The U.S. supremacy in the age of high finance: expansion and crisis

In the post-war boom era of 1945 to 1971, the U.S. surplus was at the center of the global economic order. Throughout the Bretton Woods period, the United States recycled part of its surplus via foreign direct investment – mainly in Western Europe and also in Japan. Within the system of international economic flows, the U.S. exported goods to the rest of the world and also finance these purchases.  Besides, the United States created demand for the exports of  foreign countries, primarily Germany and Japan.

After the 1970s, this system of international economic flows changed.  From 1971 to 2008, there is the expansion of the age of high finance where the U.S. deficits have been at the center of the global economic order. Considering this background, What Yanis Varoufakis (2013) calls the “Global Minotaur” is the system of international economic flows built after the 1970s. According to this system, the whole world surpluses aimed to finance the unsustainable expansion of a double deficit on which the US built its political and economic hegemony.  The American trade surplus turned into a large and increasing deficit that joined the government deficit to form the twin deficits. These twin deficits characterize the “Global Minotaur era”.

Without the Wall Street institutions recycling the global surpluses, the U.S. had not been able to hold its twin deficits. Indeed, the new global order after the 1970s was supported thanks to the close collaboration of the expansion of high finance overwhelmed by the political power of economic neo-liberalism.  Besides, the global expansion of corporations and supply chains enhanced business models based on increasingly lower wages. As a result, the global surplus recycling mechanism reversed the flow of global trade and capital flows: the United States provided sufficient demand for manufacturing in foreign countries – mainly China –  in return for  capital inflows.  As a matter of fact, between 1971 and 2008, the era of high finance supported the expansion of global trade at the cost of financial bubbles, corporate mega-profits and increasing social inequalities. In this scenario, mainstream economics supported the free market efficiency discourse.

However, accordingly Varoufakis (2013), the “Global Minotaur” has a crucial weakness. Indeed, the last cause of the global crisis is founded on the Minotaur’s dynamics that is synonymous to the global asymmetries on which the global architecture has been built after the 1970s.  Indeed, the maintenance of the U.S. supremacy requires global permanent unbalances. Consequently, the current global surplus recycling mechanism could not stabilize the world economy.

As the fundamental structural flaws in the global economy have not been addressed since the 2008 financial crisis, there are serious concerns that a new global economic crisis of unprecedented magnitude could still happen.

 

Reference

The Global Minotaur: America, Europe and the Future of the Global Economy, by Yanis Varoufakis, Zed Books, New York, 2013.

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6 comments
  1. Garrett Connelly said:

    I just finished reading Yanis Varoufakis quite carefully. This notion of recycling excess profits as investments in other production centers such as Germany and Japan is a perpetual motion dream. It sounds good but does not actually exist or function in a modern, sustainable global economy.

    Yanis Varoufakis assumes the Earth to be infinite and his notion of recycling cash from the international profits of net exporting nations leads exactly to the environmental collapse we are presently experiencing. The fixation on borrowing renamed as recycling so as to expand the global economy is responsible for the recent failure of Greek democracy before the onslaught of the troika.

    Borrowing money to finance the schemes of highly paid central planners who invest in projects that less educated masses wouldn’t approve using proper democracy is a form of more of the same only faster. The world economy already requires more than one Earth and long observed nature’s laws dictate a human specie die-back unless a cultural shift to using less resources and producing less pollution can be devised.

    Greek and Puerto Rican answers to their colonial financial masters is the same. A colonized nation is not responsible for corrupt expenditures leading to unwanted debts that lined the pockets of corporatists and their hired government planners.

    • Maria Alejandra Madi said:

      Thanks for your comment. I agree with the idea that the current environmental crisis is also part of the deep crisis we are living in. I believe that the focus of Varoufakis is the concern about the global financial unbalances and the trade/production unbalances that are part of this scenario. I am afraid he does certainly not believe in a “perpetual motion dream”.

      • Garrett Connelly said:

        Yes. Yanis Varoufakis is concerned with global financial imbalances and accompanying trade and production imbalances. His financial perspective is brilliant and fun to read. My point is perpetual growth achieved via efficient recycling of excess capital from a profit center to investments in economies with greater growth potential is financially logical but completely impossible for a global economy that already requires 1.5 planets.

        Yanis Varoufakis accurately describes the period when the US exported excess capital after the war, primarily for Germany and Japan. The problem of perpetual motion occurs when one attempts to design a new financial system for recycling excess capital from now highly profitable Germany to less productive countries during this modern time of accelerating environmental collapse. Note that the global economy would require three Earths if every person lived like Europe does on average.

        The impact of heat stress on labor productivity provides a good example.* It is estimated that productivity in many of the less skilled manual labor jobs like food production and construction will decline by up to 40% by 2030. Technical workers in air conditioned offices can maintain productivity by investing in more air conditioning and power plants by recycling excess capital from profitable nations but that in turn contributes to global environmental collapse.

        We exist in a world where Australia dredges a channel through the reef to more rapidly ship coal to newly industrializing countries that burn the coal to make electricity. The coral dies from heat and ocean acidification and a point comes when people also begin to die-off. This is one external limit to the idea of perpetual growth. A second limit occurs through destruction of democracy.

        A common view of democracy is that people vote for government representatives and then return to their daily lives and let the democracy do its job. That vision is false. Democracy is a tool used by humans to focus distributed intelligence. Elected officials are corrupted by capital exporting nations who convince the governments to borrow money to do thing that voting people would not approve of paying for via taxes. That is how governments like Ireland, Greece and Puerto Rico end up with debts impossible to repay.

        There is no financial recycling system that can cover the debts and compounding interest of nations which have been corrupted into borrowing for dubious purposes in the first place. Nations reduced to financial colonies by capital exporting countries are not responsible for debts they have been manipulated into.

        * see http://www.eurekalert.org/pub_releases/2016-07/tca-htf071416.php

    • Maria Alejandra Madi said:

      Thanks for reblogging my post.

      • dmf said:

        my pleasure, thanks for making it available

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