1b) Summary of the Book: ‘THE GLOBAL MINOTAUR’

This book, written by Yanis Varoufakis, the Greek ex-finance minister, looks at how the global capitalist system has been managed since the end of World War II.  From 1945 to 1971 the capitalist countries were organized as a formal currency union, known as the Bretton Woods system.  It was, however, more than a monetary union, and Varoufakis calls the ‘Global Plan’ the general economic arrangements uniting the countries in question, essentially what is known as the West.  Then from the late 70’s to 2008 this system was unilaterally replaced by an informal one which doesn’t have a name.  Varoufakis resorts to a mythological metaphor to find a name for it: ‘the Global Minotaur’.  The minotaur was a monster, half man and half bull, and that is quite revealing…..

Below is a summary of the book, which will allow the reader to get a good understanding of the two latest economic paradigms in historic terms, before we get into a more detailed economic analysis in the dedicated chapters, 3 and 4.  This summary will also explain why the Neoliberal paradigm has reached the end of its life after the 2008 financial collapse, a concept which is essential to grasp in order to understand the current economic, political and geopolitical turmoil (which will be the subject of chapter 5).


At the end of World War II the USA was the unquestioned hegemonic power.  Half of Europe was under the control of the Red Army and the rest lay in ruins.  The people in power in the USA were the generation who had experienced the Great Depression and implemented the New Deal.  They were painfully aware of how the capitalist system is prone to crisis and how the New Deal had only partially improved the situation, as the crisis in the end was only resolved with the outbreak of a devastating war.  Their main concern was to stabilize the capitalist countries and connect them into a resilient system, able to avoid another financial collapse, which they feared might prove fatal for capitalism given the presence of the Soviet Union.

The Global Plan would be based on a new monetary system (which replaced the gold standard) equipped with matching institutions and would have its solid economic foundations on the creation of two industrial areas (in addition to the already existing American one) around Germany and Japan.

Bretton Woods monetary system

In 1944 the famous conference of Bretton Woods was called, to design the new monetary and institutional framework. Two of the institutions designed at the conference, the IMF and the World Bank, are still in place.  However, the main one, the currency union, consisting of a fixed exchange rate regime with the dollar at its heart, is long gone, as it ended in 1971.  This was a system of fixed exchange rates, anchored to the dollar, which was in turn anchored to gold.  This is how it worked: 1)fluctuations would be allowed only within a narrow band of plus or minus 1%, and governments would strive to stay within this band by buying or selling their own dollar reserves.  A renegotiation of the exchange rate of a country was only allowed if it could be demonstrated that its balance of trade and its balance of capital flows could not be maintained, given its dollar reserves: 2) the International Monetary Fund would temporarily finance these imbalances, which the exchange rate rigidity was likely to bring about; 3) if a country found itself in a persistent external surplus, the IMF could authorize its trade partners to take protectionist policies against it (e.g., tariffs or quotas); 4) international capital movements (which greatly destabilise exchange rates) were restrained: 5) banking, finance, and the creation of credit money within each country were tightly regulated and restrained; 6)to create the requisite confidence in the system, the USA committed itself to pegging the dollar to gold at the fixed exchange rate of $35 per ounce of gold and to guarantee full gold convertibility on request from the participant countries’ central banks; 7) the participant countries declared the gold content of their currencies, and as a consequence the parity of their currencies with respect to the US dollar.

The most important consequence of the Breton Woods system is that as a matter of fact, due to its convertibility into gold, the US dollar became the main instrument of international liquidity, the money used for the settlement of international transactions, taking on the role that had been played by gold up to World War I.

Necessity for a Global Surplus Recycling Mechanism (GSRM)

The problem with currency unions is the simple fact of life that trade and capital flows can remain systematically unbalanced for decades, if not centuries.  Some regions within a country (e.g. the Greater London area in Britain) will always post a surplus in their trading with other regions.  So it is with states within federations (California will never balance its trade with Arizona).  Given that these trade imbalances are chronic, something has to give.  When each of these entities has its own currency, it is the exchange rate that gradually shifts in order to absorb the strain caused by trade imbalances (before the Euro, Germany’s persistent trade surplus with Italy resulted in a gradual devaluation of the lira relative to the Deutschmark).  However, once these economic regions are bound together by the same currency, another solution is required:  a mechanism for recycling the surpluses from the surplus regions to the deficit regions.  Such recycling might be in the shape of simple transfers (e.g. paying unemployment benefits in Yorkshire through taxes raised in Sussex).  Or, and this is much more desirable, it might be in the form of productive investments in the deficit regions (e.g. directing businesses to build factories in the north of England).

Keynes’ proposal

To avoid the above problems, at the Bretton Woods conference Keynes made a most audacious proposal: a formal, cooperative system for recycling surpluses, called the International Currency Union (ICU).  It featured a single currency (the Bancor) for the whole capitalist world, with a central bank and other matching institutions.  More than a surplus recycling mechanism it was a surplus prevention mechanism, a system that would facilitate automatic readjustments of trade imbalances by giving penalties (in the form of charging an interest rate) to countries with trade surpluses that exceeded a certain percentage of their trade volume and giving facilitations (in the forms of zero interest rate loans) to the countries in deficit, so that they could readjust their trade imbalances without having to resort to austerity measures.

The Global Plan – an informal, US dominated system

However, the USA, which emerged from the war as the world powerhouse, had no interest in restraining their capacity to run large, systematic trade surpluses with the rest of the world.  The US policy makers understood that the money from these surpluses needed to be recycled into the deficit countries, but they wanted to retain full control of how and where to recycle their trade surpluses, so as to keep the whole system under their control and to entrench their hegemonic position.  Obviously the American plan won the day, and instead of the Bancor, the dollar became the unofficial world currency and the USA set up an informal Global Surplus Recycling Mechanism (GSRM) based on the fact that they transferred their huge surpluses to their partners both in the form of aid (such as the Marshall plan) and in the form of direct investments.  This way the USA achieved two objectives: they helped Europe and Japan to re-build their economies, and provided them with the financial means with which they could buy American goods.

Three-zone network

The American officials responsible for stitching together the plan had an intense anxiety regarding the inherent instability of a single currency, single zone global system.  They wanted to avoid another Great Depression.  If a crisis of similar severity were to strike while the world of global capitalism had only one leg to stand on (the dollar) the future looked bleak, particularly in view of the significant growth rates of the Soviet Union, thus they decided to create a network comprising three industrial monetary zones, in which the dollar zone would be predominant (reflecting the centrality of American finance and its military role).  The other two zones would be centered around Germany and Japan and their respective currencies. These two zones would act as shock absorbers in case the American economy took one of its many periodic downturns.  However, strong currencies cannot be willed into existence.  They must be underpinned by heavy industry, as well as by adjacent trade zones, a form of vital space that provides the requisite demand for manufacturing products.  The reason why Germany and Japan were chosen (while Britain and France were pushed aside) is because at the end of the war these two countries were weak, devastated, despised and occupied, therefore in a good position to be completely dominated.  In addition, they both featured solid industrial bases, a highly skilled workforce and a people which would jump at the opportunity of rising, phoenix like, from their ashes.  Moreover, they both offered considerable geostrategic benefits vis-à-vis the Soviet Union. There was strong resistance against this idea (both inside the USA and on the part of its allies), grounded on the urge to punish Germany and Japan, but the start of the Cold War greatly helped the architects of the Global Plan to overcome this resistance and paved the way to re-industrialise the two conquered nations, making them into the Global Plan’s pillars.

Pillar 1: Germany/Western Europe

It is useful to think of the Marshall Plan (its formal name was European Recovery Program) as the Global Plan foundation stone, a massive aid package that was to change Europe forever.  During the fist year the sum involved was 2% of USA GDP ($5.3 billion). By 31/12/51, when it came to an end, $12.5 billion had been expended.  The end result was a sharp rise in European industrial output (about 35%), political stabilisation, and the creation of sustainable demand for manufacturing products both European and American.  The Marshall plan involved not only a great deal of money but also vital institutions.  Indeed the Americans’ condition for parting with about 2% of their GDP annually was the erasure of intra-European trade barriers and the commencement of a process of economic integration that would increasingly be centred around Germany’s reviving industry, particularly coal mining.  In this sense, the Marshall Plan may be regarded as the progenitor of today’s European Union.  After 3 years the plan’s architects judged that Europe was sufficiently dollarized.  In 1951 it was decided that it was time to wind down the Marshall Plan and start phase 2 of the American design for Europe: integration of its markets and its heavy industry.  That second phase came to be known as the European Coal and Steal Community.  This new institution was soon to provide the vital space that the resurgent German industry required in its immediate economic environment. From 1951 onwards the cartelisation centred on Germany’s resurgent industry would generate enough surplus for Europe to move ahead on its own.

Pillar 2: Japan

While Japan’s industry (and infrastructure) emerged from the war almost intact (in sharp contrast to Europe’s), it was plagued by a dearth of demand.  The New Dealers’ original idea was that the Chinese mainland would provide the yen-zone with its much needed vital space, just as the rest of Europe was to provide Germany’s factories with the requisite markets. However, Mao’s Revolution in China took away this possibility but soon afterward the war in Korea provided the first opportunity to boost Japanese industry.  The Marshall plan was wound down in Europe and the funds were shifted to Japan, whose new role would be to produce the goods and services required by US forces in Korea.  The US transfers to Japan were quite handsome: they amounted to almost 30% of Japan’s total trade.  New institutions were also created:  the famed Ministry for International Trade and Industry built up a powerful, centrally planned (but privately owned) multi-sector industrial base.  In order to provide Japanese industry with the necessary markets, the USA administration clashed with, among others, Britain, to have Japan admitted to the WTO’s predecessor (the Genral Agreement of Tariffs and Trade).  This move was very important, as it allowed Japanese goods to be exported with minimal restrictions wherever the United States considered would be a good destination.  In addition, Washington decided to turn America’s own market into Japan’s vital space.  Indeed, the penetration of Japanese imports (cars, electronic goods, even services) into the US market would have been impossible without the consent of Washington’s policy makers.  Eventually also the Vietnam war was used to boost Japanese industry.  A by-product of that murderous venture was the industrialization of South East Asia, which further strengthened Japan by providing it, at long last, with a commercial vital zone in close proximity.

To sum up, the US administrators took audacious steps to create a 3 zone system of cooperation: they provided their ex-enemies with the initial liquidity necessary to restart their industrial engines, they ensured that Europe and US controlled Asia were well stocked with US dollars, so that they could buy German and Japanese exports, and also high value added American goods (airplanes, armaments, construction equipment).  In addition, they founded the new political institutions that were needed. Never before in history has a victor supported the societies that it had so recently defeated in order to enhance its own long-term power, turning them, in the process, into economic giants.

The role of the Third World

Regarding the colonized world, the USA emerged from WWII with a healthy respect for it, and hostility for its European colonizers.  However, this attitude was soon to change as the goal of securing unhindered energy and raw material supplies for Europe and Japan, as well as sources of demand for their industrial output, put the USA on a collision path with many liberation movements, towards which soon the USA started to take an aggressive stance.  In short, the US took it upon itself to relegate the third world to the role of supplier of raw materials to Japan and Western Europe.  The means to achieve this was a long series of coups and wars to overthrow distrusted governments and replace them with more compliant ones.

US domestic policies

The Global Plan comprised not only the creation of the Deutschmark and yen-zones by means of economic injections and political interference for the benefit of Germany and Japan, but also the careful management of overall demand within the United States, also with a clear view of its effects on these two zones.  The main preoccupation of American policy makers at the time was to avoid another major slump and, to achieve this, they had two strategies:

  • To boost foreign demand – as we have already seen, they dollarised the world in order to create foreign demand for America’s exports
  • To boost internal demand by means of :
  1. the arms race with the Soviet Union + the Korean & Vietnam wars
  2. social spending programs (President Kennedy’s New Frontier and President Johnson’s Great Society/War on Poverty)

The first two spending programs substantially strengthened US corporations and kept them onside at a time when their own government was going out of its way to look after foreign capitalists.  The greatest benefits, of course, accrued to companies connected to the Military Industrial Establishment (MIE).  This contributed in turn to the development of the Aeronautic-computer-electronics complex (ACE), an economic powerhouse largely divorced from the rest of the US economy, but central to its growing power.

Despite the positive impact of the Global Plan on the domestic American Economy, large segments of the US population which were not linked to the MIE or the ACE were completely left out of the post war recovery.  This caused significant social tensions, hence the necessity for social spending programs (on education, health, urban renewal, transportation, the arts, environmental protection etc).  These programs, while failing to bring about the scale of improvements hoped for, did nevertheless play a major role in relieving poverty and social tensions.

In retrospect the Global Plan was a grand success, at least for the developed countries: it promoted intercontinental stability, growth and relative equality.  The developed nations experienced a period of legendary growth, with Europe and Japan growing faster than the USA, making up for lost ground.


The Global Plan unraveled because of a major design flaw in its original architecture: the lack of an automated Global Surplus Recycling Mechanism (such as the one proposed by Keynes) that would keep systematic trade imbalances constantly in check. The US policy makers vetoed Keynes’ proposal thinking that the US could and should manage the global flow of trade and capital all by themselves, without committing to some formal, automated GSRM. They probably imagined that trade imbalances would favour America in perpetuity, and failed to see that adopting the US dollar as the international trade and reserve currency posed a major problem, outlined by Triffin in 1960.

Triffin Dilemma

Adopting the US dollar as the world currency exposed the USA to the following dilemma: they could choose either a) to issue money in proportion to the needs of their domestic economy (and to their gold reserves) and in so doing they would have preserved the credibility of the dollar, but the rest of the world would fall short of liquidity for financing international trade (including the purchase of US goods and services). Or they could choose b) to issue money in proportion to the world needs. This would allow the rest of the world to buy US goods (the Marshall plan was designed for this purpose), but the convertibility into gold at a fixed rate would eventually become untenable: the partners’ central banks would sooner or later realize that there were too many dollars around, compared to the US actual gold reserves, and would knock at Fort Knox’s door to call the US bluff.

This is precisely what happened at the beginning of the Seventies, and the answer was given by Nixon on August 15th 1971: the unilateral suspension of the dollar’s convertibility to gold, which meant the end of the BW system. From that point on, the dollar was without an anchor and the global monetary system went from a fixed to floating exchange rate regime.

Paul Volcker and the reversal of capital flows

The United States had not wanted the collapse of their Global plan.  However, once they lost their surplus position, they were quick to see the writing on the wall:  they wasted no energy in trying to mend the system.  This would have required to keep their government spending and their imports in check and live within their means, a move which would have dramatically curtailed their hegemonic position.  Paul Volcker, appointed in 1970 by Nixon as Under Secretary of the Treasury for international monetary affairs, along with his task force, are the main people responsible for designing and implementing the next post-war phase.

The US policy makers understood that reserve currency status allowed them to run large deficits, as there was huge international demand for dollars, which were used as means of exchange (for international trade) and as currency reserves (for central banks). This fact, along with their dominance of the world financial markets, allowed the United States to pay for their deficits by a combination of creating money and attracting ever increasing amounts of foreign capital to Wall Street. From now on, the USA would consciously expand its twin deficits (trade deficit and government deficit) in order to further entrench their hegemony, and would finance them by attracting to the United States the majority of the capital generated by the world surplus producing countries.  This would fling the world economy into a chaotic and ultimately unsustainable, yet strangely controlled flux: into the labyrinth of the Minotaur. This new arrangement would stabilize the world economic system (after a transition period of turmoil) by recycling into the USA other countries’ surpluses, thus creating the aggregate demand required by the system as a whole.  However, to attract the amount of capital needed for the purpose, a series of measures would have to be taken which in the longer term would cause what Paul Volcker himself called the ‘controlled disintegration of the world economy’.

The Minotaur metaphor

To understand this new system which we still live in (although at the moment it is seriously damaged by the financial collapse of 2008) Varoufakis uses a metaphor coming from Greek mythology: the Minotaur.  In pre-classical Greece, when Kind Minos of Crete ruled, the story goes that trade, peace and prosperity were in place, a kind of Pax Cretana  policed ruthlessly by the powerful king.  Nonetheless, a dark secret lurked in the basement of the king’s palace: a sad and savage beast, half man and half bull, was raging encased inside the maze-like Labyrinth that the king had built for it.  Unable to be nourished by anything other than human flesh, the Cretan King made sure, to avoid enraging the Gods, that the beast was nourished.  Indeed, Athenian teenagers were sent regularly to Crete as tribute.  This was the price that subjugated Athenians had to pay in order to enjoy the peace and prosperity that Crete guaranteed.  To use the story as an allegory for the system in place from 1973 to 2008 we need to replace the Minotaur with the twin deficits, which were satiated by the tributes of capital surpluses sent over to Wall Street (the Labyrinth) in exchange for the aggregate demand that the American purchases of net exports provided German, Japanese, Korean and Chinese factories.

Outside the metaphor

American policy makers understood that they had a straightforward task: to engineer the reversal of global capital flows in favour of the United States and at the expense of the two economic zones it had built around Germany and Japan.  There were two interlocked prerequisites for this reversal of global capital flows:

1) improved competitiveness of US firms in relation to their German and Japanese competitors, which in turn was achieved by a) lower rise in their costs of production(mainly the cost of oil) and b)  lower wages for American workers.  The combination of these two resulted in higher profits for American corporations, which attracted foreign capital to Wall Street to buy shares.

2) high interest rates – this was an end in itself, as it served to attract large capital flows into the United States (to buy mainly US Treasury bonds), and it was also instrumental to achieving lower wages

The two main economic variables that were directly or indirectly manipulated by US policy makers to achieve this reversal in capital flows were oil prices and interest rates.

The first to rise were oil prices, ostensibly increased by the OPEC countries after their revenues in dollars collapsed, given the devaluation of the dollar in terms of gold which followed the end of the fixed parity of the dollar with gold.  However, Varoufakis maintains that this move would not have taken place without a complacent attitude by the hegemonic power, of which most OPEC countries were strong allies.  The oil price increase damaged European and Japanese industries (which had to import almost 100% of their oil) a lot more than it did American industries, which only imported 32.5% of the oil they used.

Along with the price of gold and the price of oil, the prices of other primary commodities also increased dramatically.  This resulted in sharply increasing costs of production across the world, causing a lethal combination of both inflation and unemployment, otherwise known as stagflation.   In order to fight inflation, Paul Volcker, by now chairman of the Fed, dramatically stepped up interest rates, (which had already been rising during the 70’s) to 11% in 1979 when he took his position, and then to an incredible 20% in 1981, then again to 21.5%.  While this brutal monetary policy did tame inflation (pushing it down from 13.5 % in 1981 to 3.2% two years later) its harmful effects on employment and capital accumulation were profound, both domestically and internationally.  This policy drained investment from productive activity in favour of speculative activity and the resulting unemployment was instrumental in giving corporate America a wonderful opportunity to put a lid on real wages.  At the same time, productivity was rising fast, due to technological advances.  The combination of low wages and high productivity took the profits to the sky, thus attracting huge amounts of capital to Wall Street.

Imperceptibly for most people a sea change was taking place: a shift from the real economy to the financial economy. The Global Plan had consisted of a progressive, egalitarian social compact between the corporations, government and working people and had succeeded in rebuilding the capitalist economies after the ravages of the Great Depression and the ensuing war: the reconstruction of Europe and Japan, then later the rise of the Asian Tigers, the growth of the middle class and the establishment of the Welfare state were all achievements of the Global Plan. With its collapse in 1971, this compact was ‘willfully disintegrated’ to pave the way for the Global Minotaur.

However, the pivotal aspect of the system, the presence of a Global Surplus Recycling Mechanism did remain, it only changed direction. Under the Global Plan, the US was the surplus amassing country with the good sense to recycle part of it to Western Europe and Japan, thus creating demand for its own exports, but also for the exports of Germany and Japan.  The Global Minotaur worked in reverse: America absorbed other countries’ surplus capital, which it then recycled by buying their exports.  Disguised under the rhetoric of supply-side economics (the fabled trickle down effect) American policy makers remained well aware of the role of aggregate demand.  The twin deficits became the traction engine that pulled world output and trade out of the 1970’s mire.

THE FLEDGING MINOTAUR – The Reagan & Thatcher years

When Ronald Reagan entered the White House in 1981 the fledging Global Minotaur was already in residence, with the twin deficits gradually expanding.  Regan spoke the language of supply-side economics: unimpeded individual initiative as the engine of growth, balanced budgets, the withering of big government (except for Defence).  This meant large tax breaks for the highest earners, reductions in social programs and most notably, the removal of many restraints on Wall Street that were remnants of the Global Plan era.  However, after a few months of trying to balance the budget, and once unemployment skyrocketed in 1981, Reagan performed an abrupt U-turn and, instead of shrinking the government, he put his foot down on the accelerator of military spending.  This proved a boon for the large industrial network connected to the arms industry.  The twin deficits ballooned, unemployment shrank and the Minotaur was on its merry way.  As the US budget deficit exploded, it accelerated the tsunami of foreign capital rushing into New York to buy safe American debt in a time of general uncertainty, allowing Wall Street to create private money on the back of it, as we will see later.

Margaret Thatcher won office in the UK on a similar political manifesto.  Despite the rhetoric on de-regulating labour markets and reducing labour costs to increase employment and growth, she didn’t manage to reduce wages to the same extent as they had been reduced in the USA.  What she did manage, was to take a machete to industrial output, ‘ridding’ Britain of many of its traditional industrial sectors and, in the process, the bothersome trade unions.  Together with the mining and steel industries, millions of full time jobs disappeared forever.  The portion of national income that went to workers fell dramatically and whole areas of Britain started to resemble the Third World.  But real wages per hour did not drop.  This is part of the explanation of why she won the 1983 and 1987 elections: the 4.5 million new jobless people were too glum and disgruntled to bother to vote and, at the same time, the workers who did hang on to their jobs saw their income rise thanks to two ‘bonuses’: 1) selling the workers at very low prices the council houses in which they had been living, and 2) offering them shares in newly privatized companies (such as BT, British Gas, TSB Trustee Savings Bank) at far below the estimated market prices.  Both these moves encouraged the still working segments of the working class to consent to an economy that put all its eggs on the basket of speculation, either on house prices or on share prices.  Meanwhile, the co-opted workers immediately sold their shares to the conglomerates and they did the same thing with their council homes, in an attempt to move to better neighbourhoods and make some extra cash in the process.  The newly privatized housing allowed the banks to increase mortgage lending and credit card facilities.  This marked the start of a by now familiar growth model, fuelled by the housing bubble and the related consumer spending.  Meanwhile the City of London’s traditional strength in the realm of finance, its deregulation under the Thatcher government (known as the Big Bang) and the City’s links with Wall Street all ensured that a significant portion of the foreign capital flight to the United States passed through the city.  This gave access to its banks to large sums of money, even if for a short period of time, on the back of which they could create more money through speculation.  Together with the proceeds from domestic privatizations of UK industries and the nation’s stock of social housing, as well as the mountain of money created as mortgage/consumer debt, these financial streams merged into a potent torrent which allowed the City of London to prosper.

To sum up: the impulse for the growth experienced during the Reagan and Thatcher years was given by military spending (funded from money creation and foreign capitals) in the case of the USA and by privatizations of national wealth (+ passing money on its way to Wall Street) in the case of the UK.  On the back of these streams of money Wall Street and the City created, over the years, yet more money, in the form of financial titles (derivatives and other types of speculations) and in the form of consumer credit backed up by the housing bubble.

THE MINOTAUR IN FULL SWING – The 90’s and beyond

In a typical year before the Crash of 2008, even before the crazed frenzy of 2006-08, the Minotaur was devouring more than 70% of global capital outflows.  Japan and Germany were the primary sources until the early 2000’s, along with the oil exporting countries.  Then from around 2003 China stepped in as the greatest contributor.  Mountains of cash shifted from all over the world to Wall Street (in the region of $3-5 billion dollars per working day) and from there to the US corporations and households in the form of equity and loans.  However, money from foreign exports was not the only source.

We can summarise the financial flows which fed the Minotaur as follows:

  • trade surpluses from the oil producing countries, Japan, Germany and later South East Asia and China
  • domestic profits generated by ‘Walmart style’ US corporations
  • money from a long string of foreign financial collapses, with the relative capital flights, asset stripping and speculations
  • money multiplication (in the form of toxic titles + credits backed by housing bubbles)

The Walmart model

A substantial stream of money came from the Walmart type corporation, a new type of conglomerate which ushered in a brand new phase of capital accumulation, resulting from the new market conditions created to suit the Minotaur.  Unlike those corporations that focused on building a particular brand (e.g. Coca Cola) or companies that created a wholly new sector by means of some inventions (e.g. Edison with the light bulb, or Microsoft with Windows, Sony with the Walkman etc.) Walmart and its ilk built empires by finding ingenious methods of squeezing their suppliers’ prices and generally hacking into the rewards of the labourers involved at all stages of the production and distribution of its wares. It profited from amplifying the feedback between falling prices and the American working class’s falling purchasing power.  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, (such as Apple), we cannot fail to recognize the influence of the Walmart model.

Financial collapses

Another source of money for Wall Street came from the financial crises which took place in a variety of countries as a consequence of the financial deregulation introduced to create a Minotaur friendly environment.  This pattern goes a long way back. The first casualties were communist countries and Third World countries in the early 80’s following the Volcker shock, the steep increase in interest rates.  According to Varoufakis, a persuasive case can be made that interest rates (much more than the arms race) played a major part in the defeat of America’s greatest foes, the Soviet Union and its satellites, as well as those non-aligned Third World regimes where national liberations movements had risen to power in the 1960’s.  A long time before the advent of the Minotaur (during the 60’s and early 70’s) Western banks, constrained by the Global Plan’s low interest rates and tough regulatory regime, cast their gaze far and wide, offering large loans to Third World countries, Soviet satellites (e.g. Poland and Bulgaria) as well as semi-independent communist countries  such as Romania and Yugoslavia.  The loans were used to underwrite much-needed infrastructure, education, health systems, fledging industrial sectors etc.  When interest rates soared, as part of Volcker’s strategic disintegration of the world economy, communist regimes began to feel the pinch and had to impose harsh austerity measures to repay their debts as quickly as possible. The result was mass discontent, major unrest and the first stirrings of organized opposition (such as the Polish Solidarity trade union), with the start of a chain of events which eventually lead to the collapse of these regimes.  As for Third World countries, there as well debt crises erupted.  The IMF happily offered money to the governments to repay the western banks but on condition that harsh austerity measures be imposed: dismantling the public sector (including schools and clinics), the transfer of valuable public assets to Western companies. It is not at all an exaggeration to suggest that the Third World debt crisis was a disaster of the same magnitude as the brutal experience of colonization, a disaster for which these countries have never quite recovered.

After this wave of debt crises the next important casualty was Japan.  The troubles started with the 1985 Plaza Accord (allowing an abrupt devaluation of the dollar against the yen) which the country was ‘convinced’ to sign, and which was then followed by the ruinous decision of the Bank of Japan to pour excessive amounts of liquidity into the economy, in an attempt to stave off the recession resulting from the revaluation of the yen.  This led to inflating real estate prices and, when the bubble burst, to the familiar pattern of a banking crisis, followed by QE easing to refloat the banks and finally to the lost decades of stagnation from which the country has never quite recovered.  Interestingly, up until 2008 the Japanese malaise actively boosted the Global Minotaur.  Japan’s next to zero interest rates resulted in the accelerated migration of capital from Tokyo to New York in search for better returns.

Similar patterns repeated themselves in various other countries, as a result of financialisation, coupled with repeated attempts to tie domestic currencies to the US dollar (the so-called dollar peg).  These changes in monetary policies, adopted under pressure from the US/the West, led to a long chain of financial crises whose ultimate effect was a real economic meltdown in each of the countries involved.  The chain began in 1994 with the Mexican peso crisis, then moved to South East Asia (with the collapse of the Thai baht, the South Korean won and the Indonesian rupiah), proceeded to Russia and soon ended up back in Latin America (with Argentina being the most tragic victim).  All these crises began with a large inflow of cheap foreign capital that led to bubbles in the real estate markets.  Once the bubbles burst a violent outflow of capital, plus a friendly visit by the good people of the IMF turned these economies into the financial equivalent of scorched earth (always for the benefit of Wall Street).  So, quite naturally, when these nations eventually rose from their ashes, they saved and saved so as to preclude any repetition of that nightmare.  And what happened to these savings? They flocked to New York, fuelling further the Minotaur’s continuing rise.

After 2008 the Euro-zone entered into a similar crisis for similar reasons, and the same pattern is reproducing itself again in the countries affected, the first step having been the wild speculations on the weaker countries’ debts, which led to further fattening of the Minotaur.

Money multiplication

Of all the streams of money feeding the Minotaur, this is the most crucial to understand the unfolding of events, as Varoufakis maintains that it was the main factor causing the financial collapse of 2008, which in turn spelled the end of the Minotaur and the instability that followed.  The tsunami of capital coming both from abroad and from domestic profits (£3-5 million a day) unsurprisingly made the Wall Street bankers (and later European bankers) go absolutely wild and, not content with what they already had in their hands, they seized the unique opportunity to create even more money on the back of the money coming their way.  The new private money which eventually brought the system down was in the form a) toxic titles (derivatives etc.) and b) mortgage debt which inflated the American housing bubble.  This private money-generation machine, designed and directed by Wall Street’s private banks, quickly spread to other countries and became a global phenomenon.

a) Toxic titles

Wall Street’s first reaction to the Minotaur’s capital flows was a takeover and merger frenzy.  The projected capital gains from the mergers, based on expectations inflated by the amounts of money flowing to Wall Street (and the City) created expectations of more gains, in what seemed a virtuous cycle and it was actually a stock market bubble.  This in turn gave rise to the creation of more toxic titles based on hedging and leverage (a form of borrowing money to bet big time on shares and options to buy shares, which increases the stake of the bet monumentally).  The combination of options to buy, hedging and leveraging is such a risky business that, had it been a pharmaceutical, never in a million years would it have secured approval form the authorities.  This is now well understood.  Much less well understood is the fact that, without the Global Minotaur guaranteeing a steady torrent of capital into the United States (often via London) these practices would never have taken off in such a scale, not even in Wall Street. Once the Clinton administration released the financial sector from all regulatory restraints (with the repeal of the Glass-Steagall act by a decision credited to US Treasury Secretary Larry Summers) the global economy became flooded with this private money. Its infinite supply kept interest rates down all over the world, fuelling asset bubbles.  To give an idea of the scale of the phenomenon, back in 2003 for every $1 of world income, £1.80 worth of derivatives circulated.  Four years later, in 2007, the ratio had risen to $12 of derivatives for every $1 of world income: a 640% increase!  The world of finance had evidently grown too large to be contained on planet Earth!  And all of this was happening while the official ideology was dominated by monetary conservatism, ringing with long sermons about the perils of printing money!!!

b) Housing bubbles

Perhaps the most widely felt effect of the Global Minotaur’s ascendancy was its impact on house prices. With wages stagnant, the banks had a clever idea: why not use their expanding capital inflows to give credit to middle and working class households in the form of mortgages, personal loans and credit cards?  While the average American worker, whose wages had been stagnating since the early 70’s, was bombarded with heroic reports of America’s high growth rates, the sole line of communication with this fictional world where income rose and living standards improved was home ownership.  Thus millions of Americans borrowed to buy a home, and then borrowed against that home to buy other (mostly imported) goodies.  As a result, private debt levels rose fast, and so did house prices. Incidentally, it’s interesting to note that while inflation is treated as an enemy of civilization and a scourge, house price rises are almost universally applauded.   Over time, the same growth model spread to a number of other countries, especially the Anglo-Celtic ones (UK, Canada, Australia, Ireland)

The subprime mortgages and the securitized derivatives (also called CDO’s: collateralized debt obligations) that were used to offload the risk from the banks granting the subprime mortgages to the stock market at large is the main point where these two bubbles (toxic titles and housing bubble) actually crossed over and amplified each other, and it is no probably no chance that it was the detonator for the financial collapse of 2008.

Where did this money go? Into unsustainable debt:

  • US government bonds (= govenment debt)
  • Investment in US corporations (=business equity & debt)
  • Mortgage debt/Consumer credit to buy mainly foreign goods (= private debt)
  • To finance mortgage debt/consumer credit abroad (=foreign private debt)

All of the above debt financed the aggregate demand that kept the world economy buoyant. The United States and its satellites (e.g. Britain) were accumulating external national debt, Anglo-American families were amassing retail debt, and Wall Street was generating and accumulating toxic assets (or private money).  Meanwhile the oil producing nations, Germany, Japan, South East Asia (especially after the crisis) and latterly China were building up gargantuan currency reserves, which they were pumping into Wall Street and the City of London.  These flows financed the twin deficits, and kept production going in Europe and East Asia. Unfortunately this whole mechanism was based on a rising and unsustainable amount of debt, in the presence of stagnant wages. It is quite obvious, and the USA top administrators as well as some of Wall Street high priests, knew it very well that this could not go on indefinitely.  This is what Paul Volcker himself wrote in 2005:

What holds [the US economic success story] all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing…

  As a Nation we don’t consciously borrow or beg.  We aren’t even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar…

  And it’s comfortable for our trading partners and for those supplying the capital.  Some, such as China, depend heavily on our expanding domestic markets…

  This seemingly comfortable pattern can’t go on indefinitely.  I don’t know of any country that has managed to consume and invest [year after year] 6% more than it produces for long.  The United States is absorbing about 80% of the net flow of international capital.

This arrangement (the hollowing out of the real economy in order to attract growing amounts of capital) was bound to come to an end sooner rather than later in any case.  However, the reckless abuse of the system from the part of the Wall Street bankers (and the other who followed suit) greatly accelerated its demise, and possibly prevented the implementation of an orderly exit strategy, of a Plan B, if there was one at all.  This we don’t know.

What we do know is that after the crash of 2008 three things happened:  first the Minotaur was left lying in its labyrinth, too unwell to keep consuming enough of the surplus outputs of the exporting countries, and as a consequence their economies stalled.  Secondly, the financial markets collapsed and the private money they had created was gone.  Third, the politicians had a chance to rein in Wall Street but they were not up to the task and they blew it.  This emboldened the banks even more:  after receiving their rescue packages they started to bite the very hands of the states that had saved them, by creating yet more private money and by speculating on the sovereign debts.  This new paradoxical state of affairs that we are now under, the tyranny of the bankrupt banks, Varoufakis calls Bankruptocracy.


Following the financial collapse the first bail out for the banks came in the form of the Geithner-Summers plan.  The straightforward way to do a bail out would have been for the state to buy the toxic assets and leave it at that.  In contrast, the bail out which took place in the United States, the Geithner-Summers plan, was constructed in such a way as to create yet more toxic instruments to replace the previous ones, the only difference being that this time they would be backed up by the taxpayers’ money.   It was basically a license to go back to business as usual.  Similarly in Europe an intricate mechanism was built to guarantee the debts of the various states, with the debts linked to each other in such a way as to enhance the likelihood of a domino effect, and the banks and hedge funds were allowed to resume creating toxic money in the forms of bets on these public debts.  The very essence of the Geithner-Summers Plan, both in its original form and its European version, was a vindication of Wall Street’s private money formation.  Rather than resoundingly declaring ‘never again!’ Our political leaders have effectively signaled to the banks that it is business as usual, only this time around with public funds.  In fact, whereas prior to 2008 Wall Street created synthetic financial products on its own, following the 2008 meltdown it has done so with massive government (American and European) subsidies.

This is, in short, the sequence of events: first the banks were empowered (with taxpayer’s money) to return to their racket, then they repaid a smidgeon of their debts to the government, just enough to legitimize the fresh bonuses of their managers and it was back to business as usual.  Then followed various waves of quantitative easing, whose official purpose is to stimulate the real economy, but in reality respond to the necessity to re-finance Wall Street.

True, there was an attempt to reign in Wall Street.  Obama enlisted none other than Paul Volcker for the purpose, and he came up with the Volcker rule, which revived the Glass-Steagall Act by prohibiting banks which accept deposits and are insured by the state from participating in either the stock market or the derivatives trade.  But in the end the Volcker rule didn’t pass.  Our governments have completely capitulated to the failed banks and the market based process of selection is no longer in place.  On the contrary, the current state of affairs, bankruptocracy, rewards failure, and the bigger the failure, the bigger the rewards in terms of money and power.

In my opinion, however, this paradoxical situation is driven by a systemic necessity.  As the top US policy makers seem to have no plan B (unlike what happened in 1971, when they were quick to see the writing on the wall) and seem determined to hang on to the Minotaur at all costs, they need to keep up appearances of business as usual, and they need to keep on offering the rates of return that foreign and domestic capital is used to obtaining.  Possibly even more so, now that everybody knows that the king is naked.

The post Minotaur world without a GSRM

Following the 2008 catastrophe, America’s deficits diverged massively.  As all sorts of incomes collapsed, asset values fell to the floor, and Americans started to reduce drastically their consumption of imported goods.  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), as government strove to prop up Wall Street and stimulate Main Street. By 2011 the trade deficit recovered to, more or less, its 2005 level, while the budget deficit stabilized at $1228 billion.

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 is necessary to keep world total demand for produced goods buoyant?  The answer that surfaces upon close inspection of official statistics is negative.  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. (That is, 23.7% less, not in absolute terms, but compared to the trend level that demand would have had without the Crash)
  • At the same time, America was failing to attract through Wall Street (as its capitalization is too thin) the level of capital flows necessary to maintain the pre-2008 pace of investment into its private sector. By 2011 the United States had lost 56.48% of the assets held by foreigners compared to the trend level that would have been in absence of the Crash.  The main reason for this decline was that foreign net capital flows ending up as loans to US corporations fell drastically.

In conclusion, the crisis did not alter the deficit position of the United States.  The federal budget deficit more or less doubled while the trade deficit, after an initial fall, stabilized 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.  American markets are sucking 24% fewer net imports and are attracting into the American private sector 57% less capital than they would have in absence of the Crash.  In short, of the mighty Minotaur the only thing left is the still accelerating flow of foreign capital into America’s public debt, evidence that the world is in disarray and money is desperately seeking safe haven in the bosom of the reserve currency.

With the Minotaur knocked out, no one any longer fulfils its crucial function of keeping America’s twin deficits running and absorbing the world’s surpluses.  Thus the world economy is stumbling around, rudderless.  The Crisis that began in 2008 mutates and migrates from one sector to another, from one continent to the next.  Its legacy is genaralised 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.   Until and unless a new global recycling mechanism rises from the Minotaur’s ashes the world economy will remain depressed.  We are now in a situation in which a new monetary system with annexed GSRM is badly needed and yet America is stubbornly standing in the way, not willing to give up any portion of its hegemony. We risk returning to a pre-World War II scenario of radical instability.


The main emphasis of the book is on the recycling of surpluses and its main achievement is to shed considerable light on how the economic system has been functioning in reality since 1945.  In the first phase all went well, as there were high levels of growth  (associated with post war reconstruction) and a healthy dose of recycling (which saw the rise of the welfare state and the middle classes).  In the second phase, the growth mainly continued on paper, in the financial economy (and gradually degenerated to an exponential level), while in the real economy the recycling was still taking place (and this is what held the system together) but on the basis of unsustainable debt.  This phase has now come to an end, as it is clear that the paper claims accumulated in the financial economy cannot be honoured for the most part, and that to restart the system you need to recycle in favour of the real economy one way or the other.  This is the time when the negotiation of a new monetary system is due, and with it the decision of who and how shall recycle the relative surpluses.  Varoufakis suggests that the Americans, as they are the only nation with a long experience in this kind of mould breaking, take the lead one last time, and redesign a system along the lines proposed by John Maynard Keynes at the Bretton Woods conference.  A surplus recycling scheme that would not rely on some bright officials or the unaccountable financial sector of a single country, but on a well run, global organization that consciously and transparently sets the parameters for the recycling of goods, profits, savings and demand.

The problem is that recycling is the opposite of accumulation, and what is sustainable economically is not sustainable politically.  Unfortunately another solution for this dilemma looms large, and it is war: by destroying physical capital and producing a new hegemonic power, it can be a brilliant mechanism for resetting the system and restarting a new cycle.  Then if we survive there will be another Bretton Woods conference all over again.  In alternative, an emerging power may be trying to set up a another Bretton Woods-style arrangement without transitioning through a devastating world war…

Go to Chapter 2 – The Chinese Challenge