The Global Minotaur

1. The Global Minotaur: America's twin deficits as the engine of global growth

For if my diagnosis about Greece's misfortune was right (i.e. that there is no such thing as a Greek crisis, but rather that Greece is a symptom of a broader shift in global economic history) it was imperative that my book should reflect this.

The Global Minotaur metaphor explains how the United States, from the 1970s onwards, used its twin deficits (trade and budget) to fuel global economic growth. This system worked by:

• Absorbing surplus goods from other nations through America's trade deficit
• Attracting excess capital from the rest of the world to finance its budget deficit
• Recycling these surpluses through Wall Street, which turned them into investments, loans, and demand for goods worldwide

This mechanism allowed the US to maintain global economic hegemony despite running persistent deficits. It differed from the previous "Global Plan" era (1950s-1960s) when the US was a surplus nation recycling its surpluses to rebuild Europe and Japan.

2. From the Global Plan to the Global Minotaur: The evolution of post-war economic order

Keynes believed that, if global trade was badly imbalanced, with some countries (e.g. the United States) enjoying large surpluses and others in deep deficit, a small crisis anywhere could easily turn into another global catastrophe.

The post-war economic order evolved in two distinct phases:

1. The Global Plan (1950s-1960s):

   • US as the surplus nation, recycling surpluses to rebuild Europe and Japan
   • Fixed exchange rates under the Bretton Woods system
   • Collapse due to US losing its surplus position

2. The Global Minotaur (1970s-2008):

   • US twin deficits as the engine of global growth
   • Floating exchange rates
   • Financialization and deregulation of markets

This transition was marked by the Nixon Shock of 1971, which ended dollar-gold convertibility and ushered in a new era of American economic dominance based on deficit spending and financial innovation.

3. Wall Street's alchemy: The creation of private money and toxic derivatives

To adopt a logically incoherent assumption in one's theories is bad enough. But to gamble the fortunes of world capitalism on such an assumption is bordering on the criminal.

Financial innovation gone wild led to the creation of complex derivatives and private forms of money that eventually destabilized the global economy:

• Collateralized Debt Obligations (CDOs): Packages of various debts sold as low-risk investments
• Credit Default Swaps (CDSs): Insurance-like contracts betting on debt defaults
• Securitization: Process of turning illiquid assets into tradable securities

These instruments allowed banks to:

• Create money-like assets outside traditional regulatory frameworks
• Hide risks and increase leverage to unprecedented levels
• Generate enormous profits while building systemic instability

The fundamental flaw was the assumption that individual risks could be accurately modeled and managed, ignoring the possibility of systemic failure.

4. The handmaidens of the Minotaur: Walmart, trickle-down economics, and toxic economic theory

Walmart represents more than corporate oligopoly capitalism. It represents a new guise of corporation, which evolved in response to the circumstances brought on by the Global Minotaur.

The Minotaur's support system included various economic and ideological components:

1. Walmart's business model:

   • Emphasis on low prices and cost-cutting
   • Exploitation of workers and suppliers
   • Creation of a "cheapness" ideology

2. Trickle-down economics:

   • Justification for tax cuts for the wealthy
   • Promise of benefits trickling down to lower classes
   • Actually led to increased inequality

3. Toxic economic theory:

   • Models assuming perfect markets and rational actors
   • Ignored possibility of systemic crises
   • Provided intellectual cover for deregulation and financialization

These elements worked together to sustain the Minotaur by suppressing wages, boosting corporate profits, and justifying policies that favored the financial sector and wealthy elites.

5. The Crash of 2008: When the Minotaur stumbled

Once fully endorsed by the American electorate, Washington embarked upon supply-side economic policies and massive increases in the military budget.

The financial crisis of 2008 marked the mortal wounding of the Global Minotaur:

• Triggered by the collapse of the US housing bubble and subprime mortgage crisis
• Revealed the fragility of the global financial system built on toxic derivatives
• Led to the freezing of credit markets and a global economic downturn

Key events:

• September 2008: Lehman Brothers bankruptcy
• Government bailouts of major financial institutions
• Implementation of unconventional monetary policies (quantitative easing)

The crisis exposed the unsustainability of the Minotaur-based global economic order and the dangers of unchecked financialization. It also highlighted the interconnectedness of global financial markets and the systemic risks created by complex financial instruments.

6. Europe's crisis: A flawed currency union without surplus recycling

Europe is disintegrating because its architecture was simply not sound enough to sustain the shockwaves caused by our Minotaur's death throes.

The European debt crisis revealed fundamental flaws in the eurozone's design:

• Lack of a surplus recycling mechanism within the currency union
• Divergence between surplus countries (e.g., Germany) and deficit countries (e.g., Greece, Spain)
• One-size-fits-all monetary policy unsuitable for diverse economies

The crisis unfolded in stages:

1. Greek debt crisis (2009-2010)
2. Spread to Ireland, Portugal, Spain, and Italy
3. Banking crisis intertwined with sovereign debt problems
4. Austerity measures imposed on struggling economies

The eurozone's response, focused on austerity and bailouts without addressing the underlying structural issues, prolonged the crisis and deepened economic disparities within the union.

7. China's dilemma: Feeding the Minotaur while building its own empire

China's startling growth has left an indelible mark on the rest of the developing nations. Some have been devastated by the competition, but others have been liberated from a relationship of dependence on the West and its multinational corporations.

China's economic strategy evolved in response to the Global Minotaur:

• Export-led growth model, feeding the US trade deficit
• Massive accumulation of US dollar reserves
• Gradual shift towards domestic consumption and regional influence

Challenges and dilemmas:

• Balancing export-dependence with domestic demand
• Managing currency pressures and capital flows
• Expanding influence in developing nations while avoiding conflict with the West

China's rise has reshaped global economic relationships, particularly in Asia and Africa. However, its continued growth and stability remain intertwined with the health of the US economy and the global financial system.

8. The world after the Minotaur: In search of a new global surplus recycling mechanism

Without a GSRM materialising soon, the future is better left uncontemplated.

The post-Minotaur world faces significant challenges:

• Lack of a global surplus recycling mechanism (GSRM) to balance trade and capital flows
• Persistent global imbalances and financial instability
• Risk of prolonged stagnation or recurring crises

Potential solutions and scenarios:

1. Emergence of a new hegemon (e.g., China) to replace the US role
2. Creation of a multilateral GSRM (e.g., reformed IMF or new institution)
3. Regional economic blocs with internal recycling mechanisms

The author argues that a well-designed GSRM is essential for stable global economic growth. Without it, the world risks falling into a pattern of chronic instability, rising inequality, and potential conflict between established and emerging economic powers.

Last updated: January 24, 2025