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What is really going on?

Yanis Varoufakis

. . . what is really going on? My answer: A half-century long power play, led by corporations, Wall Street, governments and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked.

For 50 years, the US economy has sustained the net exports of Europe, Japan, South Korea, then China and other emerging economies, while the lion’s share of those foreigners’ profits rushed to Wall Street in search of higher returns. On the back of this tsunami of capital heading for America, the financiers were building pyramids of private money, such as options and derivatives, to fund the corporations building up a global labyrinth of ports, ships, warehouses, storage yards, and road and rail transport. When the crash of 2008 burned down these pyramids, the whole financialised labyrinth of global just-in-time supply chains was imperiled.

To save not just the bankers but also the labyrinth itself, central bankers stepped in to replace the financiers’ pyramids with public money. Meanwhile, governments were cutting public expenditure, jobs, and services. It was nothing short of lavish socialism for capital and harsh austerity for labour. Wages shrunk, and prices and profits were stagnant, but the price of assets purchased by the rich (and thus their wealth) skyrocketed. Thus, investment (relative to available cash) dropped to an all-time low, capacity shrunk, market power boomed, and capitalists became both richer and more reliant on central-bank money than ever.

It was a new power game. The traditional struggle between capital and labour to increase their respective shares of total income through mark-ups and wage increases continued but was no longer the source of most new wealth. After 2008, universal austerity yielded low investment (money demand), which, combined with plentiful central-bank liquidity (money supply), kept the price of money (interest rates) close to zero. With productive capacity (even new housing) on the wane, good jobs scarce, and wages stagnant, wealth triumphed in equity and real-estate markets, which had decoupled from the real economy.

Then came the pandemic, which changed one big thing: Western governments were forced to channel some of the new rivers of central-bank money to the locked-down masses within economies that, over the decades, had depleted their capacity to produce stuff and were now facing busted supply chains to boot. As the locked-down multitudes spent some of their furlough money on scarce imports, prices began to rise. Corporations with great paper wealth responded by exploiting their immense market power, yielded by their shrunken productive capacity, to push prices through the roof.

After two decades of a central-bank-supported bonanza of soaring asset prices and rising corporate debt, a little price inflation was all it took to end the power game that shaped the post-2008 world in the image of a revived ruling class. So, what happens now?

Probably nothing good. To stabilise the economy, the authorities first need to end the exorbitant power bestowed upon the very few by a political process of paper wealth and cheap debt creation. But the few will not surrender power without a struggle, even if it means going down in flames with society in tow.

Yanis Varoufakis

  1. Romar Correa
    July 24, 2022 at 7:39 am

    Who will not enthusiastically endorse Yanis Varoufakis’ piece written with his customary gusto and plainspeak? He makes the welcome distinction between profits in the real circuit which have shrunk and profits in the financial circulation which continue to skyrocket. I confine my responses to the former. Yesterday, it seemed, low inflation was the new normal. A handful of monopolists straddled the globe and with state-of-the art technology and small crews of workers, the unit cost of production of everything kept getting lower. The product of a low price and billions of consumers is superdupernormal profits. The price was also, thereby, entry-deterring. Overnight, it seems, high and rising prices are with us. The degree of monopoly is given at any point of time and was so earlier. It cannot be that ‘untapped’ monopoly is being exercised only now. It must simply be the case that a surge in demand is being met by a surge in prices pari passu. The increase in the cost of minerals is partly the result of horrific political factors. The question then is: Have we entered an inflationary REGIME or will the explanatory forces go away? The imminent recession will dissipate demand and silence recently-emergent worker voice.

  2. Charlie Thomas aKa Cacciato
    July 26, 2022 at 9:08 pm

    The triumph of short term thinking by accountants and economists. I am an outlier, a quantitative forest ecologist. Trees don’t appear over night and their disappearance is like spending capital over night. Global warming and forest disappearance are totally ignored by capitalist economists.

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