Before 1971, US global hegemony was predicated upon America’s current-account surplus with the rest of the capitalist world, which the US helped to stabilize by recycling part of its surplus to Europe and Japan. This underpinned economic stability and sharply declining inequality everywhere. But, as America slipped into a deficit position, that global system could no longer function, giving rise to what I have called the Global Minotaur phase.
According to ancient myth, King Minos of Crete owed his hegemony to the Minotaur, a tragic beast imprisoned under Minos’s palace. The Minotaur’s intense loneliness was comparable only to the fear it inspired far and wide, because its voracious appetite could be satisfied – thereby guaranteeing Minos’s reign – only by human flesh. So a ship loaded with youngsters regularly sailed to Crete from faraway Athens to deliver its human tribute to the beast. The gruesome ritual was essential for preserving Pax Cretana and the King’s hegemony.
After 1971, US hegemony grew by an analogous process. The Minotaur was none other than the US trade deficit, which devoured increasing quantities of the world’s net exports. America’s burgeoning deficit was financed by billions of dollars of daily net inflows into Wall Street from the foreign (and often US) owners of these distant factories – a form of modern tribute to the Global Minotaur.
The more the deficit grew, the greater its appetite for Europe’s and Asia’s capital. What made the Minotaur truly global was its function: it helped recycle financial capital (profits, savings, and surplus money). It kept gleaming German factories busy. It gobbled up everything produced in Japan and, later, in China. But at the same time, Wall Street learned how to turbocharge these capital inflows through exotic financial instruments. The floodgates of financialization burst open and the world was flooded with debt.
In the autumn of 2008, the Minotaur was mortally wounded after running into the wall of private debt that was a by-product of its appetite. While the Fed and the Treasury refloated US markets (at the expense of weaker Americans left behind since the 1970s), nothing would be the same: Wall Street’s capacity to continue “closing” the global recycling loop vanished. The US banking sector could no longer harness America’s twin trade and budget deficits for the purposes of financing enough domestic demand to sustain the rest of the world’s net exports. From that moment on, the world economy would find it impossible to regain its poise.
(2) In fact, he has done so in another article in July 2016 already:
It all began with the death of the international monetary system established at Bretton Woods in 1944, which had forged a post-war political consensus based on a “mixed” economy, limits on inequality, and strong financial regulation. That “golden era” ended with the so-called Nixon shock in 1971, when America lost the surpluses that, recycled internationally, kept global capitalism stable.
Remarkably, America’s hegemony grew in this second post-war phase, in parallel with its trade and budget deficits. But to keep financing these deficits, bankers had to be unleashed from their New Deal and Bretton Woods restraints. Only then would they encourage and manage the inward capital flows needed to finance America’s twin fiscal and current-account deficits.
Financialization of the economy was the goal, neoliberalism was its ideological cloak, the Paul Volcker-era Federal Reserve’s interest-rate hikes were its trigger, and President Bill Clinton was the ultimate closer of the Faustian bargain. And the timing couldn’t have been more congenial: the Soviet empire’s collapse and China’s opening generated a surge of labor supply for global capitalism – a billion additional workers – that boosted profits and stifled wage growth throughout the West.
The result of extreme financialization was enormous inequality and profound vulnerability. But at least the West’s working class had access to cheap loans and inflated house prices to offset the impact of stagnant wages and declining fiscal transfers.
Then came the crash of 2008, which in the US and Europe produced a massive excess supply of both money and people. While many lost jobs, homes, and hopes, trillions of dollars in savings have been sloshing around the world’s financial centers ever since, on top of more trillions pumped out by desperate central banks eager to replace the financiers’ toxic money. With companies and institutional players too frightened to invest in the real economy, share prices have boomed, the top 0.1% can’t believe their luck, and the rest are helplessly watching as the grapes of wrath are “…filling and growing heavy, growing heavy for the vintage.
And so it was that large chunks of humanity in America and Europe became too indebted and too expensive to be anything other than discarded – and ready to be lured by Trump’s fear-mongering, French National Front leader Marine Le Pen’s xenophobia, or the Brexiteers’ shimmering vision of a Britannia ruling the waves again. As their number grows, traditional political parties are fading into irrelevance, supplanted by the emergence of two new political blocs.