hard copy or EPub format. Am I missing something? Where can I find the 2nd edition?

    Thanks.

    • Dear Curious Dave, The second edition is currently in press. It should be out in February. If you want, I can send you a copy of the new chapter and preface, the part which differs from the first edition. Just send me an email using the Contact page on this blog. Yanis

  4. Your figures for the U.S. 2011 deficit are apparently wrong. In 2011, the trade deficit for the full year was $558 billion and the CA deficit was $473 billion.

    A further interesting angle on the matter is the U.S. cumulative external debt, the Net International Investment Position, as officially measured by the Fed. In 2006, it was $2.6 trillion, which was amazing, since it actually had gone down, even as the CA deficit blew to an unprecedented 6% of GDP. In fact, if one added up all the prior CA deficits since 1990, $2.9 trillion was “missing” from the NIIP. In 2008, the NIIP rose to $3.4 trillion, but in 2010, the last sighting, it was back down to $2.5 trillion, despite continuing, if lowered CA deficits. I think that should be a large clue, as to how U.S. MNC, with Wall St. mega-banks joined at the hip, borrow long and cheap from abroad and invest at much higher returns abroad, making the vapor bucks from the trade deficit magically disappear, via the “net factor payments” portion of the CA deficits even as the persistent U.S. trade deficits subtract aggregate demand, employment and investment from the U.S. domestic economy, thus contradicting the basic interests of the vast majority of U.S. workers.

    If I have one strong reservation about the global surplus recycling mechanism hypothesis, it would be the tendency to treat the matter as one between national economies and not modeling the crucial role of the MNC/Wall St. complex in restructuring oligopoly rents through basically arbitraging the over-valued U.S. $ against undervalued “developing” world currencies and hence reaping enormous windfalls, (not just through cutting wage shares in output, since every economic asset or factor of production is also similarly discounted), rather than facing the difficulties and uncertainties of maintaining profits the real investment in improvements in processes and products. During the Volckerdaemmerung, the man himself, always lucid, spoke of the “controlled disintegration of the global economy”. So it was a tale foretold, except for the “controlled” part.

  5. Yanis – “Almost 70% of the profits that the non-American producers of these goods made returned to Wall Street. ” This recycling shows up in the US trade deficit figures?

  6. Yanis,
    Not being learned in economics, I still like reading your posts.
    I think they keep me sane in a country where the majority of the people thinks that the main problem is that “We ate them all together” as Mr Pangalos said.
    A lot of people seem to believe that what we are facing is solely a problem caused by Greece and its people.
    Only today I was told by a colleague that “outside Greece the world is fine, there are no major economic troubles”. The fact that he is in position of some “responsibility” in the “organization” for which I work, makes the fact more worrisome.
    Thanks a lot for your posts.

  7. “the world continues its journey in the uncharted waters of a dark ocean whipped up continually by the evil winds of dread and fear.”

    A rather flowery language. You could work for Valve: write the GlaDOS prose for Portal III. Like “The Enrichment Center is required to remind you that you will be baked, and then there will be cake.”

    Just kiddin’ – a good article! When will the revised Minotaur available in German language?

  8. Dear Yanis – I have just recently finished reading your book and I found it great!! However, it occurred to me that one could argue that the status quo in terms of the deficit(s) of the United States could be maintained, with or without the Global Minotaur. Please comment if you would be so kind. I lay out my thinking below.

    By accounting identity, the US Trade Balance could continue to be in deficit (i.e., its “Foreign” Sector could continue to be in surplus) if the US Public Sector was able to continue to run a deficit. Alternatively, or complementarily, the US Private Sector could also support this same Trade Imbalance, as long as it too was able to continue to run a deficit. In both cases, debt levels would increase (Public Sector and/or Private Sector Debt Levels, respectively), or savings levels would decrease. This train of thought follows the late Wynne Godley’s financial balances approach: (S – I) = (G – T) + (X – M).
    If one agrees that the above is true by definition (i.e., the equation is not a theory but an accounting identity derived from the National Account formulas), then a question regarding the Global Minotaur Hypothesis could become whether US Total Debt Levels could have grown, or could continue to grow, without a Global Surplus Recycling Mechanism?

    To answer that question one could start off by analysing the Public Sector. The US Government, as a sovereign issuer of its own fiat currency, “could” technically afford to purchase anything that is for sale in US dollars (which does not mean that it “should”). It could do so by “keystrokes” considering the US Treasury and the Federal Reserve as a consolidated unit, part of the same Government. As you know, the US Public Sector does not actually finance itself through the bond market, nor does it rely on any foreign entity, public or private, to provide it with funds. The US Government cannot go broke. Liquidity does not technically have to be “recycled” into the US for the Public Sector Debt Level to increase, and therefore for the US Government to run a Public Deficit (G – T) which supports the Trade Deficit (X – M).

    In terms of the US Private Sector, banks can and do create money (loans) out of thin air. Loans create deposits, and this is beside the point that Wall Street through CDO’s, toxic products and other means was able to turbo boost the leveraging of America. A key element of the rationale being put forward is that the Money Multiplier Concept is a myth; something I understand you would argue as well. What banks mostly need to create loans (and thereby assist the Private Sector to run a deficit and increase its Debt Level) are credit worthy customers… not reserves, not liquidity from overseas. Admittedly, however, banks having deposits of US dollars (including those US dollars held by foreigners that directly or indirectly contributed to the Trade Imbalance) can certainly help the process of creating loans, for deposits tend to be the cheapest source of funding for banks. However, it is not a necessary condition that banks have such deposits at hand in order to increase the size of their balance sheets. Therefore, and again, liquidity does not technically have to be “recycled” into the US for the Private Sector Debt Level to increase, and therefore for the Private Deficit (S – I) to help support the Trade Deficit (X – M).

    What could put an end to the US acting as a main engine of world growth thanks to it consuming foreign goods (imports) on a massive scale? Again, referencing the financial balances formula, one could argue that either: a) the US Public Sector would have to find itself in a position where the Rest of the World was unwilling, or less willing, to accept US dollars in payment for their exports, and/or b) the US Private Sector would have to become too indebted and therefore unable to further run deficits. Considering the first point, that is unlikely to happen in our lifetimes. Considering the second point, we may have reached that threshold already, but having a Global Surplus Recycling Mechanism to provide further liquidity would not seem to be relevant. When balance sheets are stretched, throwing more loans at them is not a solution as we know.

    Considering all of the above, a conclusion may be that the Global Minotaur certainly helped get us to where we are, and if it has indeed been mortally wounded, then certainly there will be an impact. However, the absence of a Global Surplus Recycling Mechanism does not “necessarily” imply that we cannot continue further along this same path, for better or worse, just because an international funding loop has been broken or is being eroded.

    • If one understands and agrees with the MMT view then i believe one should conclude that there is no need for a surplus recycling mechanism in a free floating exchange rate regime.
      Problems arise though,when governments,markets etc. dont understand (or for whatever reason pretend to not understand) this reality and the advantage of having a fiat free floating currency.

      To make my point more clear imagine 2 economies.The one has a trade surplus the other one has a corresponding trade deficit.A trade deficit implies a money leakage for the domestic economy which can be offset by either prv sector increasing its borrowing (which can never go on for ever ) or by deficit spending from the government (and also by a combination of the two ofcourse).Assuming that the government doesnt understand the privilege of issuing a free floating currency and is thus reluctant to deficit spend as much as needed this would result in an increase of the prv. sector borrowing until the leverage level would become unsustainable and a recession/depression would follow all other things equal.This would also lead to decreased demand since the private sector would try to net save which would cause less exports for the surplus economy.
      If the government of the surplus economy is similarly reluctant to deficit spend so as to either boost domestic demand or cover the loss of external demand through direct purchases then this economy would too suffer from recession and increased unemployment.Thats the part where the need for a surplus recycling mechanism comes in.

      I think its no coincidence that the 1st attempt for a SRM was Keynes’ proposal for his so called International Clearing Union.The need was apparent back then due to fixed exchange rates.The only way to offset the money leakage caused by trade imbalances would be by recycling the leaked money back to the economies where it came from so as to maintain the flows that kept both sides (defict and surplus economies) running.

      But why would such a mechanism be needed if governments wanted to enjoy the full advantage of issuing a free floating fiat currency?

  9. Dear Yanis – I have just recently finished reading your book and I found it great!! However, it occurred to me that one could argue that the status quo in terms of the deficit(s) of the United States could be maintained, with or without the Global Minotaur. Please comment if you would be so kind. I lay out my thinking below.

    By accounting identity, the US Trade Balance could continue to be in deficit (i.e., its “Foreign” Sector could continue to be in surplus) if the US Public Sector was able to continue to run a deficit. Alternatively, or complementarily, the US Private Sector could also support this same Trade Imbalance, as long as it too was able to continue to run a deficit. In both cases, debt levels would increase (Public Sector and/or Private Sector Debt Levels, respectively), or savings levels would decrease. This train of thought follows the late Wynne Godley’s financial balances approach: (S – I) = (G – T) + (X – M).

    If one agrees that the above is true by definition (i.e., the equation is not a theory but an accounting identity derived from the National Account formulas), then a question regarding the Global Minotaur Hypothesis could become whether US Total Debt Levels could have grown, or could continue to grow, without a Global Surplus Recycling Mechanism?

    To answer that question one could start off by analysing the Public Sector. The US Government, as a sovereign issuer of its own fiat currency, “could” technically afford to purchase anything that is for sale in US dollars (which does not mean that it “should”). It could do so by “keystrokes” considering the US Treasury and the Federal Reserve as a consolidated unit, part of the same Government. As you know, the US Public Sector does not actually finance itself through the bond market, nor does it rely on any foreign entity, public or private, to provide it with funds. The US Government cannot go broke. Liquidity does not technically have to be “recycled” into the US for the Public Sector Debt Level to increase, and therefore for the US Government to run a Public Deficit (G – T) which supports the Trade Deficit (X – M).

    In terms of the US Private Sector, banks can and do create money (loans) out of thin air. Loans create deposits, and this is beside the point that Wall Street through CDO’s, toxic products and other means was able to turbo boost the leveraging of America. A key element of the rationale being put forward is that the Money Multiplier Concept is a myth; something I understand you would argue as well. What banks mostly need to create loans (and thereby assist the Private Sector to run a deficit and increase its Debt Level) are credit worthy customers… not reserves, not liquidity from overseas. Admittedly, however, banks having deposits of US dollars (including those US dollars held by foreigners that directly or indirectly contributed to the Trade Imbalance) can certainly help the process of creating loans, for deposits tend to be the cheapest source of funding for banks. However, it is not a necessary condition that banks have such deposits at hand in order to increase the size of their balance sheets. Therefore, and again, liquidity does not technically have to be “recycled” into the US for the Private Sector Debt Level to increase, and therefore for the Private Deficit (S – I) to help support the Trade Deficit (X – M).

    What could put an end to the US acting as a main engine of world growth thanks to it consuming foreign goods (imports) on a massive scale? Again, referencing the financial balances formula, one could argue that either: a) the US Public Sector would have to find itself in a position where the Rest of the World was unwilling, or less willing, to accept US dollars in payment for their exports, and/or b) the US Private Sector would have to become too indebted and therefore unable to further run deficits. Considering the first point, that is unlikely to happen in our lifetimes. Considering the second point, we may have reached that threshold already, but having a Global Recycling Mechanism to provide further liquidity would not seem to be relevant. When balance sheets are stretched, throwing more loans at them is not a solution as we all know.

    Considering all of the above, a conclusion may be that the Global Minotaur certainly helped get us to where we are, and if it has indeed been mortally wounded, then certainly there will be an impact. However, the absence of a Global Surplus Recycling Mechanism does not “necessarily” imply that we cannot continue further along this same path, for better or worse, just because the funding loop has been broken.

  10. Or, to put it another way:

    It’s important to understand that the many years of so-called “prosperity,” “economic well being,” and, for certain individuals, spectacular success, that formed the basis of neo-conservative (aka neo-liberal) “free-market” dogma for such a long time, were in fact built on a combination of monumental illusion and outright fraud, a mirage that has now evaporated along with the “free” market financial system it was supposedly based on. It’s not simply that a few “bad apple” investment bankers got carried away with greed and wrecked a system that was otherwise operating legitimately. The system was from the start fundamentally flawed, an elaborate Ponzi-like scheme fueled far more by the get rich quick dreams of bankers and investors than by legitimate profits earned by legitimate businesses. (from http://amoleintheground.blogspot.com/2009/02/shape-of-things-to-come-part-2.html )

    And here’s the cure: http://amoleintheground.blogspot.com/2009/02/shape-of-things-to-come-part-3.html

    What is more: http://amoleintheground.blogspot.com/2009/02/shape-of-things-to-come-part-8.html

  11. Or, to put it another way:

    It’s important to understand that the many years of so-called “prosperity,” “economic well being,” and, for certain individuals, spectacular success, that formed the basis of neo-conservative (aka neo-liberal) “free-market” dogma for such a long time, were in fact built on a combination of monumental illusion and outright fraud, a mirage that has now evaporated along with the “free” market financial system it was supposedly based on. It’s not simply that a few “bad apple” investment bankers got carried away with greed and wrecked a system that was otherwise operating legitimately. The system was from the start fundamentally flawed, an elaborate Ponzi-like scheme fueled far more by the get rich quick dreams of bankers and investors than by legitimate profits earned by legitimate businesses. (from http://amoleintheground.blogspot.com/2009/02/shape-of-things-to-come-part-2.html )

    And here’s the cure: http://amoleintheground.blogspot.com/2009/02/shape-of-things-to-come-part-3.html

    What is more: http://amoleintheground.blogspot.com/2009/02/shape-of-things-to-come-part-8.html

  12. Yanis,

    While the Popperian falsification scenario you deal with is sufficient for your purposes here, as you know, the situation is more complex. In principle, had your hypothesis been in empirical difficulty, you might have felt justified in invoking Duhem-Quine methodology to ‘save your hypothesis’, or utilizing a Lakatosian depiction of the state of affairs. Fortunately, neither was needed.

    While strictly a side issue for this particular discussion, Wall Street’s role in the GSRM has involved monumental fraud. A fuller account of the failure of this mechanism would seem to me to require an account of this fact. The late Charles Kindleberger, Bill Black and Prem Sikka would contend that every bubble generates a criminogenic environment which is doomed to fail at some point. The failure point was postponed again and again because the GSRM,as you so effectively characterize it, was essentially transferred from one domain to another.

    I would like to encourage you to add fraudulent activity to your analytical toolkit. We are not talking about ‘innocent fraud’, as it were. This is nothing more than white collar criminal behavior. And economic theory must begin to come to terms with it. And your approach seems to me to eminently suited to the task. If you don’t mind my saying so.

    • Lady,

      You have been right! Yanis here describes the role and the functions of global Minotaur but he does not say much about the causes making the Minotaur not playing hir role any more. I think what you call monumental fraud is an important determinant of the failure of the system.
      Like in Europe, deficit and debt boosted when governments financing poor investments (i.e. not only poor obviously) of private bankers. Then suddenly realised that national debt is not any more servable so austerity needs to take action. In economics, we still fail to find an analytical role for corruption and fraud since we take as given that political and justice system can deal with these issues well enough. In fact, this is not always the case.

  13. Well lets not forget mini me – the UK
    It has been increasing its real goods imports at least in Sterling ( now £100 billion trade deficit in 2011)
    I think its 2012 Q3 trade deficit with Germany is a record while its trade with France is now in perfect balance………a new Plantagenet perhaps ?

    UK trade deficit in goods is down somewhat for the third quarter (record in Q2)
    2012 £
    Q1 : -25,415
    Q2 : -28,059
    Q3 : -25,443

    However its oil balance just keeps on getting worse
    2012 £
    Q1 : – 3,092
    Q2 : – 3,544
    Q3 : – 3,750
    However it 2011 Q3 was even worse at – 3,835 so we could be looking at some seasonal factors.

    http://www.ons.gov.uk/ons/dcp171778_283558.pdf

    Again the UKs trade balance with Germany is striking in comparison to France.
    Q3 real goods trade deficit £
    Germany : – 5,846 (which could be a record high , must check)
    France : + 90

    the China deficit is almost as big (also showing signs of weakness) although there is less overall trade between those two countries
    China : – 5,503

    I have heard people on MMT sites claim this trade deficit is only a few % of overall GDP but they are confusing stocks and flows which perhaps the more sophisticated MMTers don’t do.

    For example 90% of cars might have a lifespan of 12 years or so……….
    So lets say 2 or 3 % of GDP * 12…………(although you must subtract depreciation)

    The UK is using its sov nature within the EU construct to buy real goods while it still can.
    People in the UK & indeed Ireland are buying expensive diesel cars that in the case of Mercs will last 20 + years.

    The UK was the only growing large car market this year and this month.
    Why is that ?

    http://www.smmt.co.uk/2012/11/resilient-new-car-market-growth-continues-in-october/

    Including 32,427 C class Mercs
    38,102 BMW 3s

    nearly 18,000 more then all the Ellesmere Astras bought this year……….

    Are these functional national economies with rational trade patterns ?

    Nope.
    Get it while you can………………………..

    UK German goods imports in Y2011 : £50,457 million

  14. Thanks Yanis, so refreshingly at odds with neoglib economic practice to see you put your explanatory framework to the test of reality (and emphasising Popper’s falsifiability rule as opposed to the possibly misleading track of verification-seeking).
    …just a quibble on the ovararching graph: if the ‘Net Exports’ arrow on the left represents flow of money instead of ‘goods’ (as the ‘Net Profits’ one on the right does), shouldn’t it be pointing downwards *towards* the ‘Rest of the World’? This would better illustrate the notion of re-cycling and (maybe labelled as ‘Net Exports Income’ or something to prevent confusion with the movement of ‘goods’).

    Could you bring to greater public attention research in alternative approaches for investment such as Thomas Pogge’s “Health Impact Fund” you mentioned in the 2010 “Greening Humanity” conference? (Since ‘Wall Street’/positional exclusivities and such toxic economic practices based on ‘toxic economic theories’ have to go, we need radical new/old ways of managing our global funds to deal with our global problems than keep letting current market mechanisms have the sole say on any investment, take their cut along a short-and-narrow view, externalise the cost, and exacerbate instability/inequality while at it…)
    Keep up the good work in both research and public education! Thanks!

    http://www.youtube.com/watch?v=hCSWihWRKlU&feature=relmfu (“Greening Humanity” talk, part 2 of 3)

    http://www.vitalspace.org/the-two-deadly-foes-of-humanitys-vital-space-yanis-varoufakis

    Thomas Pogge on the Health Impact Fund:

  15. But what can be done about it? In other words, given the analysis in the Global Minotaur, what is the prediction for the world economy under current policies? What policies would be recommended and by whom?

    I get from the Minotaur book in the closing page: Washington is the only player who can save the day. I am surprised that you think that. Do you believe that Washington has any leverage on the world economy today (or on much of the US economy, to start with?)

    It took major global collapse (WW2) for Washington to install a global economic order in the past. Is this what we should be expecting this time around as well?

  16. Reblogged this on Place Management & Branding and commented:
    This blog entry by Yanis Varoufakis in his own blog, though not directly linked to place management, contains such interesting thoughts on the economic co-dependancies between places that I have found it absolutely relevant. Indeed, one of my main points of criticism of a lot of research is that it tends to look at places only as competing entities, ignoring all the other complex relations that link them together.

  17. The Global Minotaur isn’t dead yet. As long as global pension funds recycle savings into US corporate debt and real estate markets, it will keep on ticking. But if debt deflation takes hold, then the Minotaur will experience a slow and painful death.

    • Leo,

      The pension funds will soon discover, if they haven’t already, that the U.S. real estate market is a loser’s game — notwithstanding all the freebies given to them by the Obama administration, courtesy of the unwitting American taxpayer (via Freddie and Fanny), of course.

      Moreover, regarding pension funds and corporate debt … have the pension funds not learned their toxic bonds lesson from a few years back?

      I guess that is ZIRP for you, eh?

      PS: Not being and American, I did not have the “pleasure” of voting for the lesser of two psychopaths last week ;-)

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