The Minotaur in the Room: Announcing the London launch of my new book on the true causes of the ongoing global economic tumult – 1st September 2011

In London on Thursday 1st September at 18.30? Why not join us in the launch of The Global Minotaur at the Bookmarks bookshop , 1 Bloomsbury Street? Aditya Chakrabortty (of The Guardian) will introduce the book. (Click here for a pdf of the invitation)

Meanwhile, here is a piece that sums up the reasons why this book seems highly relevant to understanding the topsy turvy economic world we live in. I entitle it:


With the sound of crashing markets and the roar of burgeoning uncertainty reverberating in our ears, it is time to take pause to ask a simple question: Why is the global economy finding it so hard to regain its poise after the Crash of 2008? My contention is that in 2008 the world lost a Global Surplus Recycling Mechanism (GSRM) which was keeping it in the precarious equilibrium that Ben Bernanke mistook for some ‘Great Moderation’ and which caused Gordon Brown to think, calamitously, that the era of boom-and-bust had ended. Grasping how this GSRM worked and why it perished is, I submit, a prerequisite for coming to terms with our current predicament. The key to sustainable growth in a capitalist economy is the successful recycling of surpluses. Every nation, every trading bloc, every continent, indeed the global economy itself, is made up of deficit and surplus regions. California, Greater London and Germany will always be in surplus vis-à-vis Arizona, the North of England and Portugal respectively. Given this chronic chasm, which market forces can never obliterate, the deficit regions are unable to maintain demand for the goods and services of the surplus producers. Thus, without surplus recycling stagnation beckons for surplus and deficit regions alike.

Surplus recycling is commonplace at the national level (e.g. in the United States military procurement often comes with the precondition that new production facilities are built in depressed states). However it is at the global level that the issue of surplus recycling becomes more pressing and difficult to institute. The post-war era was remarkable in that two GSRMs saw to it that the world economy achieved unprecedented growth. The first GSRM lasted from the late 1940s to the early 1970s. The United States exited the war with enormous surpluses which it quickly sought to recycle to the rest of the Western world in a multitude of ways (e.g. the Marshall Plan, wide-ranging support for Japanese industry, endless backing of the European integration project), effectively functioning as a GSRM itself. Alas, this first post-war GSRM broke down, predictably, when America’s surpluses turned into deficits toward the end of the sixties. The loss of that GSRM threw the world into the 1970s crises which did not subside until a new, most peculiar, GSRM was put in place, again courtesy of the United States. This time, America operated like a vacuum cleaner that absorbed the surpluses of the rest of the world, running ever increasing trade and government deficits. Those deficits were, in turn, financed by a tsunami of capital flowing into Wall Street, as the rest of the world recycled its profits by investing them in the United States.

Ancient myth has it that pre-classical Athenians maintained, in the name of peace and prosperity, a steady flow of tributes to the Cretan Minotaur. From 1980 onwards, the ‘rest of the world’ sent a tsunami of capital to Wall Street by which to finance what I call a Global Minotaur (*):  a GRSM that functioned as the ‘engine’ pulling the world economy onto higher growth planes and giving the semblance of some ‘Great Moderation’. Alas, built upon the Minotaur-induced mass capital flows into Wall Street, the world witnessed the most intense and profligate financialisation possible. When the pyramids the latter had built caved in, the Minotaur was mortally wounded. With it the US deficits’ capacity to recycle the world’s surpluses disappeared. Since then, the best paid plans of Central Banks’, G20 nations, the IMF etc. have failed to put back together the rude energy of the wounded beast.

To recap, without a functioning GSRM, the Crisis that started in 2008 will continue to migrate across continents and sectors, regularly threatening us with imminent collapse. The trick is to design both within Europe but also globally a new GSRM; one that works just as well as the Minotaur did in its heyday but, at once, one that does not feed on increasing imbalances and destructive inequalities.

(*) The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy, London: Zed Books; August 2011


  • Good points Yanis.

    Francis Cripps (Wynne Godley’s partner at Cambridge) noted this in an article What Is Wrong With Monetarism in 1983

    The conclusion which has to be drawn is that, if a modern economic system is to function properly, a mechanism is required for the management of aggregate demand. Now it happens that the need for management of aggregate demand within a closed national economy can be met rather easily. It is easily met because national economies have an institution called the state which is unique in that it has virtually unlimited powers of credit creation or borrowing (or would have within a closed national economy). Keynesians gave up at this point, thinking that once the need for demand management had been pointed out, and the possibility for demand management by a national government had been understood, the problem of demand management was solved once and for all. Unfortunately, there is no such thing as the state in the contemporary international economy at the international level and the absence of the state as such at the international level is, I believe, a sufficient explanation of why the world economy has run into serious problems of recession …

    … The important point is rather that in an international economy the possibilities of national demand management are strictly limited. They are limited by problems or balance or payments adjustment and international finance. Governments that wish to regulate national demand so as to sustain full employment run into problems of increasing trade deficits and, in economics with liberal exchange regimes, loss or confidence and outflows of capital. It is actual or potential balance of payments crises which have been decisive in breaking the habit or Keynesian demand management at the national level. Many national governments are still trying but they are trying under difficulties and they are frightened of balance of payments problems that would result if they tried too hard.

    and also

    … [U]ntil the economists in our society get around to tackling this problem, we risk being stuck with periods of long recession, even if we are occasionally and accidentally favoured with periods of world boom.

  • Well, for the sake of your non UK based readers, please capture the event in a video and upload it to youtube.

    I also have had in mind bying your other book “Modern Political Economics”. Now which one would you suggest first? And which audience are you targeting with each of the books?

  • Damn! Can’t you schedule your book releases in sync with school holidays in Germany? I’m regularly in London and would have made it. But not while on holiday with my son. You are on your own again!

  • Must Read: UBS’ Andy Lees On Why The US Economy Is, All Else Equal, Doomed
    Tyler Durden’s picture
    Submitted by Tyler Durden on 08/09/2011 17:31 -0400

    “With all the mess going on at the moment, I thought it was worth while stepping back a little and trying to look at the bigger picture.” So begins Andy Lees’ latest must read letter to clients whch explains succinctly virtually the entire story of where we were, how we got to where are now, how the current trajectory is unsustainable, why due to decades of capital misallocation anything that the Fed does now is essentially irrelevant, why our untenable debt pile does nothing but perpetuate an unsustainable ponzi scheme which will result in an unseen explosion in the true cost of capital: gold, and why the bond market will eventually, and inevitably, force an epic repricing in the cost of non-gold capital absent the arrival of the deux ex machina of real, actionable innovation that the Fed, and all global central planners, keep hoping for. Because the longer we keep plugging away with that worthless substitute, financial innovation, which is anything but, the greater the final collapse. Andy’s conclusion: “Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour. Until we get some real breakthrough technology, requiring large amounts of capital to both innovate and then roll out, we have no chance of supporting the economy.” Too bad than that this absolutely spot on observation reflect precisely the opposite of what the Fed is pursuing. Which is why, all else equal, and it will be unless the Fed is finally eliminated from existence, America, and the entire western way of life, is doomed… But don’t take our word for it. Here is Andy.

    Why are we here: simple – years of central planning resulting in the greatest experiment in capital misallocation in history.

    We are in this mess because of excessive leverage and excessive consumption, financed by excessively cheap real capital – (not just Bernanke & Greenspan but further back to the end of the gold standard, and in fact even before that as it was this misallocation of capital that forced us off the gold standard in the first place). If capital had been allocated productively, then by definition debt would fall as a percentage of GDP. Total debt may rise, but efficient allocation of capital would always mean the economy would grow faster than the debt as it means you are making a positive rather than negative real return on that capital.

    Whichever way you look at it, capital has been massively misallocated for years.

    Corporate profits… or massive debt-funded ponzi scheme?

    How can that be when corporates report massive profits? The profits are based on paying their workers a salary that meant they could only buy the goods they made by borrowing; in other words, a massive unsustainable ponzi scheme that could only ever end up with default. Without the household debt accumulation, there would be no market to sell their products to, and without paying the workers sufficient, the debt would always have to default.

    This required a massive increase in financial innovation to keep the illusion of corporate profitability alive – (household debt was a way of delaying putting the true costs through the corporate P&L account and recognising the costs). Financial sector innovation is itself another form of capital misallocation, taxing people away from real innovation – (to keep the illusion alive, an ever greater percentage of economic output had to be allocated to this illusion machine) – helping add to the resource constraint we are in today.

    If financial innovation, which we have so much of is not needed, what is the right kind? And why is it so sorely missing.

    A lot of what are described as efficiency gains have been just the removal of levels of safety and the removal of innovation in the system. Innovation and ongoing operations are always and inevitably in conflict, with the most readily apparent conflict between short and long term priorities. A second handicap to innovation is the way efficiency is achieved by breaking down things into small repeatable tasks. This specialisation and repeatability is a company’s greatest strength, but it is also its greatest weakness. Innovation is neither repeatable nor predictable. It is non-routine and uncertain. (Book: The Other Side of Innovation).

    The culprit: none other than the great moderation, and, now, ZIRP4EVA:

    Low real interest rates support excessive consumption, taking money away from innovation and balance sheets. When the US started suffering from its peak oil in 1970, rather than innovation it turned to globalisation to tax the broader global resource balance sheet, just as Britain and Europe had done 100 years earlier through colonialism, and recently accelerated that with the WTO. Globalisation has always been about accessing resources.

    Which bring us to topic #1 here, and everywhere else where economics is involved: cash flows.

    This has been a factor mobilisation story on unprecedented proportions, but appears to have reached its conclusion as resource constraint has meant the “cash flow” to grease the wheels has started to become more expensive and constrained. Profit without productivity can only carry on for a finite period; we are now clearly consuming down our balance sheet or putting it through the P&L account.

    So we are left with a massive amount of debt, a massive amount of capital and labour that is unprofitable in the world we face, and a balance sheet of insufficient resources to keep the illusion alive. The only thing that will get us out of this in the long run is innovation which will expand the balance sheet, expand the pie and create the jobs that people want.

    How do we get rid of the debt? Are we in a debt trap whereby any interest rate hike will kill the recovery? Clearly it is going to be incredibly difficult, but low real rates are the cause of the problem, not the solution. I don’t personally see a zero rate trap, but we need to allocate capital far more productively than we are doing.

    The cost of money itself is hugely important. How negative were real rates? When people talk of borrowing from the future, surely the same logic applies to the cost of capital. If we have had low or negative rates that supported excessive consumption, we now need to have high real rates to direct capital back to innovation and gradually repair the balance sheet. The real cost of capital has to go up. No matter how much fighting the Fed and Treasury do, the real cost of capital will rise. The bond markets have to be allowed to clear some of the debt and thereby remove some of this misallocation of capital.

    It’s not “debt trap”, it is “Fed trap”

    Does that mean we are trapped in a position whereby the Fed cannot raise rates? Quite frankly it doesn’t really matter what the Fed does; real rates have to go up, are going up and will go up. The more the Fed and the government misallocate capital, the more the real cost of capital will have to rise higher to compensate. The only thing that will get real rates down is either a massive new discovery of incredibly cheap fossil fuels or the innovation that delivers cheap fusion. Otherwise it is a case of the cost of capital rising and causing demand destruction.

    Getting the central banks monetary policy inline with the real cost of capital in the market must be the first step to rectifying the misallocation of capital. One obvious thing would be for economists to stop ignoring CPI of food and energy as irrelevant as it is the fastest growing part of the economy. By ignoring it, they are turning what should be a smooth and relatively painless transfer of capital into an occasional out-of control collapse and transfer. Getting both a proper monetary and fiscal policy framework in place, based off genuine data rather than smoke and mirrors and fiddles must be the first priority.

    Which brings us to where we are now: a massive, unsustainable ponzi scheme:

    Whilst politicians and investors acknowledge that excessive leverage created the asset and debt bubble, they do everything they can to prevent a rational deleveraging or efficient allocation of capital. For the moment the best measure of the cost of capital is gold. For years gold fell as fiat money was printed and this unsustainable ponzi scheme established, however as that ponzi scheme now unravels, gold must go up. The scale of both the ponzi scheme collapse and gold appreciation will be huge.

    The problem is total credit market debt is still increasing.

    As Fitch recently highlighted, Chinese on & off balance sheet debt has expanded by nearly 40% GDP in each of the last 3 years. In other words, the misallocation of capital is continuing making the ultimate problem that much worse. China is now getting almost no growth per unit of additional debt.

    With each additional unit of debt, we are digging ourselves a deeper hole to get ourselves out of. Surely it is better to at least slow the digging? If we can allocate capital productively at the margin – (we know where we need to start making real returns) – then once we can start making a positive return on that marginal debt, then it becomes easier to support the residual debt we have.

    If Andy is right, the framework of the next great class class conflict is set: it will be between the productive private economy and the “unproductive economy.” Yes: Marxist tensions are about to make a repeat appearance:

    Private sector annuity rates will be tumbling and yet the unproductive public sector are still being given great pensions. We are taxing the productive private economy to give to the unproductive economy. This has to end. The idea of a European fiscal union fills me with dread as that would be locking this unproductive transfer into stone. Rather than keep kicking the can down the road, lets own up to our excesses and start putting the economy back on track. Don’t reward the rioters in London with yet another handout; force them to pay for the damage they have caused and the police time they have consumed.

    Is Greenspan to blame for this dead end? Yes… but only so far. One can just as readily blame the traditional duel between short and long-termism, or what is known better as “it will be the other administration’s/generation’s issue.” In other words, Washington is just as guilty as Wall Street, and that infamous private bank.

    Why have we misallocated capital for so long? We can blame it on democracy, but bigger than democracy is the culture that forces politicians to favour the immediate status quo over the longer term good of the country. That culture then presumably comes down to poor understanding which comes back to low levels of education. We need to address these route courses.

    His conclusion:

    The real cost of capital has to rise. That will happen through default in one way or another. Debt has to be cleared. Multiple contraction is inevitable.

    Financial sector innovation has to be squeezed by engineering and scientific innovation. Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour.

    Energy is the cash flow in this story. Until we get some real breakthrough technology, requiring large amounts of capital to both innovate and then roll out, we have no chance of supporting the economy.

  • Well, Yanis, you’ve come up with some clever new word arrangements to describe regulation of destructive greed as practiced by corporations, the new individuals.

    Although, technically, we’ve learned that there are resource limitations on infinite growth, because the scholarly articles are out there, we’re still hearing pleas for more growth, to “solve” the aggregate demand problem that’s deflating our expectations of an infinitely increasing standard of living.

    We’ve reach the pitchforks and torches stage of globalization. Have you noticed the riots in London? Paris in the banlieus? Egypt? Tunisia? Greece? Somalia? We didn’t prepare the population for the downgrade, and now they’re too upset to reason with.

    Too many hogs at the production trough, skimming the profits until there’s nothing for the workers. Too bad. Another giant psychological error in global governance. Back to whips and guns.

  • Congratulations on the new book! I very much look forward to reading it. I like the Minotaur metaphor. It had also occurred to me but in a different way, that of the creature sucking up Athenian youth, that is a monster sucking up capital instead of letting it go to the real economy and where was our new Theseus who would slay it? But no! We need to reinstate the monster instead, it seems. Like Cavafis’ Barbarians. We need them!
    Best of luck! Unfortunately owing to hyper taxation here in Greece at the moment, a much coveted trip to London seems out of the question for me.

    • Thanks for this. Not to worry. The Greek translation is coming soon after. And an Athenian launch to boot…

  • Hi Yannis,
    how has the launch of your book been? Please share your experience and if you have it, that please upload the video of the meeting and/or discussion somewhere for everybody.

    And please also care to answer a former question of mine, which of your books (or even other books) you would suggest as first reading, for the understanding of the current crisis.


    • It went brilliantly. Packed house. Excellent questions. Quite moving. Alas, no video recording. Too overwhelmed to think of it until the whole event was over… However, on the following morning, I did a video recorded re-run (almost) of my presentation at the premises of UNITE (the trades union with 1.3 million members). Soon I shall be able to post a link to it. Lastly, here is the recommended further reading on the crisis, as it appears at the end of my book: Many of the arguments in this book are explained in much greater and scholarly detail in the book that I co-authored with Joseph Halevi and Nicholas Theocarakis entitled:

      • Modern Political Economics: Making sense of the post-2008 world, London and New York: Routledge, 2011.

      Readers may be interested in the large relevant bibliography it offers. Having said that, let me warn you that it is a dense, academic book; certainly not one to take along to the beach…

      Those interested in the Global Minotaur’s lineage may consult the paper that Joseph Halevi and I published on the subject in 2003:

      • Joseph Halevi and Yanis Varoufakis. ‘The Global Minotaur’, Monthly Review, 55 (July-August), 56-74, 2003

      That article occasioned a series of questions and answers that were later published as:

      • ‘Questions and Answers on the Global Minotaur’, Monthly Review, 55 (December), 26-32, 2003

      Turning to something completely different, and far more edifying, I would thoroughly recommend two books that will make you smile, laugh and generally will lift your spirits courtesy of their fine prose and imaginative links between matters of finance and matters of life. The fact that they were penned by two accomplished novelists is not a coincidence. So, here they are:

      • Margaret Attwood’s Payback – Debt and the Shadow Side of Wealth, Canadian Broadcasting Corporation: Massey Lecture, 2008
      • John Lanchester’s Whoops! Why everyone owes everyone and no one can pay, London: Allen Lane, 2010

      And since I just recommended literary books on the Crisis, I cannot resist the temptation to suggest to readers who have never read the Grapes of Wrath, to make amends. No other book, especially not by an economist, can convey better what a Crisis does to people; of what it really means to become a plaything of a depression’s unchecked forces. Thus, the following recommendation:

      • John Steinbeck. The Grapes of Wrath, New York: The Viking Press, 1939

      Before I return with two recommended books on the Crash of 2008 itself, I want to recommend two books by Jamie Galbraith which are an excellent introduction to the period preceding it:

      • Created Unequal: The Crisis in American Pay, New York: The Free Press, 1998
      • The Predator State: How conservatives abandoned the free market and why liberals should too, New York: The Free Press, 2008.

      Lastly, the two books I promised you on the Crash of 2008. Out of a plethora of books that I could have recommended, I chose one written by a well known Marxist and one by a well known financier. It is astonishing how mutually consistent their arguments are: A sure sign that, at a time of Crisis, logic brings people of different ideological backgrounds closer; at least if they are hungry enough for the truth and thus prepared to be baptised in the shock of unfolding drama. The two books are:

      Rick Wolff. Capitalism Hits the Fan: The global economic meltdown and what to do about it, Northampton, Mass.: Olive Branch Press, 2010

      George Soros. The Crash of 2008 and What It Means: The New Paradigm for Financial Markets, New York: Public Affairs, revised edition, 2009

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