Is the World Re-balancing?

Before the Crash of 2008, the dominant view amongst the world’s policy-making elites was that global imbalances were not a problem. The great and the good in Washington and in London, in Paris and in Frankfurt, at Davos and on the golf courses where deals of note are struck, dismissed as economically-illiterate moaning-minnies all those who dared warn against large current account imbalances. Caught up in the soothing fiction of the ‘Great Moderation’, and the toxic fantasy that finance had invented ‘riskless risk’, the powers-that-be were adamant that we were living in a ‘new paradigm’.

In this ‘new paradigm’ of their over-excited imagination, risk was being dispersed (through financialisation) from the global financial centres to the rest of the world, net capital was flowing the other way (from the Periphery to the capitalism’s Metropoles), and the result was sustainably unbalanced current and capital accounts. In short, from the gilded perspective of the true believers in some fictional ‘Great Moderation’, untrammelled markets had produced, at a planetary scale, a virtuous, sustainable, and highly lucrative ‘equilibrium imbalance’. After the Crash of 2008, their tune changed. And it changed even more radically when, two years later, the Eurozone’s never-ending crisis followed suit. Suddenly, it became fashionable to blame, retrospectively, the hitherto benign global imbalances for the crisis. America’s pre-crisis gargantuan current account deficit, amounting to 6% of the planet’s largest national income, as well as China’s 10% of GDP current account surplus, were no longer thought of as innocuous. Similarly, within the Eurozone, Germany’s and Holland’s pre-2008 combined €35 billion-plus current account surplus, juxtaposed against Portugal’s, Greece’s and Spain’s combined current account deficit of €31 billion, metamorphosed from ‘natural’ repercussions of creating a common currency area to sources of local and global instability. In short, the crisis of 2008 turned imbalances from symptoms of the neoliberal ‘Great Moderation’ to the villains of the piece.

Six years have passed since those heady days and it is now clear that the global imbalances are waning. America’s current account deficit has fallen from 6% to less than 3% of GDP while China’s current account surplus has diminished from a breathtaking 10% to a reasonable 2.5%. Even within the long suffering Eurozone, quasi-insolvent nations like Spain and Italy are eliminating their current account deficits, despite the rise and rise of Germany’s surplus. Perused from a planetary perspective, German surpluses and Turkey’s or India’s deficits seem like minor problems that should perhaps be of concern to Europeans or Asians though not to the world at large. From this perspective, the world seems better balanced now than at any time since the 1980s. But is it so?

In what follows, I wish to pose three intertwined questions:

  • Is the world re-balancing?
  • Was the Crash of 2008 crisis caused by global imbalances?
  • Or was it the laxity in financial regulation that caused the global imbalances in the first place?

While there are important kernels of truth in the phrasing of each of these questions, the answer to every one of them is a resounding ‘no’.

Are we witnessing a new global balance?

Judged only in terms of current account imbalances, there is no doubt that the yawning discrepancies have fallen considerably. Against the false belief that the Chinese currency remained pegged to the dollar, the remnibi rose by 40% in relation to the greenback at a time when American consumers cut down on their consumption, boosted their savings ratios (despite the low interest rates) and, generally, de-leveraged. Meanwhile, the Chinese government’s cranking up of investment funding on infrastructure increased further the demand of capital goods (from places like Germany, the US, the Netherlands). The imbalance in China’s trade with the West was, thus, ‘corrected’ substantially both through exchange rate flexibility and by behavioural changes domestically and overseas (involving US consumers but also  the Chinese government).

Besides China and the USA, other trading blocs are seeing a drop in the absolute value of their ratio of current account to GDP too. Even the Eurozone, which is being brutally forced by austerity to respond to its deep crisis in a mercantilist manner, features only a modest current account surplus of 1.5% of GDP. The question however remains: Is this evidence of a world economy that is re-balancing?

Before 2008, conventional (Washington-consensus) wisdom was imploring us to recognise that the world was in equilibrium; an equilibrium created by two counter-balancing forces: one force was the tsunami of goods that sailed across the oceans to flood (mainly) the Anglosphere (i.e. the US, UK, and Australian markets) with a multitude of consumer delights, the other force being the torrent of capital that gushed in the opposite direction. If we considered the current account imbalances together with the capital account imbalances, these two types of imbalances were, we were being told, cancelling each other out, yielding a harmonious, dynamically stable global equilibrium.

Of course, it was all utter non-sense. The ‘equilibrium imbalance’ thesis was neglecting the simple truth that the equilibrium in question was intrinsically unstable. For reasons that Hyman Minsky, John Maynard Keynes, Karl Marx and Friedrich von Hayek would have explained perfectly adequately, Wall Street, the City of London and Frankfurt were always going to build pyramids of toxic money on top of that splendid ‘equilibrium imbalance’. Which is precisely what they kept doing until our ‘equilibrium imbalance’ was destabilised, crashing into a pulp in the Fall of 2008.

Today, a new error is taking its cue from that older one. As it was spectacularly wrong to imagine that the pre-2008 situation was a form of ‘equilibrium imbalance’, so too now, it is dramatically mistaken to think that the ‘re-balancing’ we are witnessing, vis-à-vis current accounts, is a case of ‘equilibrium balance’. It is no such thing.

Exhibit A is the mountain of cash on which corporations in the US and in Europe are sitting, too terrorised by the prospect of low aggregate demand to invest . We now have it on good authority that some $2 trillion of surpluses are slushing around within corporate America. Similarly, in the UK another $700 billion is circling around within the circuits of finance, refusing to channel itself into any productive investment. And a further $2 trillion is ‘lost’ in the no man’s land of idle savings that circulate in the rest of the world. In short, nearly $5 trillion of excess savings is not, I submit, a sign of a world in the process of ‘re-balancing’.

Come to think of it, every crisis manifests itself in two distinct mountains: one of debt and losses, the other of idle, fearful savings. Unless these mountains start ‘eliminating’  one another; unless the excess savings stop being idle and begin to turn into the investments that stand a chance of producing the incomes which can uniquely extinguish the mountain of debts and the losses, it is offensive even to speak of a new ‘balance’; of a world that is ‘re-balancing’. We now live deep inside Keynes’ Paradox of Thrift, a realm in which Presbyterian prudence by everyone produces less income all around and poisons the world’s debt dynamics, labour markets, democracies. We inhabit a world which saves more that 25% of planetary income but which, at the same time, wastes a large part of it by letting it fester in a glut of self-fulfilling negative expectations regarding future demand.

To conclude, while current accounts are more or less re-balancing, this ‘new balance’ is pregnant with the most catastrophic of instabilities: the one that comes from long-term global stagnation and from a level of aggregate demand too low to create a modicum of equilibrium between global savings and global investment into the things that we need (e.g. technological advances in energy technology), the education that we deserve, the health that decency dictates.

Was the Crash of 2008 caused by global imbalances? Or was it the laxity in financial regulation that caused the global imbalances?

In a recent piece entitled ‘Requiem for Global Imbalances’, Barry Eichengreen argued that global imbalances were not the cause of the 2008 meltdown. In this I am in full agreement. But I beg to differ from his answer as to what actually caused it: “The principal culprits in the crisis”, Eichngreen writes “… were lax supervision and regulation of US financial institutions and markets, which allowed unsound practices and financial excesses to build up. China did not cause the financial crisis; America did (with help from other advanced economies).”

Why do I disagree? Had lax supervision and the phony revolving-door type of regulation of Wall Street not turned finance into “a bubble on a whirlpool of speculation” – to quote John Maynard Keynes’ General Theory? Most certainly. And did this whirlpool not culminate in 2008 into a cataclysm that brought down the West’s financial centres? Of course it did. Was this natural repercussion of lax regulation not the reason politicians and central bankers felt obliged to bail out the bankers, along with their banks, at the expense of the multitude that were left saddled with negative equity, with the impact of hideous austerity drives, and with the long term repercussions of what Larry Summers recently referred to as ‘secular stagnation’? Absolutely! So, why am I disagreeing with Eichengreen that “the principal culprits in the crisis were… lax supervision and regulation of US financial institutions and markets”?

The reason is that, in my estimation, any account of the crisis that fails to pose the following questions is dangerously incomplete: What explains the laxity in supervision or the gutless regulation of Wall Street? Why were banks kept on a tighter leash in the 1960s? Was there a steady loss of character by the regulators so that, by the 1980s, quasi-corrupt officials were turning a blind eye to the horrors committed in the name of financialisation by the latter’s priesthood? Is greed a fairly new human condition; one that was relatively absent from Wall Street prior to 1980? Even if all this were so, how do we explain the steady loss of character? Why did greed dominate when it did? What are the deeper causes of the, obvious, triumph of corrupt practices and of the evident moral decline amongst the regulators?

On the true causes of lax regulation and global imbalances

In 1971 US policy makers reached an audacious strategic decision: Faced with the rising twin deficits that were building up in the late 1960s (the budget deficit of the US government and the trade deficit of the American economy), Washington decided to turn a blind eye to them. To allow the deficits to rise and rise, rather than to impose the type of stringent austerity (as the Germans would have done) whose effect would be to shrink both the US deficits (budget and current account deficits) and America’s capacity to project hegemonic power around the world.

The question, of course, was: Who would pay for the red ink on America’s current account and federal budget? In my book The Global Minotaur (2011/13) I propose a simple answer: The rest of the world! How? By means of a permanent influx of capital ceaselessly funding America’s even increasing twin deficits. Why would investors from around the world send their money to Wall Street to finance American deficits? The answer is: Because Washington would pursue policies that predictably deliver to non-US investors, who chose to put their money in Wall Street, higher and safer returns than elsewhere.[1]

If my hypothesis is correct, the twin deficits of the US economy, in conjunction with Wall Street, 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 global scale, and required what Paul Volcker described vividly in 1978 as the prior “controlled disintegration of the world economy”, 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. In other words, it begat what we now call ‘global imbalances’.

Interestingly, these imbalances were no accident, assuming that my hypothesis holds water. Fuelled by America’s twin deficits, they served the dual purpose of: (a) maintaining (indeed increasing) US hegemony, while (b) allowing global capitalism to achieve something resembling equilibrium. On the one hand the world’s leading surplus economies (e.g. Germany, Japan and, later, China) kept churning out goods that American consumers gobbled up. In this sense, the expansion of US deficits generated the increases in aggregate demand that kept the factories of the surplus countries in Asia and Europe going. On the other hand, almost 70% of the profits made globally by capitalists domiciled in Eurasian countries were then transferred back to the United States, in the form of capital flows to Wall Street. But for Wall Street to act as this ‘magnet’ of other people’s capital returns, it had to be unshackled from the US government’s 1960s-style stringent regulations. Once finance was unshackled, greed had a field day.

And here is the rub: Wall Street’s greed, as well as the laxity of regulation on behalf of the US government, are usually taken as ‘givens’; as socio-political processes somewhat exogenous to the dynamics of US capitalism and are explained, if at all, by a pop-sociology or ‘cultural studies’ of sorts . In sharp contrast, my argument is that the laxity of regulation, the so-called ‘revolving doors’ (that saw regulators turn bankers and vice versa), as well as the increasing greed of Wall Street personnel, were all by-products of a remarkable phenomenon: of the emergence of the first global hegemon whose strength grew in proportion to its… deficits; deficits that had to be financed by a constant influx of foreign capital in Wall Street; which in turn necessitated authorities that turned a blind eye upon Wall Street’s shenanigans.

The Crash

What was it that tripped up the Bretton Woods system, causing it to lose its footing and to collapse on 15th August 1971? The answer is: the US government’s inability to exercise self-restraint vis-à-vis its own capacity to exploit its  exorbitant privilege; its ability, as custodian of the world’s reserve currency, to print global public money at will so as to finance (without substantial new taxes) a stupendous military-industrial complex, the Vietnam war, Lyndon Johnson’s, otherwise splendid, Great Society policies etc..

And what was it that brought us the Crash of 2008? Again, it was an American failure at self-restraint. Only this time, it was not the US government’s failure (even if a case can be made that it happened on the US government’s watch) but of the private sector in general and of the banks in particular: The American financial sector failed spectacularly to exercise self-restraint vis-à-vis its capacity to exploit its newfangled exorbitant privilege: its ability, as custodian of global financialisation, to print global private money at will; a capacity that was functional to the maintenance of American hegemony and, therefore, one that was at odds with any serious type of regulatory constraint upon the bankers.

Conclusion

Global imbalances were not the cause of the Crash of 2008. However, their diminution is, equally, no sign that the world is re-balancing. A quick look at excess savings and excess labour, in the United States, in Europe and in Asia, reveals the inconvenient truth that the world is out of kilter. As it was analytically feeble to argue, prior to 2008, that global capitalism was in a state of ‘equilibrium imbalance’, it is today inane (even insulting) to claim that we are shifting toward a state of ‘equilibrium balance’ – see also M. Pettis’ excellent book The Great Re-balancing (2013). Before 2008, the observed unbalanced equilibrium was pregnant with the instability brewing, by necessity, inside the circuits of finance. Today, once more, the observed tendency towards balance (at least in current accounts) is a symptom of vicious underground forces that are begetting disequilibrium, despondency and discontent in the core of our societies.

References:

B. Eichengreen (2014). ‘Requiem for Global Imbalances’, Project Syndicate at project-syndicate.org, 13th January 2014; last accessed 27th January 2014, at URL: http://www.project-syndicate.org/commentary/barry-eichengreen-notes-that-a-decade-after-external-imbalances-emerged-as-a-supposed-threat-to-the-global-economy–the-problem-has-disappeared

M. Pettis (2013). The Great Re-Balancing: Trade, conflict and the perilous road ahead for the world economy, New Jersey: Princeton University Press

Y. Varoufakis (2011/2013). The Global Minotaur: America, Europe and the Future of the World Economy, London and New York: Zed Books (second edition, 2013)


[1] Click here for the last chapter of the latest edition in which I outline this hypothesis fully.)

20 thoughts on “Is the World Re-balancing?

  1. Yani,
    Would your “Rebalancing involve the liquidation of Trioka visitations, dismissing these highly paid bailiffs and an official apology to the people’s of Europe for their pain & suffering??

  2. Yani, you wrote: “of the emergence of the first global hegemon whose strength grew in proportion to its… deficits; deficits that had to be financed by a constant influx of foreign capital in Wall Street; which in turn necessitated authorities that turned a blind eye upon Wall Street’s shenanigans.”

    Which U.S. deficits “had to be financed by a constant influx of foreign capital in Wall Street”?

    As I am sure you know very well, post-1971 and the final abandonment of U.S.$ convertibility, U.S. Government deficits do have to be ‘financed’ at all, let alone by ‘foreign capital’. With an external sector deficit, for the domestic private sector to be in surplus, the U.S. govt sector HAD to be in deficit. Some of the U.S.$ reserves accumulated by the exporters to the U.S. found themselves ‘invested’ in offerings invented, ‘produced’ and marketed by “Wall Street”. They didn’t “finance” the U.S. govt budget deficit.

    Unless I am missing something or have misunderstood the basic national accounting identities, of course.

  3. Pingback: Wednesday READ – 29 January 2014 » 99GetSmart

  4. In your book and this post you characterize US deficit policy as a strategic decision as it most certainly was. What was the alternative though? By practicing domestic fiscal restraint in order to reduce its deficits the US would cause a global shortage of dollars and since dollar was -and still is- the primary global reserve currency the world would experience a global recession. It’s the essence of the Triffin dilemma and the world economy without a doubt has been better off with the US running trade deficits, not the other way around. Of course this has the natural result of great imbalances in capital flows that cause financial crisis from time to time. Could they be avoided with better market supervision? Maybe, we’ll never know. The only true alternative is a complete redesign of the global financial system. Ideally this would follow Keynes’s Bretton Woods proposal of a true international reserve currency. As one can guess, this is something that will not go down easily in the US. Is it possible for the world to somehow stumble its way to a de facto situation of three basic reserve currencies (yuan, euro and dollar) and some semblance of equilibrium of international trade between their respected monetary spaces in order to avoid major future crisis like the one of 2008?

  5. Another excellent article!

    The only area where I sort of disagree is that I believe what finance does shouldn’t matter. In other words I’d seek to further disconnect finance from the real economy rather than make finance “stable” or “prudent” or fitting any other quality. I believe the hurt in the 2008 crisis happened when governments, especially misguided ones in the Deutschezone and the UK, exchanged financial losses with real-world austerity.

    Real world goods and money flows matter, as do real expectations. Financial losses and speculation are just numbers. If we had a financial (as in securities) system properly disconnected from monetary issue and payments then bubbles and crashes would transfer idle savings between idle savers with neutral effect on the real world.

  6. Sure, the state and financialmarkets worked hand in hand. I do not know why both would not share the blame equaly. Banks were intentionaly allowed to do just what you described in order to keep hegemony going.
    There are couple of points that you did not include. Australia and Canada have even larger home debt and even larger home prices but their banks did not colapse. why?
    Second; Volcker kept rates much above Taylor rule rate for 5 years after the inflation had subsided. This acctually started Summers’ secular stagnation. Wages were surpresed thanks only to such too high rates that kept many firms in the red. (interest rates above profit rates for given employment). He could have raised requerd reserves with much better eficiency instead of keeping rates high. There is a story that Volcker said: We have a chance now to keep inflation down for good. He did it with rate much above Taylor rule for 5 years.

    Australia and Canada did not have financial crash even with bigger house bubble. Reason is clear, they did not allow for wages to decline for 30 years. Aus has minimum wage of $AUS 16 which is about $US 18. They did not wage class war.
    Clearly USA could keep hegemony without domestic deficit, without allowing wages to stagnate.
    Is USA actually listening recomendations from Club of Rome?

  7. A question: when you speak about the mountain of idle savings, are you taking into account the unrecognized mountain of losses that will sooner or later be officially recognized as indebted sectors (Greece’s state, Spain’s households and state and private companies, American households…) default on their debts? Is the mountain of savings substantially larger than those losses? Slightly larger? Smaller?

    • I hope you noticed that I refereed to two mountains – one of debts/losses and another of idle savings. The problem is that those liable for the debt/losses (states and indebted, poorer, households) are not the same entities that have stashed idle savings. And this is the problem. When the net savings of the more powerful are not invested in order to create jobs and income for the indebted weaker ones, the latter are forced to default and the former worry even more about their savings (intensifying their investment strike). Nothing good comes out of such a mess.

    • Yanni,

      Draw an analogy to the weather. The minute you have differences between two regions you get currents flowing. Currently there is a huge risk differential between the south of Europe and the north of Europe + the US. This risk differential got triggered with the crisis and was reinforced by the handling of the crisis. Its causes though are often deeper and in the case of Greece for example go back to corrupt politicians as well. All was good until the crisis hit.

      So what you describe as the two mountains is really the result of a very dynamic system that allocates money and investment.

      Nothing wrong with the allocation, it makes sense you would do the same with your money. In fact Mr. Stathakis a Syriza parliamentarian (for the readers Syriza is the left opposition party that is now ahead at the polls in Greece) has a 500K investment account in one of the prestigious investment firms in the US (the same firm that was hired as an independent agency to audit Greek banks).

      If Europe woke up one morning and delivered a blessing to all its banks and made a statement that all money is secure and that all banks will be backed by a common mechanism and not by bankrupt states then you could essentially change the dynamics and maybe get Mr. Stathakis to bring his 500K from the mountain of surpluses back in Greece to help solve the problem with the mountain of debt.

      The same applies to investment and in such a way you help re-balance the system that as you say if left out of hand can cause extreme harm.

      Of course European policy is only one tool, you need to also have honest politicians, rules regulation and taxation that reward investment, to get a country like Greece to attract money and investment at the same rate that it attracts tourists.

      The challenge is how to manage the dynamic systems to create the balance.

      In the case of the US there is another imbalance. That is between the beneficiaries of the money printing operation of Bernanke who are the very wealthy, people like W. Buffet who are 200% invested in the markets and the workers that have little to no investments and also get no interest on any of their bank savings as rates are set to 0.

    • Very good question. The issue is extremely complicated. I have to ask: What about the IMF’s and Bundesbank’s proposal of utilising said deposits through a haircut of 10% to write down debt? The bail-in banking resolution model is designed along these lines in the eurozone.

    • Yes you are right. But what I meant is that the savers are often also creditors. When the defaults happen, they’ll have to use their savings to compensate for the unrecoverable credits. So, depending on the defaulted amounts, their net position, the actual wealth, could be quite small or even negative. And I can understand that investing their savings would improve the chances of getting their credits back… but what if the defaults happen anyway and they don’t have the savings to compensate for it.

      You speak of $5 trillion in idle savings. Spain’s total debt alone is €4 trillion. Not that I think that it’s going to default nearly all of its debt, but there’s algo Italy and Greece and US and Japan…

      Thank you for this article!

  8. Yanis, on one point I have to forcefully disagree with you. You put Paul Volcker in line with morally declining regulators. I think the opposite is true. Volcker was the last regulator (or rather Fed Chairman) of unquestionable ethical and moral values. The classic responsible public servant. Not only did he wring out – at great economic pain – dramatic US inflation but he also supervised the largest bank failure before Lehman in an admirable way. I can judge this because that bank happened to be my employer at the time. Volcker was the type of public servant in whose presence top Wall Street bankers got sweaty hands, as they should when in the presence of their top regulator. Volcker was a completely down-to-earth common sense individual. “Bankers don’t have to be smart; they should be safe” could have been invented by him. When asked some time ago what all this financial innovation had brought the world, he said something like “I think the invention of the ATM did more good for the world than all the financial innovation taken together”. That was so typical of him! About 25 years ago, I had the opportunity to sit next to him at a small luncheon. The man was just so ordinary and down-to-earth!

    I would argue that, had Paul Volcker remained Fed Chairman to this day, we would not have seen all the irresponsible financial deregulation and neither would we have seen Lehman and the rest of the crisis.

    • Dear Klaus,

      You are right. Even before you posted this comment, I had removed my reference to Volcker, because on re-visiting my post I realised that I was being unfair to him. (In any case, anyone who has read my Minotaur will know that Volcker is one of my heroes in that book.) What I had meant to say was that the great transformation which saw the US actively boost its deficits as a means of attracting capital flows and projecting its hegemony on the basis of deficits, had started under Volcker – who had foreshadowed that transformation in the early 1970s. In this new paradigm, to which Volcker was a critical contributor, required looser regulations of the financial sector – of Wall Street. Indeed, the abuses had began under Volcker’s watch. But I do take your point that, had Volcker been re-appointed, he would have tried his best to rein them in. And this is of course why he was not re-appointed.

      Thanks for the post though.

  9. I have a few of questions for you (some of them are yes-or-no)

    (A) Is is fair to caricature your thesis as follows?

    Saver R (rich gal) was financing P’s production (be it homeowner, manufacturer etc) via an agent A (the globalized financial system). But A misallocated these investments and they incurred losses.
    Trust in A fell and R stopped investing and keeps her capital liquid. Meanwhile, A is complaining that he is a really-really honest person at heart but lax rules by Big Bad Government(tm) caused him to err, which he deeply regrets, won’t do it again etc etc.

    In the meantime, P is in deep trouble because she cannot repay her loans and sits idle, not exploiting productive resources.

    (B) If this is a fair caricature of your argument, then (failing to see a new policy recommendation in this article I am extrapolating from the MP) do I understand that you propose to substitute A by a number of state-based institutions, call them agent G, that will re-channel R’s funds towards P’s productive needs, re-energizing A in the process?

    (C) What if ideology does not endorse such a substitution of A’s function by G, and thus it does not happen? Is time relevant here? Or, is it your considered opinion that P should wait indefinitely for either a gestalt in ideology, energizing G, or, until A regains the good graces of R? Intuitively I feel that one of the two will happen _eventually_, but are these choices (assuming capitalism) the only game around?

    (D) In an attempt to tease an alternative answer at C, how would you comment on a different state-based approach, based on taxation, capital controls etc? Naturally, ideology is even more vehement against such an approach that it is against C, but is pushing such an alternative a viable threat to curb resistance to C (vis. a vis Roosevelt’s experience at selling the New Deal by leveraging the pressure by unions and communists)?

    (E) I see that more macro-economists are starting to pay attention to distributional issues (of assets, income and debt) than before. Is this story of (micro-) inequality not relevant to the Global Balances story?

    [N.B It is hard for me to swallow that even progressive economists such as Krugman are holding opinions like “each liability is also an asset, so debt doesn’t matter”–isn’t his view just like trickle down economics, the “rising sea lifts all boats” crap? (btw, what a bad analogy, anyone who has ever been to sea–like many of us Greeks–knows that a rising sea *sinks* small boats)]

    • Vasili,

      Well said, the issue in Europe is that you cannot punish a state aka Greece and all its people for failure in government and corruption at all the top levels.

      You have to understand the negative dynamic system and stop it before it does more damage. This can be done at the policy level.

      Economists like Krugman ignore the fact that dynamic systems tend to overshoot and create bubbles. They are happy to press for more and more money printing and when the imbalance is created like with the mortgage crisis they stand to the side wondering how it happened. And then they get Nobel prices.

    • @Κωνσταντινος

      Actually, I was not referring to Greece. It just struck me as surprising that Yannis’ analysis of Global Recycling seems to downplay distributional issues. These issues were central (for or against) in the philosophy of the Bretton Woods participants but seem to be ignored today.

      To be fair, in the Minotaur book (which I have yet to re-read) Yannis does discuss distribution of wealth, but somehow this seems peripheral or orthogonal to the main Recycling/Rebalancing debate.

  10. Reblogged this on Arijit Banik and commented:
    As we witness the latest sell off of securities, concern ourselves with frothy valuations, and fret over FED ‘tapering’ –another nugget from Bernanke’s lexicon mine– we need to consider that rumours of global rebalancing and sustainable recovery are greatly exaggerated. Read the latest post by Yanis Varoufakis

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