On The Global Minotaur
In The Global Minotaur, written by the former Greek Minister of Finance Yanis Varoufakis, we get an economic vivisection of the modern area, starting from the Great Depression to 2008.
The Minotaur is a metaphor used by the author to describe “the reversal of the flow of trade and capital surpluses between the United States and the rest of the world.” Which is to say, the particular way in which the U.S. became a country with a deficit that craved for foreigner products and commodities but who, at the same time, was able to attract all the capital from those two surpluses in the form of financial investments to Wall Street. A kind of super vacuum cleaner that could absorb all the money of the world and, thus, create an unbalanced economy.
According to Minister Varoufakis, the modern era of economics could be, of course, traced back to the Great Depression, but particularly to the end of the Second World War and the rise of the U.S. as the most important country in the World. A country that was in a very favorable position to extend Roosevelt’s New Deal idea to, on a huge scale, stabilize a post-war and post-depression capitalist world that would turn around the dollar, but also would help Germany and Japan. Why strengthen your enemies? Mr. Varoufakis says that because both countries had the know-how and a traditional strong industry. I would add also because one the of the causes of the Second World War was that Germany had been economically mistreated after the First World War and because the enemy, the only real competitor of the US during 1945, was the Soviet Union. A country that was limited in the West by Germany and on the East by Japan. Like the two parts of a clamp holding its prey. Or, at least, two walls trying to contain it.
But aside from the need to limit the influence of the Soviet Union and to develop a market for U.S. surpluses, there was the problem of stabilizing the economy and saving capitalism from its greed. According to Mr. Varoufakis, “ politicians tried to find some way of lashing themselves to some imaginary mast - just as Odysseus had done so that he could listen to the Sirens Bewitching song without falling prey to the temptation to disembark onto their island. That mast was the Gold Standard.” Which is to say, the USA agreed to back the dollar to a particular ratio of gold. The dollar became automatically the reserve currency of the world. The only currency used in capitalist countries to buy commodities and the reference to exchange currencies. The way I see it, the dollar simply became gold.
This period, comprehended from 1944 to 1971, is called in the book The Grand Plan. This was not only ambitious in scope and great in its targets but also became extraordinarily successful, bringing to humanity one of our golden eras of growth and development.
Europe grew as it was hoped and Germany and Japan became the other two small engines of the World. Two engines that started to produce as many and as good of products that the U.S. had to look for a market to feed them. For Germany was Europe. And for Japan, it had to be countries in Asia but not Mao’s China.
Vietnam War and the European Union? Only two consequences, according to Varoufakis, of those U.S. ambitions for its protected Germany and Japan. But problems started when the Vietnam War spun out of control as well as with the rise of U.S. consumerism – as a result the country found itself with a twin deficit. One in commerce, by importing more that they were exporting. And the second one with a government that was expending more money than it had.
In 1971, some countries like France started to fear the U.S. did not have enough gold to back its dollars. There were too many dollars everywhere. So they sent a kind of battleship to New York to exchange dollars for gold. Not long afterward, the U.S. killed their own agreement signed in 1944 and left the Gold Standard.
In theory that could have triggered a devaluation of the dollar, but neither the German Deutsche nor the Japanese yen were big enough to substitute a dollar that had infiltrated all the veins of the system. So the dollar kept being the currency of the world while at the same time the United States was freed to do whatever they wanted with their money. Odysseus was not trapped anymore to a mast of moderation, and the beast, the minotaur, was born. Now the U.S. could buy as many products as they wanted with the only fear being the need to keep inflation in check. This process did take a long time to reign in, particularly in oil, which was a product that the U.S. started to consume as if it was an addict to drugs.
On the other hand, Germany and Japan learned to produce cars and machines that did not need much of oil, they went up on the technological ladder and learned to fight inflation with technology. Technology that they kept selling to a U.S., who didn’t know exactly what to do until the 80s when neoliberalism gave him the magic formula: Finance. Growing by more debt. More leverage and higher returns based on a fake risk-less risk. Lower operational costs by deregulating the system. Low inflation secured by using the dollar as the world’s reserve currency, higher computing power thanks to new technologies and lower taxes for investors. It worked like magic, and the U.S. began to attract more money than ever, producing such a strong economy that the Soviet Union collapsed when trying to compete with it. Neoliberalism became a religion, and the Minotaur kept absorbing the world’s surplus of capital, including those from a reborn China and many other countries liberated from communism.
By the end of the nineties, something miraculous happened; for the first time in decades, the US government had a surplus (during the glorious and infamous last Clinton years). Then came the dot-com bubble and the 2001 attacks. The U.S. started a war on terror that would hurt it financially the same way the Vietnam War did. The Minotaur began to absorb more money to produce bombs and also to produce houses, so the people were happy with the war. Deregulation spun out of control and millions of people were given credit to buy houses they couldn’t afford with mortgages they couldn’t pay. The bonds created for those mortgages were rated AAA by the only internationally recognized rating agencies, all three American...of course. That way, those AAA bonds had the equivalent value of money since they were, in theory, risk-less. And with the sweet addition that they could produce a return of investment. It was better than free money since banks only had to borrow money to buy those risk-less bonds and use them to back buying more bonds, up to infinite.
In 2007, many American homebuyers realized they could not repay the mortgage. The Crisis started and the insurance companies that had guaranteed those mortgages had to pay out, so the price of insurance also went up. Bond prices went down. Banks stopped giving more credit to buyers and a vicious circle was created. By the summer of 2008, it was clear the entire financial system of the world was infected by those bonds called CDOs.
The market crashed and, according to Minister Varoufakis, the Minotaur was badly wounded. U.S. purchasing power plummeted, and it stop importing as many products as it used to. The World needed a second engine to keep flying and China took the role. At least in terms of commodities, because in terms of capital the Crisis only exacerbated the unbalanced nature of the flow of capital. And here comes, according to me more than Varoufakis, the devilish genius of the United States. In a period of crisis, how do you convince people to invest in you? How do you convince companies to invest in you when you don’t give a high-interest rate since the Federal Reserve has reduced interest to stimulate the economy? Well, first you have a locked market that always worked in dollars to buy commodities. But also, you produce fear in investors. Fear that the situation in other markets like Europe or Japan was worse than in the U.S. The old story of two people running in the forest. One of them tries to escape from the horrible bear (market), but the other one is only worried about running just a little faster than the other person runs since the bear will catch only one. The U.S. was that second one. They made the world believe that the dollar was better than the Euro. How? Varoufakis doesn’t say it explicitly, but it’s my view that by pointing out to the markets that Greece, the weakest part of Europe, was about to collapse. And if Greece collapsed the whole of Europe could collapse, so the only option was to invest in dollars, which reminds me of former President of the Federal Reserve, Paul Volcker, when almost forty years ago said, “A controlled disintegration in the world economy is a legitimate object for the 1980.”
Juan Torregrosa Pisonero
Madrid, 21 December 2015