Continuing with the story of the Global Minotaur, today’s post looks at it as a most peculiar Global Surplus Recycling Mechanism .(to get up to speed on what this mechanism might be all about, click here) Following the collapse of the Global Plan in 1971, by the end of the 1970s America’s twin deficits had started playing the role of a haphazard yet extremely powerful and effective ‘machine’ by which the world’s surplus capital was recycled through New York.
At the Bretton Woods conference, John Maynard Keynes and Harry Dexter White clashed on the type of the Global Surplus Recycling Mechanism (GSRM) that was best equipped to keep the post-war world economy on a sustainable path.
Keynes had wanted a formal, institutionalised GSRM that would, automatically, recycle surpluses thus curtailing both surpluses and deficits at once. White, on the other hand, insisted upon America’s right to run large surpluses and to choose, as it pleased, the ways and the means by which these surpluses would be recycled. White, of course, got his way and the Global Plan allowed the United States the privileged role of managing and maintaining the GSRM in accordance with its judgment and interests.
When the United States lost its surplus position, the Global Plan‘s fate was sealed. By means that we already discussed, the United States turned its new twin deficits into its advantage. Instead of forfeiting its hegemonic role, or trying to reduce its deficits, it did quite the opposite: It enhanced its hegemony by boosting its deficits! And since deficits must somehow be financed, the key to this second post-war phase was to have the rest of world generate a constant tsunami of New York-bound capital.
The two US deficits worked harmoniously together to accomplish their new task. When the US government reduced taxes or spent enormous amounts of money on missiles (as it did under President Reagan), the budget deficit ballooned. To finance it, it attracted foreign capital that was all too pleased to buy US Treasury Bills (i.e. I-Owe-Yous issued by the US Treasury). This capital inflow helped balance out America’s increasing trade deficit. Meanwhile, both deficits together drew capital into New York that allowed Wall Street to extend credit further!
This never-ending haj of the world’s capital to the Global Financial Mecca nourished America’s deficits to such an extent that they soon began to resemble a mythological creature, a Global Minotaur whose presence the US economy became dependent on and whose influence quickly extended to the globe’s every region.
The Minotaur‘s dynamics were synonymous with the global asymmetries on which its new global architecture was erected. To be maintained, they had to keep deepening, accelerating, growing. In this sense, its supremacy required a kind of permanent negative engineering; an attempt by the Minotaur‘s minders (strategists like Henry Kissinger and Paul Volcker) to rule by unbalancing; to reign by destabilising; to prevail by unhinging.
These destabilising moves, which threatened to undermine the international order, were counter-balanced by the Minotaur‘s most intriguing aspect: the fact that it worked just like a GSRM. A weird, most peculiar, terribly unruly GSRM, but a GSRM nevertheless! In fact, it worked in precisely the opposite way to how the original GSRM had worked under the Global Plan.
Under the Global Plan‘s GSRM, the United States was the surplus amassing country with the good sense to recycle parts of its surpluses to W. Europe and Japan, thus creating demand for its own exports but also for the exports of its protégés (Germany and Japan primarily). In sharp contrast, the Global Minotaur worked backwards: America was absorbing other peoples’ surplus capital which it then recycled by buying in their exports.
The Global Minotaur’s glittering triumph
In the aftermath of the Crash of 1929, the world understood that, in a time of Crisis, the state (the Fed and the Treasury) must step in as the lender of last resort. In the era of the Global Minotaur a new dictum was needed: The United States had become the spender of first resort. Its trade deficit became the steam engine that pulled world output and trade out of the 1970s mire. Its budget deficit and banking sector acted like a magnet that stimulated the capital inflows necessary to keep Wall Street buoyant and the US deficits satiated. It is no wonder that, when the Minotaur was wounded in 2008, the world ended up in another mire.
While its supremacy held sway, the Global Minotaur performed the duties its minders had planned for it to perfection. The diagrams below leave no doubt about the tumultuous changes that the Minotaur inflicted upon an unsuspecting world economy. From 1975 onwards, America’s twin deficits gathered pace (with the sole exception of a dip during President Clinton’s second term). As for its effects on America’s relative economic position, the wilful “disintegration in the world economy”, that occurred in the 1970s and early 1980s, had painful effects for all: GDP fell all over the world but, notably, it fell more in Europe and Japan than in the United States. It was the prelude to America’s revitalised hegemony. For while in the 1960s, US growth trailed behind that of its protégés, in the 1970s and 1980s America caught up. And once the 1990s came, it powered ahead. The Global Minotaur had worked its legendary magic.