Is there Life After Money? A Summary, with comments, of Yanis Varoufakis’ The Global Minotaur: America, Europe and the future of the world economy, Zed Books
By Dr Paul Tyson, Honorary Associate Professor, Department of Theology and Religious Studies, University of Nottingham.
[Note that the cover displayed here is of the German edition. Click here for the main page on the book.]
Yanis Varoufakis is Professor of Economics at the University of Athens. His book, The Global Minotaur: America, Europe and the Future of the Global Economy (Zed Books, New York, 2013) provides the reader with a fascinating and accessible history of the global economy from 1929 to 2008. Varoufakis makes well defended claims explaining how the global economy is now broken, and why the usual orthodoxies concerning how global economics works, and who the good guys and the bad guys are, is not the real story. The persuasiveness of his argument rests on the manner in which he explains the logic of high global finance in both economic and geo-political terms whilst not neglecting how very human matters of value and purpose are expressed in the context of history and power. In short, his account gives us an integrated vision of what has happened and where we now are in which economics, politics and philosophy (as practical wisdom) are always dynamically related.
The history Varoufakis outlines has three eras. Firstly there is the Industrial Revolution to 1945 era which includes the capital ‘C’ global financial Crisis of 1929 and two capital ‘W’ global Wars. Then there is the post-war boom era of 1945 to 1971. This period he calls ‘The Global Plan’ era where the US is the surplus economy at the centre of the global economic order. Finally, there is ‘The Global Minotaur’ era from 1971 to 2008, the age of high finance, where the US is the deficit economy at the centre of the global economic order. The breakdown of the capacity of this last era to keep global finance in some sort of equilibrium now defines the prevailing uncertainties, devastations and conundrums of the present. In short, we live on the edge of the collapse of global finance and trade in its present form, so it would be wise of us to start thinking about how to live without money as we know it.
The first period examined focuses on the US because the 1929 experience of financial Crisis in North America heavily shaped the structure of the global economy which the US built after World War Two. The pre-history of the post-war era is defined by the growth of corporate, financialized capitalism. Here the new productive capacities of the industrial revolution re-configured the world of finance so that enormous projects – railways, power stations, telephone networks etc. – could access enormous investment funds. As grateful, no doubt, as we all are for power stations, the first flowering of the modern economy (1847 – 1929) was characterized by volatile cycles of bubbles and busts. Balancing forces in finance, regulation, commerce, government and industry so as to get the good out of high finance without producing catastrophic disaster was no easy challenge. The most spectacular bust born out of the marriage of new industry and high finance was the crisis of 1929. The Great Depression followed. By 1945 it was clear that it took massive government spending and the commandeering of industry for the war effort to lift the US out of its sustained economic dysfunction. The effectiveness of rejecting more ‘classical’ belt tightening, free market attempts to recover from Crisis found post-war US policy makers accepting a broadly Keynesian explanation of what went wrong in 1929 and how to fix it.
The post-Depression generation was very aware of the capacity for stock market speculation to conjure huge artificial profits where wealth became a function of the market itself rather than of real production. In the aftermath of the Great Depression it was clear that finance could not be simply left to its own free market profit driven devices, otherwise it readily became the dog that wags the tail of real production, real workers and real wealth. When finance facilitates the real economy it is a great boon, when the real economy becomes a subsidiary of finance, economic volatility and the cycle of bubble and bust cannot be avoided, sometimes resulting in the catastrophic destruction of the real economy upon which, ultimately, finance depends.
The US came out of World War Two as the global hegemon. Unlike Europe, its productive infrastructure was fully intact, its enterprising culture was primed and confident, and its military power was unrivalled. Thus the US used its dominance to set up a ‘Global Plan’ for stable international economic growth.[1] The US always had an eye to preserve its place of leadership within the new world order it set up at Bretton Woods in 1944, yet its plan was not narrowly nationalistic. Via its Marshal Plan and the rule of MacArthur the US financed the re-building of its former enemies – Germany and Japan – and incorporated them into the age of global prosperity it sought to build. The lesson of the Treaty of Versailles was well learnt.
The first key feature of the post-war boom was a stable exchange rate pinned to the gold standard where that standard was pinned to the US dollar at US$35 an ounce. This prevented speculative currency trading and the competitive devaluation of national currencies. The IMF was given the role of lending money to governments where there was an imbalances in national trade payments (national deficits occur when a country buys/spends more than it sells/produces) in order to keep both nations and the international system in balance. The second key feature of the post-war ‘Global Plan’ was what Varoufakis calls a Surplus Recycling Mechanism for putting the American trade surplus (the capital accrued from producing/selling more than a national economy buys/spends) to work abroad. This later mechanism meant that the US could re-export (in the form of capital transfers) some of the American trade surplus back to Europe and Asia in order to maintain both the health of America’s key allies and, importantly, their demand for American exports.One cannot overstate the centrality of The Surplus Recycling Mechanism to this post-war Grand Plan which was responsible for the longest, most stable, balanced growth period in the history of industrial societies. Essential to that success were the constant transfusions of capital by the US to support Germany’s and Japan’s economies and, moreover, its efforts to create and support vital zones around German and Japanese industries that could absorb German and Japanese surpluses. The EEC would have never been established otherwise. And when Mao Ze Dong prevented a similar vital zone to be created in China for Japan’s surpluses, Washington turned the US market over to Japan’s industry, at great cost to its own. This was no act of philanthropy toward Europe and Japan. It was rather a clear vision that hegemony requires that the hegemon recycles its surpluses so as to maintain its own industry’s aggregate demand.[2]
This astonishingly successful model finally ended when in August of 1971the US terminated the convertibility of its dollar to gold, allowing international currency exchange rates to float whilst the US dollar remained the reserve currency for global trade (particularly in the trade of oil and primary resources).[3]
Varoufakis locates the cause of the demise of ‘The Global Plan’ in the Vietnam war. As it is crucial to understand the ground on which the 1971 – 2008 global world order was set up I will quote Varoufakis extensively at this point.
Setting aside the appalling human suffering, the [Vietnam] war cost the US government around $113 billion and the US economy another $220 billion. Real US corporate profits declined by 17 percent, while, in the period 1965–70, the war-induced increases in average prices forced the real income of American blue-collar workers to fall by about 2 percent…
[The Vietnam war and President Johnston’s ‘Great Society’ spending on education, medical care and transport meant that] the government was forced to generate mountains of US government debt. By the end of the 1960s, many governments began to worry that their own positions (which were interlocked with the dollar in the context of the Bretton Woods system) were being undermined. By early 1971, liabilities exceeded $70 billion, whilst the US government possessed only $12 billion of gold with which to back them up.
The increasing quantity of dollars was flooding world markets, giving rise to inflationary pressure in places like France and Britain. European governments were forced to increase the volume of their own currencies in order to keep their exchange rate constant against the dollar, as was stipulated in the Bretton Woods system… Beyond inflationary concerns, the Europeans and the Japanese feared that the build-up of dollars, against the backdrop of a constant US gold stock, might spark a run on the dollar, which might then force the United States to drop its standing commitment to swapping an ounce of gold for $35, in which case their stored dollars would lose their value, eating into their national ‘savings’.
The flaw in the Global Plan was intimately connected to what Valery Giscard d’Estaing, President de Gaulle’s finance minister, called the dollar’s ‘exorbitant privilege’: the United States’ unique privilege to print money at will without any global institutional constraints. De Gaulle and other European allies accused the United States of building its imperial reach on borrowed money that undermined their countries’ prospects. What they failed to add was that the whole point of the Global Plan was that it should revolve around a surplus-generating United States. When America turned into a deficit nation, the Global Plan could not avoid going into a vicious tail spin.
On 29 November 1967, the British government devalued the pound sterling by 14 per cent, well outside the Bretton Woods 1 per cent limit, triggering a crisis and forcing the US government to use up 20 per cent of its entire gold reserve to defend the $35 per ounce of gold peg…
In August 1971, the French government decided to make a very public statement of its annoyance over US policy: President George Pompidou ordered a destroyer to sail to New Jersey to redeem US dollars for gold held at Fort Knox, as was his right under Bretton Woods! A few days later, the British government under Edward Heath issued a similar request (though without employing the Royal Navy), demanding gold equivalent to $3 billion held by the Bank of England. Poor, luckless Pompidou and Heath: they had rushed in where angels fear to tread! President Nixon was absolutely livid. Four days later, on 15 August 1971, he announced the effective end of Bretton Woods: the dollar would no longer be convertible to gold. Thus the Global Plan unravelled.[4]
August 1971 is a remarkable turning point in the operating dynamics of post-war global trade and finance. With astonishing audacity the US refused to relinquish its hegemony (which, after all, rising Europe and capitalist Asia were heavily invested in) but made the global system of trading balances operate in reverse. Instead of the US being the surplus economy around which global trade and finance operated, it became, after a decade of trauma, the deficit economy around which global trade and finance operated.
The signature of first world global economics between 1945 and 1971 was of stable currencies, genuine investment in productive industry and public infrastructure, and the firm priority of the real economy over speculative finance. This was a period of sustained economic growth, of minimal inflation, of high employment and of sustained real wage increase. All this was underpinned by the powerhouse of the generous surplus economy of the US. In contrast, the period from 1971 to 2008 turned these dynamics in reverse. Currency fluctuation and speculative trading of currencies took off, high finance became far more lucrative than real investment, real wages in the US have not increased since 1973 for blue-collar American workers, and inflation (particularly in property) and unemployment have become volatile again. Under Reagan the US massively enhanced its deficits by hugely increasing its military spending and giving generous tax cuts to the super rich, even whilst it largely abandoned social security reforms to protect the disadvantaged. Once money had no anchor to some real and price stable commodity (gold) the alchemy of high finance took off as money simply lost any contact with the real world of actual production and work. We have returned to the volatile ‘natural market’ conditions that produced the Crisis of 1929 with a vengeance. And what of Europe today? Spain, Greece, Cyprus, Ireland, Iceland are reeling under the destructive hand of speculative high finance in this volatile age, not by any inherently profligate or unrealistic tendency in their people. For Wall Street has become the thing that keeps us all alive, and even China is deeply enmeshed in it. Now global finance is one system and all the big banks of the ‘free world’ are playing high flying speculative games and no financial institution is safe should confidence be shaken and should derivative trading on its likely failure get going. Whomever high finance turns against – except, so it seems, the US Federal Reserve – will be ruthlessly sacrificed to the market.
There is another fact here that needs mentioning. America has completely superior global military power compared to any other nation on earth, so whilst the IMF does not tell the US to get its deficit in order or provide it with loans with austerity conditions that make its regime toxic to its electorate, who is going to tell the US that is not fair? The US does what suits it and we are all in their game and as their game defines the global economy and global geo-political reality, there is nowhere else to play if you don’t like America’s terms.
But I digress. Varoufakis calls the US’s deficit driven new economic system that governed the world economy between 1971 and 2008 the Global Minotaur for reasons we shall unpack shortly. First a little re-cap on the background of the post-1971 era.
One of the key lessons learnt from 1929 is that both deficits and surpluses in international trade must be dealt with so as to maintain some sort of overall equilibrium. Too much differentiation in the national economic viability between trading partners readily produces flights of capital from those nations that most needed it. In 1944 the British economist John Maynard Keynes proposed an international governing body that would impartially ensure that both deficits and surpluses do not get out of balance, thus preserving the stability of global trade. The US, being the uncontested winners of WWII and the economic powerhouse of the globe, rejected the idea that they should be subject to international governance. They happily set up (and controlled) the IMF to keep national deficits from getting out of hand, but they left surpluses unregulated because they were the surplus power at the centre of global trade. As we know, the generous investments of US money into the rest of the world worked very well until 1971.
1929 taught us that without a stable financial equilibrium supporting sustained confidence, the investment cycle of profit driven investment growth followed by uncapitalizable investment retraction becomes unstable leading to increasingly inflated booms followed by increasingly devastating busts. As the amplitude of fluctuations between bull/confidence/greed driven investment peeks and bear/retraction/fear driven troughs gets bigger, there comes a point at which the cycle breaks out of the bottom in such a way that nothing can re-direct it in an upwards direction. In the Global Plan era it was the manner in which the USA dealt with its surplus that provided an ongoing climate of investment safety for the global economy. The US re-invested its surplus productively in Europe and Asia in such a way as to expand a demand for its own products and services and keep a positive environment for investment rolling in global trade.
After 1971 the world’s economy underwent a decade of serious re-configuration (early 70s to early 80s) during which the US held on to its central position in global trade by making its national deficit the engine of the vitality of Wall Street. In this decade the US demonstrated that what matters for a global hegemon is that one is the biggest and the most leading force in global trade, not whether one runs a surplus economy or a deficit economy. Now frankly, I cannot follow Varoufakis’ arguments about how Wall Street managed to suck enormous amounts of global capital into merchant banking and keep the world rolling in a growth direction after the US become the largest global deficit nation in history, but my lack of comprehension is not because Varoufakis does not explain himself with beautiful clarity and solid evidence, it is because the magical world of finance itself is just too far out of my experience of reality to have any concrete lodging place in my mind. Indeed, I think this is probably why most ordinary voters, and most politicians, defer to economic specialists who – so we trustingly believe – know what is good for “the economy” (measured chiefly in terms of the profits and losses of corporate giants and high finance), whilst simply assuming that good economic medicine is then necessary for us.
Varoufakis explains how corporate consolidations, hedging and leverage, the ‘Walmart effect’, toxic money, collateralized debt obligations, astronomical real estate price rises, supply-side economics, etc., etc., were all developed and advanced through the astonishing innovations of partnerships between high finance in Wall Street and the US government. This dynamic invented the alternative to the Global Plan – an alternative way of keeping global trade surpluses ‘re-cycling’ so as to assure a positive investment environment – which Varoufakis calls The Global Minotaur. The time has come to explain the analogy.
In Ancient Crete, King Midas exerted power over his region because of his military superiority. However, he had a problem. There was a fearsome beast that lived in a maze in Crete called the Minotaur. This bull headed human bodied beast needed human sacrifices to keep it at bay. So, tribute nations were required to send a certain number of victims to feed the beast on a regular basis. The point of using this analogy for US power and Wall Street is that our hegemon of global trade swung from maintaining its position of leadership via generous re-investment that kept global trade in safe equilibrium, to an essentially predatory mechanism for upholding its hegemony and keeping global trade in equilibrium.
I was fascinated when thinking about this to reflect on another book I read some time ago by the Australian historian Manning Clarke. The last section of his short history of Australia is a reflection on how ‘a nation building state changed its mind’. Reflecting on the post-war boom up until the early 1980s, Clarke notes that this was an era of intense and productive public spending. In that era Australian governments paid for massive common wealth and public works projects – such as building hydro-electric power stations – which were built for the common good, which produced work, and which, by providing workers with incomes, injected money into the pockets of Australians which in turn fed economic growth. It was an era committed to nation building and to the protection and stimulation of Australian industry. The 1980s, by contrast, is the period where this trend is turned around and eventually reversed. Now Australian industries must be globally competitive or die, state assets are sold off, public utilities are handed over to private ownership, and facilitating the private profits of multi-national corporations and canny private investors becomes the central concern of government. This happened in the US and the UK in the 1980s too. Thinking back over the 1980s, there certainly were voices telling us what was going on – Michael Pusey’s Economic Rationalism in Canberra being a very good case in point – but what is most striking is the manner in which Australia simply changed political direction in order to maintain its place in the new global economic direction of flow produced by the unleashing of Wall Street from the speculative constraints of the pre-1971 era. Thus in 2014 Australia’s so called Labour Party is now astonishingly more deeply committed to private money and the outsourcing or sale of previously state owned common goods than anything the right wing side of politics even considered doing in the early 1980s. Now there is no nurturing of Australian industry, but government is all about producing an economic environment that financial power (multi-national corporations and high finance) wants, such that the world has become economically and politically predatory.
I say predatory because those things that high finance likes – the tune of fiscal necessities to which our governments dance – are usually achieved at the cost of ordinary tax payers. So moving production and services off shore is great for a corporation’s profitability but it decimates entire productive sectors of first world economies. Corporate take-overs make the stock market soar, but the new merged mega-entity is usually “restructured” and “rationalized” which inevitably sheds jobs. Less regulation does indeed facilitate staggering speculative profits for high finance but this environment stimulates speculative bubbles which produces fundamental economic instability for non-high flier citizens who rely on the real economy for their livelihoods. Enormous bonuses and salaries for the powerful players of the corporate world are paid because shareholders expect their CEOs and senior managers to produce greater efficiencies on the floor of the corporation which translates into more job cuts, increased performance pressure, fewer resources and shorter time frames for the people to work within who actually do the work of the corporation. And, of course, there is the relentless pressure to casualize the labour market, if, that is, the entire labour market of a corporation cannot be replaced by cheap off shore labour.
Indeed, in a country like Australia – whose economic indicators are apparently healthy – lower and middle income citizens cannot avoid noticing the spiralling cost of basic necessities. Water, rates, rent, fuel, transport, electricity, food are commandeering an ever greater proportion of household incomes. Since the 1980s, many previously state owned providers of public necessities were supposed to become more competitive when privatized and better for consumers. But as the common and necessary goods have been handed over to private hands or governments and councils that behave like private businesses, not surprisingly, the profit motive drives a monopoly markets in the provision of basic necessities to become ever more expensive for the consumer. Brisbane City Council’s massive price hikes in the cost of water is a case in point. So our ‘economic indicators’ – as measurements of total capital flows (most of which happens at the top end of the financial tower) – are healthy, but our citizens are paying ever more for basic goods and services.
The signs are everywhere apparent that in the era of the Global Minotaur a ‘healthy economy’ is code for a good time for the military, the exploitation of primary resources and multi-national corporations, at the expense of the people who underwrite high finance, the tax payers. Just before this year’s federal budget was handed down the Australian Prime minister committed $12 billion to buying new fighter planes in the interests of national security. The opposition raised no serious debate against this astonishingly expensive (for Australia) purchase. But when the budget is handed down it is clear that fiscal reality makes it inevitable that we cannot afford to be so generous to less financial Australians anymore. So we must slash social security benefits and public health care so that only the most desperate can get some access to these ‘hand outs’. Military expenditure and the astonishingly generous ‘bail out’ of private banks get near unlimited access to public money, but public money cannot be spent on the people who can’t afford to buy basic goods and services.
So, notes Varoufakis, between 1971 and 2008 the Global Minotaur did keep the world of global trade bubbling along, but at the cost of regularly sacrificing public money to the private sectors of high flying speculative finance and multi-national corporation’s (minimally taxed) mega-profits. Indeed, when it all came unstuck in 2008, it was tax payers who, without being asked, were commandeered to underwrite the attempted salvage of the US banking sector. But that salvage is a cosmetic patch over; it did not work.a
The Global Minotaur basically died of gluttony in 2008. The unimaginably large amounts of public money that have simply disappeared into the bowls of the private financial sector, without producing any real world economic positive investment, shows us that the Minotaur’s days are numbered. The apparent recovery of Wall Street is a very disquieting ‘business as usual’ manoeuvre in blind confidence which cannot be distinguished from simply putting one’s head in the sand. Nothing was done to take destructive speculative ‘financial instruments’ out of the hands of the financial ‘industry’, and nothing was done to bring the US into the same set of accountabilities that all other nations are required by the IMF to work under for the (supposed) sake of global stability. This means that the fundamental structural flaws in our global economy have not been addressed, so with the dynamic of economic crisis still playing itself out – particularly in Europe at present – one does not need to be an economic rocket scientist to see that a capital C global economic Crisis of unprecedented magnitude is still just sitting there waiting for its day.
Varoufakis has some very intelligent suggestions on how Europe might be saved, and on what might replace the Global Minotaur without plunging us into catastrophic global disaster. He does, of course, not expect to be heeded.
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A few concluding comments.
If Varoufakis is right – and certainly I found him persuasive – then we are now in an era of global economic uncertainty that is essentially unbalanceable and that will soon come unstuck with catastrophic consequences unless some very fundamental and very creative re-thinking and re-configuring of global power is worked out. History does not give us much hope for that. What powerful commanding combination of force and wealth has ever willingly divested itself of unfair advantage and of self preserving brutality? No, in history, over confidence produced by power and advantage always destroys its own power and advantage. Most tragically, history also tells us that epoch ending upheaval is nearly always accompanied by horrifying blood-letting and the unleashing of the dogs of war. In the context of modern weaponry and the enormous military power of the US, this could be unredeemably catastrophic.
Perhaps what we need to do is prepare as best we can for disaster and start thinking of alternative ways of doing production and economics without finance, without the global economy, perhaps without even national governments. This sort of epochal closure has happened before. The collapse of Imperial Rome in the 6th century AD threw Europe into the Dark Ages of inter-city anarchy for about 500 years. Yet, it was the monasteries that kept human communities and learning alive through that time. Out of those monasteries Europe rose from the ashes and into the high middle ages. But does the West have the spiritual resources necessary to produce civilizational preserving communities of hope, learning, meaning and humanity? This is the big question that faces us if we are to think about any continuation of Western life after the collapse of the prevailing global economic world order.
Of course, the West may have had its day. It might be India or China or South America or Islam, or African Christianity from whence the new seed of human community is planted. It would perhaps be just if, say, Australian Aboriginals inherit the Southern continent again. Then again apocalyptic fears may be justified in our day. Perhaps a single global electronic monetary system will be established in desperation to save the present global economy, and this might be established within the alliance of brutal power, total surveillance, even demonic spiritual energy that is brooding within the spirit of our times. Whatever happens it seems pretty clear that hoping for some preservation of the current status quo such that ‘business as usual’ can keep going is fatuous wishful thinking. Where are our great innovators and our true leaders now? Surely now is the time we need them. Then again, ‘great leaders’ did arise with solutions to the 1929 crash – such as Hitler. In unstable times the great leader can perhaps be the most dangerous of all answers. How can we think creatively, act radically and not give ourselves to some saviour figure of a fear and greed driven mass ideological movement? This, perhaps, is the challenge we now face.
NOTES
[1] The contest between Communism and the US in the Cold War was the theatre in which the only serious rival to US global dominance was played out. As we all know, the US decisively won that struggle against the USSR, now a shadow of its former self, and the ‘market economy’ reforms implemented by the Chinese Communist Party under Deng Xiaoping has made it possible for China to enter the global market place largely under the terms of trade which the US set up.
[2] This quote is from Varoufakis’ blog site titled “Thoughts for the post-2008 world”. The piece this quote is drawn from is “If greed did not cause it, what did?”, posted in 7 December 2010. Here is the web address of this piece: http://yanisvaroufakis.eu/2010/12/07/varoufakis-brisbane-talk-crisis-us-europe/
[3] As a student of 20th century politics back when I was an undergraduate in the 1980s I always thought that the oil price shocks of the early 1970s were what ended the post-war era of fabulous global economic growth and stability. Varoufakis points out that this was not so at all. The gold standard collapsed before the oil price rises, and caused those price rises. Indeed, Varoufakis explains why the US tacitly encouraged this rise in the price of oil and primary commodities in order to motor up its new deficit approach to global financial hegemony. See Varoufakis, The Global Minotaur, pp. 96 – 98.
[4] Varoufakis, Global Minotaur, pp. 92–94.
