[…]
Yanis
Varoufakis is a Greek economist who currently heads the Department of Economic
Policy at the University of Athens. From 2004 to 2007 he served as an economic
advisor to former Greek Prime Minister George Papandreou. Yanis writes a
popular blog which can be found here.
His latest book ‘The
Global Minotaur: America, the True Origins of the Financial Crisis and the
Future of the World Economy’ is available from Amazon.
Interview conducted
by Philip Pilkington
Philip
Pilkington: In your book The Global Minotaur: America, The True Origins of
the Financial Crisis and the Future of the World Economy you lay out the
case that this ongoing economic crisis has very deep roots. You claim that
while many popular accounts – from greed run rampant to regulatory capture – do
explain certain features of the current crisis, they do not deal with the real
underlying issue, which is the way in which the current global economy is
structured. Could you briefly explain why these popular accounts come up short?
Yanis
Varoufakis: It is true that, in the decades preceding the Crash of 2008, greed
had become the new creed; that banks and hedge funds were bending the
regulatory authorities to their iron will; that financiers believed their own
rhetoric and were, thus, convinced that their financial products represented
‘riskless risk’. However, this roll call of pre-2008 era’s phenomena leaves us
with the nagging feeling that we are missing something important; that, all
these separate truths were mere symptoms, rather than causes, of the juggernaut
that was speeding headlong to the 2008 Crash. Greed has been around since time
immemorial. Bankers have always tried to bend the rules. Financiers were on the
lookout for new forms of deceptive debt since the time of the Pharaohs. Why did
the post-1971 era allow greed to dominate and the financial sector to dictate
its terms and conditions on the rest of the global social economy? My book
begins with an intention to home in on the deeper cause behind all these
distinct but intertwined phenomena.
PP: Right,
these trends need to be contextalised. What, then, do you find the roots of the
crisis to be?
YV: They are
to be found in the main ingredients of the second post-war phase that began in
1971 and the way in which these ‘ingredients’ created a major growth drive
based on what Paul Volcker had described, shortly after becoming the President
of the Federal Reserve, as the ‘controlled disintegration of the world
economy’.
It all began
when postwar US hegemony could no longer be based on America’s deft recycling
of its surpluses to Europe and Asia. Why couldn’t it? Because its surpluses, by
the end of the 1960s, had turned into deficits; the famous twin deficits
(budget and balance of trade deficits). Around 1971, US authorities were drawn
to an audacious strategic move: instead of tackling the nation’s burgeoning
twin deficits, America’s top policy makers decided to do the opposite: to boost
deficits. And who would pay for them? The rest of the world! How? By means of a
permanent transfer of capital that rushed ceaselessly across the two great
oceans to finance America’s twin deficits.
The twin
deficits of the US economy, thus, operated for decades like a giant vacuum
cleaner, absorbing other people’s surplus goods and capital. While that
‘arrangement’ was the embodiment of the grossest imbalance imaginable at a
planetary scale (recall Paul Volcker’s apt expression), nonetheless, it did
give rise to something resembling global balance; an international system of
rapidly accelerating asymmetrical financial and trade flows capable of putting
on a semblance of stability and steady growth.
Powered by
America’s twin deficits, the world’s leading surplus economies (e.g. Germany,
Japan and, later, China) kept churning out the goods while America absorbed
them. Almost 70% of the profits made globally by these countries were then
transferred back to the United States, in the form of capital flows to Wall
Street. And what did Wall Street do with it? It turned these capital inflows
into direct investments, shares, new financial instruments, new and old
forms of loans etc.
It is through
this prism that we can contextualise the rise of financialisation, the triumph
of greed, the retreat of regulators, the domination of the Anglo-Celtic growth
model; all these phenomena that typified the era suddenly appear as mere
by-products of the massive capital flows necessary to feed the twin deficits of
the United States.
PP: You seem
to locate the turning point here at the moment when Richard Nixon took the US off
the gold standard and dissolved the Bretton Woods system. Why is this to be
seen as the turning point? What effect did de-pegging the dollar to gold have?
YV: It was a
symbolic moment; the official announcement that the Global Plan of the New
Dealers was dead and buried. At the same time it was a highly pragmatic move.
For, unlike our European leaders today, who have spectacularly failed to see
the writing on the wall (i.e. that the euro-system, as designed in the 1990s,
has no future in the post-2008 world), the Nixon administration had the sense
to recognise immediately that a Global Plan was history. Why? Because it was
predicated upon the simple idea that the world economy would be governed by (a)
fixed exchange rates, and (b) a Global Surplus Recycling Mechanism (GSRM) to be
administered by Washington and which would be recycling to Europe and Asia the
surpluses of the United States.
What Nixon
and his administration recognised was that, once the US had become a deficit
country, this GSRM could no longer function as designed. Paul Volcker, who was
Henry Kissinger’s under-study at the time (before the latter moved to the State
Department), had identified with immense clarity America’s new, stark choice:
either it would have to shrink its economic and geopolitical reach (by adopting
austerity measures for the purpose of reigning in the US trade deficit) or it
would seek to maintain, indeed to expand, its hegemony by expanding its
deficits and, at once, creating the circumstances that would allow the United
States to remain the West’s Surplus Recycler, only this time it would be
recycling the surpluses of the rest of the world (Germany, Japan, the oil
producing states and, later, China).
The grand
declaration of 15th August 1971, by President Nixon, and the message that US
Treasury Secretary John Connally was soon to deliver to European leaders (“It’s
our currency but it is your problem.”) was not an admission of
failure. Rather, it was the foreshadowing of a new era of US hegemony, based on
the reversal of trade and capital surpluses. It is for this reason that I think
the Nixon declaration symbolises an important moment in postwar capitalist
history.
PP: The old
banking proverb: “If you owe a bank thousands, you have a problem; owe a bank
millions, the bank has a problem” comes to mind. Was this, then, the end of the
hegemony of the US as lender and the beginning of the hegemony of the US as
borrower? And if so, does this provide us with any insights into the financial
crisis of 2008?
YV: I suppose
that Connally’s “It’s our currency but it is your problem” turned out to be the
new version of the old banking adage that you mention. Only there is an
important twist here: in the case of the banks, when they fail, there is always
the Fed or some other Central Bank to stand behind them. In the case of Europe
and Japan in 1971, no such support was at hand. The IMF was, let’s not
forget, an organisation whose purpose was to fund countries (of the periphery
mostly) that faced balance of payments deficits.
Connally’s phrase
was aimed at countries that had a balance of payments surplus in relation to
the United States. Additionally, when a heavily indebted person or entity tells
the bank that it is the one with the problem, and not the indebted, this is
usually a bargaining ploy by which to secure better terms from the bank, a
partial write down on the debt etc. In the case of Connally’s trip to Europe,
shortly after the Nixon announcement, the United States was not asking anything
from Europeans. It was simply announcing that the game had changed: energy
prices would rise faster in Europe and in Japan than in America, and relative
nominal interest rates would play a major role in helping shape capital flows
toward the United States.
The new
hegemony was thus beginning. The hegemon would, henceforth, be recycling other
people’s capital. It would expand its trade deficit and pay for it via the
voluntary flows of capital into New York; flows that began in earnest
especially after Paul Volcker pushed US interest rates through the roof.
PP: And this
new hegemony grew almost organically out of the preeminence of the dollar as a
world reserve currency that had grown up in the post-war years, right? Could
you say something about this?
YV: The ‘exorbitant
privilege’ of the dollar, courtesy of its reserve currency status, was one of
the factors that allowed the United States to become the recycler of other
people’s capital (while America was busily expanding its trade deficit). While
crucial it was not the only factor. Another was the United States’ dominance of
the energy sector and its geostrategic might. To attract wave upon wave of
capital from Europe, Japan and the oil producing nations, the US had to ensure
that the returns to capital moving to New York were superior to capital moving
into Frankfurt, Paris or Tokyo. This required a few prerequisites: A lower US
inflation rate, lower US price volatility, relatively lower US energy costs and
lower remuneration for American workers.
The fact that
the dollar was the reserve currency meant that, in a time of crisis, capital
flew into Wall Street anyway (as it was to do again years later when, despite
Wall Street’s collapse, foreign capital rushed into Wall Street in the Fall of
2008). However, the volume of capital flows that had to flood Wall Street (in
order to keep the US trade deficit financed) would not have materialised had it
not been for the capacity of the United States to precipitate a surge in the
price of oil at a time when (a) US dependence on oil was lower than Japan’s or
Germany’s, (b) most oil trades were channeled via US multinationals, (c) the US
could suppress inflation by raising interest rates to levels that would destroy
German and Japanese industries (without totally killing American companies) and
(d) trades unions and social norms that prevented a ruthless suppression of
real wages were far ‘softer’ in the US than in Germany or Japan.
PP: You write
in the book that US officials were actually not that concerned about the rising
oil prices in the 1970s, why do you say this? And do you think that the recent
speculative pressures on oil and food prices – emanating from Wall Street
itself – have been largely tolerated by US officials for similar reasons?
YV: The
reason is in the old joke that has one economics professor asking another “How
is your wife?” and receives the reply: “Relative to what?” The whole point
about attracting capital and gaining competitiveness over another company or,
indeed, another country, is that what matters is not absolute but relative
costs and prices. Yes, the US authorities were concerned about inflation and
oil prices. They did not like their increases, especially when they could not
control them fully. But there was one thing that they feared more: An incapacity
to finance the growing US trade deficit (that would result if the returns to
capital were not improving relative to similar returns elsewhere). It was in
this context that their considered opinion was that a hike in energy prices, to
the extent that it boosted German and Japanese costs more than it did US costs,
was their optimal choice.
As for the
comparison with the recent rise in oil and, primarily, food prices, I think
this is quite different. For one, I do not see what US interests are being
served by the ways in which derivatives in the Chicago marker are pushing food
prices to a level that threaten the Fed’s quantitative easing strategy courtesy
of the inflationary pressures they are causing. Additionally, back in the early
1970s, the US government was far more in control of financial flows and
speculative drives than it is today. Having allowed the genie of
financialisation out of the bottle, US authorities are watching it wreak havoc
almost helplessly – especially given the inherent ungovernability of the United
States, with Congress and the Administration locked into mortal combat with one
another. In sharp contrast, back in 1971-73, the US government had a great deal
more authority over the markets now.
PP: I’d like
to move on to what I think is the key point of your book: namely, that the rest
of the world is funding the US’s twin deficits – that is, the rest of the world
is funding both the US trade deficit and the US government deficit.
When the twin
deficits began to open up in the US there was a fundamental change in the
nature of the US economy. Could you talk about this a little?
YV: The
change was earth-shattering for America’s social economy. The strategy of
allowing the deficits to expand inexorably came hand-in-hand with a series of
strategies whose purpose was, quite simply, to draw into the United States the
capital flows, from the rest of the world that would finance these growing
deficits. In my book I tried to detail four major strategies that proved
crucial in generating the capital tsunami which kept America’s deficits
satiated: (1) a global boost in energy prices that would affect
disproportionately Japanese and German industries (relatively to US firms), (2)
a hike in America’s real interest rate (so as to make New York a more
attractive destination for foreign capital), (3) a much cheapened American
labour that is, at once, greatly more productive, and (4) a drive toward Wall
Street financialisation that created even greater returns for anyone sending
capital to New York.
These
strategies had a profound effect on American society for a variety of reasons:
To keep real interest rates high, the nominal interest rate was pushed upwards
at a time that the administration, and the Fed, engineered a reduction in
wages. The increasing interest rates shifted capital from local industry to
foreign direct investment and transferred income from workers to rentiers. The
cheapening of labour, which also necessitated a wholesale attack against the
trades unions, meant that American families had to work longer days for less
money; a new reality that led to the breakdown of the family unit in ways which
had never been experienced before. The more family values were becoming the
emerging Right’s mantle, the greater their destruction at the hands of the
Global Minotaur that the Right was keenly nourishing.
The loss of
wage share meant, moreover, that families had to rely more greatly on their
home as a cash cow (using it as collateral in order to secure more loans) thus
turning a whole generation away from savings and towards house-bound leverage.
A new form of global corporation was created (the Wal-Mart model) which
imported everything from abroad, used cheap labour domestically for manning the
warehouse like outlets, and propagated a new ideology of cheapness. Meanwhile,
Wall Street was using the capital inflows from abroad to go on a frenzy of
lucrative take-over and merger activity which was the breeding ground for the
financialisation which followed. By combining the domestic hunger for credit
(as the working class struggled to make ends meet, even though they worked
longer hours and much more productively than before), a link was created
between financial flows built upon (i) the humble home of the bottom 60% of
society and (ii) the financial inflows of foreign capital into Wall Street. As
these two torrents of capital merged, Wall Street’s power over Main Street rose
exponentially. With labour losing its value as fast as regulatory authorities
were losing their control over the financial sector, the United States was
changing fast, losing all the values and ditching all the social conventions
that had evolved out of the New Deal. The world’s greatest nation was ready for
the Fall.
PP: You
mentioned the Wal-Mart model just now. In the book you make a good deal out of
this model. Could you explain to the readers why you do and what the
significance of it is for the broader economy?
YV: Wal-Mart
symbolises a significant change in the nature of oligopolistic capital. Unlike
the first large corporations that created wholly new sectors by means of some
invention (e.g. Edison with the light bulb, Microsoft with its Windows
software, Sony with the Walkman, or Apple with the iPod/iPhone/iTunes package),
or other companies that focused on building a particular brand (e.g. Coca Cola
or Marlboro), Wal-Mart did something no one had ever thought of before: It
packaged a new Ideology of Cheapness into a brand that was meant to appeal to
the financially stressed American working and lower-middle classes. In conjunction
with its fierce proscription of trades unions, it became a bulwark of keeping
prices low and of extending to its long suffering working class customers a
sense of satisfaction for having shared in the exploitation of the (mostly
foreign) producers of the goods in their shopping basket.
In this
sense, the significance of Wal-Mart for the broader economy is that it
represents a new type of corporation which evolved in response to the
circumstances brought on by the Global Minotaur. It reified cheapness and
profited from amplifying the feedback between falling prices and falling
purchasing power on the part of the American working class. It imported the
Third World into American towns and regions and exported jobs to the Third
World (through outsourcing). Wherever we look, even in the most technologically
advanced US corporations (e.g. Apple), we cannot fail to recognise the
influence of the Wal-Mart model.
PP: Finally,
where do you see us headed now as we emerge from the shadow of the Global
Minotaur?
YV: The
Minotaur is, of course, a metaphor for the strange Global Surplus Recycling
Mechanism (GSRM) that emerged in the 1970s from the ashes of Bretton Woods and
succeeded in keeping global capitalism in a rapturous élan; until it broke down
in 2008, under the weight of its (and especially Wall Street’s) hubris.
Post-2008, the world economy is stumbling around, rudderless, in the absence of
a GSRM to replace the Minotaur. The Crisis that began in 2008 mutates and
migrates from one sector to another, from one continent to the next. Its legacy
is generalised uncertainty, a dearth of aggregate demand, an inability to shift
savings into productive investment, a failure of coordination at all levels of
socio-economic life.
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