Yanis Varoufakis, a Greek economist and Author of the “Global Minotaur” made some great points on CSPAN recently regarding the economy and “surplus recycling” and how the American economy worked so well over the past 40 years. He argues that because we were able to “export inflation” and support the factories of the world with our rampant consumer demand while at the same time attracting investment capital to the U.S. created a closed loop of surplus capital recycling. So long as the U.S. Dollar remained the reserve currency, America provided stability and investment rewards while keeping prices/inflation relatively low.

His basic argument is that their is a “twin peaks” economy right now with a debt bubble peak and a savings bubble peak whereby there is no way to transfer wealth from surplus nations to deficit nations. He argues that Europe is in real trouble because there is no way to allocate existing goods and services between surplus and deficit nations. He also argues that the banker is the conduit of the inter-temporal recycling mechanism. In essence, if the bank fails, the whole system fails. Society argues that banks are not allowed to go bust, and once banks figure this out it becomes a license for banks to “print money.” He likens the banks ability to print money to having an ATM machine in your living room — you probably are going to use it, especially if no one else notices. Bankers have a license to print.

In America, he says, the state stepped in and played the role of regulator over recycling surplus of some states to deficit states. Basically, the factories are set up in the deficit states so that the surplus flows to the deficit states.

HE also argues that bankers had way too much control over the economy under the gold standard which he blamed for the
Great Depression. Unsustainable debt, collapse of common currency, etc … and argues that the New Dealers feared the return to the depression. The Bretton Woods system made the dollar into the global lynch pin, but did not make the mistake of the gold standard which allowed surplus recycling mechanism to take place.

He goes on to argue that once we went from a surplus nation to a deficit nation, we used our deficits to export inflation and to expand America’s dominance and wealth by expanding our deficits which keeps foreign factories in Germany and Japan going while keeping prices low at home. He argues that you can expand deficits as long as foreign entrepreneurs send their profits back to the U.S. through investments thanks to a relatively strong stock market and currency in America. Paul Volker argued that deficits worked as long as America remained the best place in the world to invest (IE markets and currency). Prices in the United States rose more slowly than in foreign nations, which helped to attract capital from the rest of the world in order to close the loop of surplus recycling and kept things moving along.

Regulatory Capture: Yourifakis believes that Wall Street’s influence over government exempts them from regulation, saying that all of the regs from the New Deal to prevent Depressions have been eroded — think uptick rule and Glass Steagal.

Yourifakis says we lost our capacity to recycle surplus using our deficits… Today the US is producing 30% less demand for the rest of the World’s manufacturing than we were in 2007. America is not producing demand for foreign manufacturing and foreign entrepreneurs are no longer sending their profits to America to invest. We have lost our surplus recycling mechanism and he thinks austerity will never work here — he says capitalism died in 2007 and socialism died in 1991 when the USSR failed. Today we have the survival of the most bankrupt — the more bankrupt you are the more power you have. So it’s basically the survival of the least fit — with bailouts the banks have more power with more problems.