“Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence because they have produced too much of the means of subsistence, bankruptcy follows upon bankruptcy, execution upon execution.”
Thus wrote Frederick Engels in 1876 in Socialism: Utopian and Scientific.
The world capitalist economy is facing a most serious crisis. How are we to explain this crisis? What is the way out of this crisis? Only Marxian analysis, contained in succinct form in the above-quoted words of Engels, offers the key to the understanding of this crisis, as well as the way out of it.
The words of Engels that we have quoted were written about England in 1876, but could just as well have been uttered in response to the shambles of the economies of East Asia, the chaos in Russia and the imminent crash on Wall Street.
Then as now Engels’ words contain the key to understanding the whole crisis: “the workers are in want of the means of subsistence BECAUSE THEY HAVE PRODUCED TOO MUCH OF THE MEANS OF SUBSISTENCE.” In other words, these devastating economic crises are caused by overproduction.
Bourgeois economic science offers little in the way of clear understanding in this regard, not because bourgeois economists are less intelligent, but because their outlook is hemmed in by their belief in the immortality of the capitalist system of production. They have sold themselves body and soul to the service of this parasitic, decadent and moribund system, namely, imperialism.
Thus even when they come pretty close to understanding the underlying cause of the crisis, they shy away from it, ending very often by confusing symptoms and their causes, and appearance and reality. One has to indulge in excavations, as it were, to dig and drag the truth out into the light of day.
Thus, in explaining the collapse in South Korea which followed on the heels of Thailand’s currency collapse of 2 July 1997, John Burton of the Financial Times emphasises high debts and excess capacity, but the truth cannot help slipping out:
“Analysts … have warned for years that the country’s rapid production expansion was unsustainable because the global market was becoming glutted” – i.e., there is overproduction.
Nor does John Burton point out the relationship between overproduction and the high debts, treating the high debts on a par with overproduction as a cause of the crisis. The debts, however, are only a problem as a result of overproduction, which makes it impossible for the debtors to sell sufficient of their products to pay the interest due on their debts. Before the markets became glutted the high debts were not a problem because sales generated more than enough to service them, but when overproduction rears its ugly head, then it’s a different story.
Equally, in bourgeois terminology overproduction is normally coyly referred to as ‘excess capacity’. Bourgeois commentators feel the need to shy away from the question of what causes ‘excess capacity’. Let us boldly ask the question that frightens them so much: what is the reason for ‘excess capacity’? Why should manufacturers not use their capacity to the full but instead produce far less than they are capable of? Only because the markets are glutted and they therefore cannot sell the goods they have tooled themselves to produce and have to cut production quotas – and jobs! Excess capacity, therefore, presupposes overproduction.
As we shall see later, ‘excess capacity’ (which presupposes high investment on technology and low returns in relation to that investment because of inability to sell the expected quantities of products) is still rampant, accounting, for instance, for the collapse of the Nasdaq index.
The present crisis of overproduction started in 1997 in the Far East. It spread rapidly from Thailand to other ‘tiger’ economies. Throughout the region it caused big business failures, threw millions of workers out of their jobs and most dynamic part of the “laid waste what was once the world economy” (Financial Times, 2 January 1998, ‘1998 in the crystal ball’). In the 12 months following the outbreak of the crisis, $100 billion of foreign capital fled Asia as the currencies of the ‘tiger’ economies tumbled, stock markets crashed, and major banks came face to face with insolvency – with their shares falling from 50%-90%. In dollar terms, compared with January 1997, equities fell by 85% in Indonesia, 83% in Malaysia and Thailand, 70% in the Philippines, 60% in South Korea, 50% in Hong Kong and 40% in Japan. In Asia as a whole, equities registered a precipitous fall of 60%. Within weeks of the outbreak of this crisis, the tiger currencies were in free fall. As against the dollar, the Thai baht suffered a devaluation of 50%, the Malaysian ringgit 40%, the Philippine peso 25%, the South Korean won 40%, the Singapore dollar 10%, the Taiwan dollar 15%, the Japanese yen 15% and the Indonesian rupiah fell from 2,434:$1 just before the crisis to an astronomical Rp 17,000:$1 on 22 January 1998, before rallying.
At the time the main concern of the western imperialist bourgeoisie was that the economic chaos should not spread outside Asia, which it would have done immediately had the IMF not rushed in with bail-out money to minimise the amount of default that banks, especially western banks, would have to bear. At the same time, it eagerly seized on the opportunity to buy up the assets of the bankrupt Far Eastern businesses at bargain basement prices. And in fact it was a year before the west began to exhibit the symptoms of being afflicted by this crisis.
Western stock markets soar
In the short term, the stock markets of western countries soared. In July 1998 they were 60% higher than in January 1997. For the most part this is to be explained by the flight of investment from the Far East to the west.
In view of the dire economic picture prevailing in the Far East at the time, with the economies of those countries reeling from the hammer blows of a deep recession, and the US trade deficit soaring to unprecedented heights, it may appear a little strange that the stock markets in the US and Europe should have gone from strength to strength. This, however, is only an apparent paradox – not a real one. As Marx explained long ago, the fever of speculation is only a measure of the shortage of outlets for productive investment: the depressed state of industry is reflected by an expansion of speculative loans and speculative driving up of share prices. The crisis of overproduction is a reflection of the over-accumulation of capital, which, unable to find profitable opportunities for productive investment, seeks a way out in stock market and other speculative activity in an endeavour to make a profit. The tendency for the mass of surplus value to increase at a slower rate, as Marx showed, than the total capital employed is expressed in the TENDENCY OF THE RATE OF PROFIT TO FALL, which only goes to show that production for profit is an inadequate basis for the consistent development of society’s material conditions of existence.
The demand for the products of industry was falling in one sector after another, from aircraft to cars, steel to oil, from the products of the engineering industry to semi-conductors – everywhere. Combined with this, the crisis in the Far East – Thailand, Indonesia, Malaysia, the Philippines and South Korea – resulted in a huge flight of capital from these countries to the imperialist heartlands. According to the Washington based Institute for International Finance, there was an adverse shift in net private capital flow to the tune of $109 billion (£65.2 billion) – representing more than 10 per cent of the pre-crisis aggregate GDP of these five countries. All these massive sums, and more, since the Far East ceased to be a good source of profitable investment, were pumped into the US and European stock markets – which explains why these stock markets became so bullish and why they rose by an incredible 60 per cent between the start of 1997 and July 1998.
In the second half of 1997, a massive flight of capital from the far east went straight into the stock exchanges of the US and Europe, thereby temporarily pushing up their prices. According to the Financial Times of 6 August 1998, a total of $126.2 billion (£76.4 billion) flowed into equity funds in the first 6 months of 1998 – easily ahead of the $108.3 recorded in the first half of 1997.
Since the buoyancy on the stock market bore little relation to the productive base of the world capitalist economy, which continued to limp far behind, it was only a question of time before the speculative bubble bust, as it did with a fall of 300 points in the Dow Jones Industrial average on 4 August 1998, signalling an end, even if temporary, for reasons we shall come to, of the ‘great bull run’, bringing to a grinding halt the so-called Goldilocks economy, whereby corporate earnings moved higher and higher without stoking the fires of inflation.
The chickens come home to roost
By the beginning of July 1998, however, the crisis had jumped continents, its first victim being Russia, which was propelled into the whirlpool of a crash thanks to the combined effects of the declining yen, a fall in the international oil price, fears of a Chinese devaluation and the soon-to-follow slide on Wall Street.
An attempt to prevent the Russian collapse through a $22.6 billion IMF rescue package proved no more effective than the proverbial attempt to empty the ocean with a bucket. On 17 August, Russia effectively defaulted. The Russian government devalued the rouble by a third, something that only three days previously Yeltsin had vowed not to do. It imposed a 90-day moratorium on some foreign debt repayments; and it decided to restructure the domestic debt market.
Far from stemming the crisis, these measures only served to exacerbate it. Not only did the foreign lenders to Russia lose their shirts, but the measures precipitated a run on the banks, a further plunge in the rouble and the Russian stock market. The rouble lost 60% of its value in one week and the Russian stock market fell 80%.
The convulsions that followed these shocks sent the stock markets over the next few weeks plunging into a frightening downward spiral. Shares in London suffered their biggest fall since the crash of 1987. In just three days the FTSE 100 index fell 405 points, or 7.2%. At its worst, on Friday 28 August 1998, it stood 1,000 points below its all-time high of 6,179 recorded a few weeks earlier. On 2 October it plunged to 4,750, 23% down from its peak in July. Even today, after great girations, it only stands around the 5,200 level.
The Dow Jones Industrial Average fell dramatically. From its peak of 9,337 on 17 July 1998, it plunged to 7,286 – approximately 20% below its mid-July level, losing all the gains it had made earlier in the year. Within less than 3 months of the outbreak of the Russian crisis, the S&P 500 Index dropped nearly 20%, the FTSE 25% and the European markets 35%. The Nikkei 225 average fell to a 12-year low.
Foreign investors in Russian bonds faced losses exceeding $33 billion (£20 billion) because of the Russian government’s default. No wonder, then, that shares suffered badly, as investors responded to fears over trading losses and loan provision – German banks in particular had heavy exposure to Russia. Following the Russian collapse, Deutsche Bank shares fell by DM 6.80 (5.5%) to DM 115.80 ($66.33). Chase Manhattan closed down $6.125 at $58.12, while Citibank fell $10.50 to $122.50.
Technology stocks were some of the biggest casualties, with Dell Computers, whose shares had nearly tripled during the previous one year, losing 15%, Microsoft 9% and Intel nearly 8%.
Equity markets in dollar terms fell in all other parts of the world too – by 29% in Argentina, 36% in Singapore, 40% in Mexico, 60% in Indonesia and 80% in Russia.
Thus, what was described as a ‘summer correction’ turned into a full-blown rout.
Fearing a potentially devastating market collapse, putting paid to US expansion, and with it the only prop to global growth, the US Treasury, egged on by the Clinton administration, sought to co-ordinate an international response to address market fears. In this, the Treasury needed, and secured, the willing co-operation of Mr Greenspan, the Chairman of the Federal Reserve, who signalled his willingness to cut interest rates and thus help to sustain artificially high equity prices, which in turn kept US growth and the world capitalist economy afloat – pro tem.
In parallel with the developments at the Fed, the G7 issued on September 14, 1998, a statement to the effect that “the balance of risk in the world economy [has] shifted” away from inflation towards much slower growth. In the words of the Financial Times:
“The strategy then was in place – the Fed was signalling interest rate cuts in the offing. The rest of the world had signed on to a promise to promote growth; markets were showing early signs of stabilising.” (‘Cooling the global markets’, Gerard Baker, Financial Times, 30 December 1998).
Meanwhile, on 23 September, New York Fed President William McDonough sat round a table in complete secrecy with some of the biggest sharks in Wall Street, haggling over the terms of a deal to rescue LTCM, brought to the brink of collapse by the Russian crisis – with exposures of more than $200 billion.
Under the deal, some of the largest players on Wall Street agreed to contribute $3.6 billion to avert LTCM’s collapse, which would have threatened horrendous global financial turbulence and ushered in a world-wide recession in the autumn of 1998.
Following the LTCM rescue, the Fed, beginning with September 1998, made three interest rate cuts of 0.25% in quick succession. Following the first interest rate reduction in the US, according to reports, central banks in 22 countries, including Germany, France, Italy, Britain and several other European countries, cut interest rates, in an unprecedented set of 55 steps. 13 October 1998 – the date of the second cut in interest rates – was the turning point in the temporary economic fortunes of world capitalism. The Dow rose 300 points in the remaining 45 minutes of trading and continued to soar the following week as traders became confident that the Fed stood ready to man the pump of monetary stimulus and far less worried that the Central Bank’s emergency measure must be indicative of the situation being really grave.
Dow Jones back on track
All this co-ordinated activity on the part of the US Treasury, the Fed, and their counterparts in other countries, had the intended effect of first arresting and then reversing the slide in equities in the US and across Europe and other parts of the globe. By 25 November 1998, the Dow Jones Index had returned to its 1998 high levels. Stock exchanges across Europe, including London, quickly recovered the ground lost during the previous three months.
The Dow Jones surged further ahead. On 16 March 1999 it broke through the 10,000 barrier. The FTSE 100 also clocked up significant, but, as we shall see, equally unsustainable rises.
The Japanese and other Asian economies were also showed signs of a fragile recovery. The South Korean economy, which shrank 6% in 1998, accompanied by a 10% contraction in consumer spending and a 29% drop in investment, grew by 10% in 1999. The Malaysian economy, having shrunk 6.7%, grew 5%. Hong Kong grew 2.9%, compared with a contraction of 5% the previous year. The Indonesian economy grew by 0.2% following the previous year’s plunge of 13.7%. Thailand’s economy grew 4.1% in 1999, following a decline of 10.4%. And the Japanese economy, after a decline of 3% in 1998, grew by 1%.
A crash waiting to happen
Normally one might have expected a cut in interest rates in the US to weaken the dollar as investors went elsewhere to obtain better investment opportunities. However, because of exceptional circumstances, the Fed realised that this result was unlikely to follow: in view of the flight to safety from the Far East and Eastern Europe into US bonds, there was not much danger of capital fight from the US consequent upon interest rate reductions, for there was nowhere for it to go.
Furthermore, the huge inflows of capital into the US strengthened the dollar, thus negativing any loss suffered by foreign investors in US bonds following interest rate cuts.
Third, was the willingness of many a European country to agree with the US to a co-ordinated policy of interest reductions, partly because, having already met the EU’s convergence criteria for Monetary Union, they were in a position to loosen monetary policy, and partly because they too were convinced of the need for such action to avert a meltdown on the stock exchanges.
Lastly, the collapse in commodity prices, resulting from a steep decline in growth in East Asia and Japan, with its disinflationary effect, persuaded the Fed not to worry unduly about fuelling inflation through reductions in interest rates. At the end of 1998, Brent Crude oil fell below $10 a barrel and non-oil commodities cost 70% less in real terms compared with two decades earlier. Between the middle of 1997 and the end of 1998 alone, copper prices collapsed by 40% and wheat prices by a quarter during 1998. While revenues declined in the oil and other primary commodity producing countries, huge amounts of extra wealth was transferred to imperialist countries through low prices, further widening the gap between the rich and poor nations of the world.
If the sluggish growth in the Eurozone, the Japanese recession and the crisis in the Tiger economies had not exercised downward pressure on prices, the surge in US demand (which grew by 5% in 1998 – up from 4.25% in 1997, accounting for half of the increase in total demand) would certainly have been inflationary enough to oblige the Federal Reserve to raise interest rates and thus put a brake on growth and knocked the stuffing out of the inflated equity valuations into the bargain.
This combination of anti-inflationary factors is, however, precarious and will not continue forever. What will happen to the US economy then?
Stock market – driving force behind the US boom
Over the past few years, since the outbreak of the present crisis in the summer of 1997 in particular, the strength of the dollar has enabled the US to play the dual role of an engine of global growth and an importer of last resort for the world economy. US consumers, buoyed by cascading paper wealth, have been able to indulge in a spending binge without any need to save since foreigners have been willing to step in with the necessary capital for US investment.
Besides financing the huge US trade deficit, “These strong capital inflows have helped finance a stock market and corporate investment boom at a time when US households are spending in excess of their income. So the economy has continued to grow despite a growing current account deficit that reflects the shortfall of domestic savings against investment” (‘The wobbliest month’, John Plender, Financial Times, 13 August 1999).
The unprecedentedly high stock market valuations have been the driving force behind buoyant US spending, for households owning shares feel richer as the prices of the shares they own go up, and they save less. This assumes great significance in view of the fact that the number of households that own mutual funds in the US has risen from 10 million at the beginning of the bull market to 50 million today. “The average American household,” according to Richard Waters, “has more than a quarter of its wealth on the stock market; more than half of its financial assets are in the form of shares. Fifteen years ago, with the stock market suffering the after-effects of 1970s stagflation, equities only made up 8 per cent of household assets.” (‘Stock market odyssey’, Financial Times, 17 March 1999). Likewise corporations, finding their capitalised values increasing, build new facilities.
Thus, while rising equity prices led to buoyant spending, the latter in turn, in the short term to be sure, drove equity prices up further still. Equities in the US have done exceptionally well. During the four years – 1996 to 1999 – alone, the annual price appreciation was 28%. While US corporate earnings had expanded at about 7% a year over the previous 17 years (and for that matter, since the end of the Second World War), this accounts for a mere third of the S&P’s gains, the remainder coming from an expanded price/earning (PE) multiple, which rose from single digits to a peak of 38:1.
Imbalance between earnings and the price of shares
Since 1982, while the US economy has grown 2.5 times in nominal terms, its equity market has risen by a factor of 10. Even bourgeois economists concede that share prices – and the corporate earnings which underpin them – cannot rise faster than the economy as a whole. The extent to which the equity market has been racing ahead of the real economy can be gauged from the fact that whereas in 1982 equity prices were equivalent to 25% of US GDP, in 1999 they were 150% of GDP – a level without precedent. Between April 1994 and July 1997, the Dow Jones Industrial Average rose by 160%. In view of this increase of stock market capitalisation as a percentage of GDP, it is not surprising that the rise in share prices in the US created, in just three and a half years (between early 1995 and the second quarter of 1998), $6,000 bn of extra wealth for US investors. In the US, 50 million households, by and large middle class, own shares – twice the number who did so in the 1980s. As the bull run on the stock market has been at the bottom of the consumer boom in the US, it is self-evident that a stock market crash would serve to destroy middle class prosperity and constitute a most serious threat to social stability.
What applies to the US also applies to other western imperialist countries. In Britain shares went up in 1997 alone by 25%. A plunge in the British stock market would put paid to the consumer boom and would, furthermore, have a devastating effect on savings and pensions.
Additional factors behind the phenomenal rise in equities
In addition to the huge amounts of foreign capital flowing into the US (in 1997 alone, $60 billion of foreign capital poured into US stocks – more than the previous 9 years combined), three other factors contributed to the phenomenal rise in equity valuations. First, there are the take-overs and mergers, which offer companies the opportunity of cost cutting, improved market gains and achieving economies of scale. As investors recognise this trend, blue chip shares have outperformed small companies – thus providing added incentive for companies to grow even bigger by acquisition – characteristic of the Dow’s rise since the latest bull market is the domination by a handful of companies. Since 1982, while corporations such as Coca-Cola, Merck and Walt Disney have risen 40-fold, others have done far less well.
Second, the practice of share buy-backs, which has been gaining strength over the past decade, has an even larger effect in driving share prices up. Companies, instead of hoarding surplus cash, which is productive of low return in the current economic conditions, return it to shareholders in the form of buy-backs. The rather low cost of borrowing presently, combined with the fact that debt is tax-deductible, only encourages companies in this practice – to the extent of persuading them to borrow money for the purposes of buying back their own shares. It is hardly surprising, then, that over the four quarters to September 1998, the US corporate sector accumulated some $359 billion of debts – the highest ever figure for any 12-month period (see Philip Coggan, Financial Times, 13 March 1999).
Not only were there very few new issues of shares, in the four quarters to the end of September 1999 in the US there was net retirement of about $158 billion, while in Britain there was a reduction in the supply of equity to the tune of £30 billion in 1998. With more and more large investors chasing fewer and fewer blue chip shares, it is hardly surprising that their prices have been pushed up beyond belief.
The third factor contributing to the high valuations on Wall Street has been the so-called moral hazard, the belief that the Federal Reserve is putting a safety net under the market following the 0.75% cut in interest rates last year – that the Fed will not allow the stock market correction to go so far as to push the US economy into recession, that it will come to the market’s rescue by opening monetary sluice gates – as it did in the autumn of 1988 and, even earlier, 1987 after the collapse of US equity markets in October of that year.
US imbalances unsustainable
Mr Greenspan, the Chairman of the Fed, admitted with great candour in December 1996 that “Irrational exuberance” on the stock market has been the price of an activist monetary policy aimed at “maximum sustainable growth of the US economy.” The result of such an interventionist policy has been, as was to be expected, to send the wrong signals, resulting in inflated asset prices and, to use the apposite terminology of Hans Tietmeyer, the former President of the Bundesbank, to “move the financial markets in the direction of casino capitalism,” which are threatening to cause a systemic failure and bring the markets to a scandalous collapse. Doubtless “…a policy of responding directly to sudden falls in asset prices, and to the consequent drying up of liquidity, provides a degree of central bank insurance to investors against the risk of being trapped in a collapsing market. If so, central banks may help to create the bubbles whose destabilising consequences they so justly fear.” (Martin Wolf, ‘Bubble trouble’, Financial Times, 24 September 1999).
The very factors which have sustained the bull market have created their own problems. The US current account deficit has risen from £183 billion (£115 billion) in 1995 to $450 billion in 2001 – the equivalent of nearly 5% of the US GDP. So far the US trade deficit has played an important role in preventing the world capitalist economy from taking the plunge into recession. Thus the deterioration in the US trade deficit to the tune of $76 billion in 1997 and 1998 accounted for two-thirds of the total improvement totalling $120 billion, in the balance of payments of the Asian newly-industrialised countries’ economies ($53 billion), the Asian developing countries ($33 billion) and Japan ($34 billion).
Encouraged by booming stock markets, US consumers have been spending like there is no tomorrow, and their savings rate is negative. The private sector deficit (the gap between savings and investment) stands at a huge 6% of GDP. So far this deficit has been financed partly by capital inflows (and partly by the budget surplus), which in turn have strengthened the dollar and kept inflation and interest rates low.
Even bourgeois economic experts are of the view that the US imbalances are unsustainable. “The US stock market,” writes Martin Wolf, “will not remain at historically unprecedented valuations indefinitely; the private sector cannot be a vast net dis-saver; and the US will not run a very large trade deficit permanently.” (‘Cauldron bubble, Financial Times, 23 December 1998).
It is the fear of the best of bourgeois economists and policy makers that the Fed’s easing of monetary policy merely served to exacerbate the gaping imbalances now dominating the US economy.
“By pumping up stock prices, it helped inflate an asset price bubble that now poses the largest threat to global stability … By allowing domestic spending to surge, it widened the already vast current account deficit to more than $300 billion this year … And by accelerating demand it let the genie of inflation out of the bottle.” (‘Plus marks for policy-makers’, Gerard Baker, Financial Times, 24 September 1999). Suffice it to say that today the $300 billion current account deficit has soared to $450 billion in less than three years!
With remorseless logic, Mr Baker drove the point home that, far from being the cure, monetary easing could actually end up producing a world-wide recession in the not too distant future, and it has. Here are Mr Baker’s predictions:
“The Fed, of course, has already taken back two of the three-quarter point rate cuts of last year. But the gloomy view is that it is too late to stop the imbalances ending in a smash. The current account deficit is undermining the dollar; once investors leave the US currency in droves, inflation will pick up speed and the stock market will collapse. That would provide a new round of global financial instability, significantly damage domestic US demand, and perhaps even precipitate the world recession the G7 worked so hard to avoid a year ago” (ibid.). This prediction came true a mere 18 months later.
The US trade deficit brought about a progressive increase in its net external indebtedness. The rate of US net liabilities to GDP rose from 10% in 1994 to 20% in 2000 and is on course to reach 30% by 2004 and 50% by 2010. “The willingness of the rest of the world to hold claims on the US is not inexhaustible,” says the Financial Times of 28 April 1999, adding that “the worry is that any refusal to hold more US assets will come in the usual panic-stricken rush.” – characteristic of capitalism, we might add.
That this ‘worrying’ scenario was already on the way becomes clear with each passing month. The Financial Times of 3 August 1999 reported that “Foreigners may finally have had their fill of Uncle Sam’s IOUs,” and that the US “finds itself in the unfamiliar position of having to compete harder for foreign capital,” adding that “dollar assets in general seem less attractive to the world’s investors than they once did.” (Foreign investors lose taste for US treasuries’, Richard Walters).
Economies in Europe, Asia and elsewhere are dependent on the US to keep the forward movement of world growth, and the US economy in turn is dependent on a continuously rising stock market to continue the growth in consumer demand. As early as January 2000, John Plender correctly pointed out that:
“In the US the stock market is now a crucial determinant of growth in the real economy. The decisions of American consumers, who are also the chief locomotive for global demand, are driven by wealth effects: unrealised capital gains provide the confidence and collateral for borrowing and spending. It follows that US equities cannot stand still; they have to go on rising if the US economy is not to stall. Any stalling would rebound on the markets” (‘New world disorder’, Financial Times, 6 January 1999).
The stock of net US liabilities to the rest of the world (the net international position of the US) at the end of 2000 was MINUS $2,187 billion – just over a fifth of the gap. Add to this the current account deficit of $450 billion in 2001 and we get a figure of approximately $2,600 billion at the end of 2001 – all this during a slowdown which set in during March 2001. By 2006, this stock of net US liabilities is forecast to rise to $5,800 billion, which is the equivalent of 46% of US GDP, or 15% of the global gap.
In other words, the whole crazy boom will come to a sudden and grinding halt if the US equities were to tumble. No wonder, then, that thinking bourgeois ideologues find the state of the US stock market and the wider US economy “frighteningly reminiscent of the political economy of the Japanese bubble of the late 1980s, on a global scale” (Leading article, Financial Times, 19 December 1998). It is also “frighteningly reminiscent” of the scenario immediately preceding the Great Crash of 1929 and, the subsequent Great Depression.
The US economy has been witnessing its longest ever peacetime growth, and has since the second quarter of 1991 expanded by an average of 3 per cent a year. During the same period, corporate profits have grown by a compound rate of over 10% a year (though some analysts put the growth of corporate profits at 7%), yet share prices until 1999 rose by 17% a year. To believe in the continuation of these trends is to believe “that company earnings will eat up an ever-larger share of the economic pie, and that investors will attribute an ever-higher value to those earnings …” (Richard Waters, ‘Stock market odyssey’, Financial Times, 17 March 1999).
On 5 December 1996, Alan Greenspan, the chairman of the Federal Reserve, asked the question, which has since gained notoriety, thanks to the meltdown of the markets in 1998: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged corrections?…” At the time Greenspan asked his question, the Dow Jones industrial average had reached 6,500. Today it stands at over 10,000.
To start with, the rise in the Dow Jones, which in March 1999 hit the 10,000 mark, does not tell the whole story. The Financial Times of 17 March 1999 explained the phenomenal rise of the US stock market, and the psychology behind it, in the following terms:
“This psychology perhaps explains two of the most striking aspects of the recent spurt. An ever smaller group of companies is leading the market higher, and more investors are betting that, because these companies’ shares have outperformed, they will continue to do so. Largely forgotten in the celebrations on Wall Street yesterday were the many companies whose shares have not been setting records. In fact more than half the shares in the S&P500 are at least 10 per cent below their records. Small companies, represented by the Russell 2000 index, have missed the party altogether. That index is over 40 per cent below its peak.
“In this narrowing stock market, it has paid to back the winners. Investors have placed their bets on an ever shrinking group of big names. This so-called momentum investing, the stock market equivalent of jumping on a bandwagon, has become the most widely practised investment technique of the day.
“With the bull still in full charge, it seems difficult to call an end. But it is worth remembering that after the crash of 1929, it took the Dow Jones Industrial Average another 25 years to return to its earlier peak.”
There is also an uncomfortable parallel between the situation in the US today and that of Japan just before its troubles started in the late 1980s. One has only to cast a glance back at the Japanese economy in the late 1980s to realise the close parallel between the Japanese economy then and the US economy now. Back then the Japanese authorities too encouraged an aggressive monetary expansion that fuelled an asset price bubble. Not only is the US growth of broad money comparable to that of Japan’s during the latter’s bubble days, the ratio of the US stock market value to the gross domestic product, which today accounts for 150% of US GDP, is nearly as high as in Japan in early 1990 (when the Japanese stock market stood at 140% of Japan’s GDP, as opposed to today’s 25% of GDP) – just before the crash. In the four years up to the end of 1989, Tokyo’s stock market index rose by an average of 29% a year. In the US, from 1995 to 1999, the S&P 500 grew at annual rate of 26%. There are even parallels between the two economies as regards inflation. If the US bubble has coincided with low inflation, so did the Japanese bubble. The meteoric rise in the prices of Japanese assets in the second half of the 1980s was accompanied by fairly modest inflation, which never went above 4%. The Japanese too appeared to be masters at manipulation of the market and, for a time, the rigging of the market did work. But eventually the bubble did, as it was bound to, burst, plunging the Japanese economy into a protracted period of economic stagnation and recession, and it is now in its third recession. The Japanese monetary expansion was driven, just like that of the US today, by the priority given to boosting domestic demand. The resultant explosion in asset prices was regarded as a solution, instead of a problem. And, temporarily, it worked. The Japanese economy became the wonder of the world. Just as until only the other day, in the words of Mr Andrew Smith, “America appears to have invented a kind of economic perpetual-motion machine in which share gains fuel consumer spending and business investment, and these in turn fuel market gains.” (Sunday Times, 21 March 1999).
Prayers for a benign slowdown
It was the hope and prayer of bourgeois economic pundits and the managers of the principal imperialist economies that any Wall Street crash would wait until growth in the economies of Japan, Euro-zone countries and the emerging economies had picked up sufficient strength to enable these to take over from the US the task of being the locomotives of world economic growth. These prayers, however, have not materialised and were never likely to.
Japan too seemed back then to have hit upon the formula of the Goldilocks economy – seemingly ever-rising asset prices, accompanied by increased consumer spending, increased business investment, low inflation, low unemployment and an expanding economy. But something had to give – and it did give – leaving Japan “with horrible withdrawal symptoms”, as the Financial Times leading article of 19 December 1998 put it. In America’s case too, pointed out respectable economics commentators, something would have to give as the trade deficit reached unprecedented levels. The “Federal Reserve has to supply the fix. But it too must worry about the ultimate fate of the junky.” (ibid.)
Because the world capitalist economy is suffering incurably from a crisis of overproduction; because “… The world has too much industrial capacity, a situation worsened by Asia’s crisis, and it will take years of savage rationalisation [i.e., recession] to bring capacity into line with demand” (Andrew Smith, The Times, 14 February 1999, ‘Deflation is a debt trap’); Martin Wolf, having analysed the state of the US economy at the end of 1998 and correctly concluded that the US’s economic position was unsustainable, equally correctly went on to say that Japan’s position was “as unsustainable as that of the US”. In substantiation, he referred to a “frightening report” from the Japan Centre for Economic Research (JCER), according to which “Japanese business has invested far too much, and that the logical course would be to drastically reduce investment.
“But, argues the report, without strong recovery in domestic demand, there remains far more capital than the country needs.” In plain language, Japan is suffering from a crisis of overproduction.
In order to bring Japanese capacity into line with the (smaller) demand, it will take years of savage rationalisation, whereby private investment in plant will have to drop at an average annual rate of 7% until 2003 and its share in the GDP reduce from 15.6% in 1997 to 10.6%, with the resultant shrinkage of the economy to the tune of 0.7% per year. Alternative to this would be a fiscal and monetary stimulus, which is hardly likely to happen, given the government fiscal deficit which is already running at 10%. Hence there is absolutely no hope of Japan coming to the rescue of a collapsed US economy.
Overwhelmed by the pessimism staring at him from every direction – from the US to the Japanese economic landscape – Mr Wolf resorts to quoting Shakespeare and concludes with the following correct, if pessimistic, assessment:
“As the witches told Macbeth, ‘Double, double, toil and trouble; Fire burn and cauldron bubble.’ The market has been bubbling and has also caused a great deal of trouble. But 1998 could have been still worse if the US had not bubbled as much as it did. Optimists now predict global recovery. But pessimists can easily see why things could become worse: neither US private dissaving, nor Japanese private investment looks sustainable; emerging market economies remain vulnerable; and stock markets are as irrationally exuberant as ever. The world needed a good deal of luck to struggle through 1998. It will need just as much in 1999” (Martin Wolf, ‘Cauldron bubble,’ Financial Times, 23 December 1998).
As it happens, its luck did hold out in 1999 but ran out, as it was eventually bound to, in March 2001.
Undoubtedly, along with the sober and thoughtful analysts, many of whose observations we have referred to in this rather lengthy presentation, the bourgeois financial press is replete with fools (call them optimists if it pleases you), who talk about the Dow Jones rising to 20,000 or 100,000, just as their forebears in the 1920s prattled on about an era of never-ending prosperity. The foolhardy of today merely need to remember that between 1924 and 1929 the rise in the Dow was little different from its rise between 1994 and today.
There are others who assert that the stock markets – in particular Wall Street – cannot decline in our time because they are “sustained by private investors saving for retirement”. This assertion evoked the following response from Tony Jackson, writing in the Financial Times of 12 June 1999:
“The management theorist Peter Drucker recounts how he published a prize-winning paper in 1929, weeks before the great crash, explaining why Wall Street could never fall. His argument, he recalls, was the same: the market had seen the advent of a new class of private investor – so-called Aunt Sallies – who would not sell whatever happened.
“And, he adds, nor did they. The market fell 80 per cent just the same.”
Most of the serious bourgeois commentators on the economy are of the view that the stock markets cannot avoid a crash for too long. According to Mr Stephen King of the HSBC, “virtually all the indicators on the bubbles checklist are flashing red for the US … when such bubbles burst soft landings never seem to be within reach”. (Quoted in Samuel Brittan, ‘Bubbles do burst’, Financial Times, 22 July 1999).
And bubbles do burst, for like negative savings ratios or fast deteriorating trade deficits, they cannot go on forever. And when the present bubble bursts, then, in the words of Gerard Baker of the Financial Times, “the downside of casino capitalism will become obvious: consumption will collapse and the US success of the past few years will prove to have been as illusory as that of Japan in the 1980s.” (26 February 1999).
“Capitalism is [indeed] a bumpy ride” (‘Balance in a bumpy world’, Financial Times leader, 19 June 1999).
At the height of the crisis in the autumn of 1998, when stock markets went into a free fall, the US financier, George Soros, in his testimony to the US Congress on 15 September 1998, stated: “The global capitalist system that has been responsible for our remarkable prosperity is coming apart at the seams.” A year later it was still coming apart at the seams.
The situation today reminds one of the following words of Paul Claudel, the French ambassador and poet, addressed in the summer of 1931 to an upbeat audience of diplomats in Washington:
“Gentlemen, in the little moment that remains to us between the crisis and the catastrophe, we may as well drink a glass of champagne.” (quoted in Robert Chote’s article, ‘Wake-up call for Greenspan’, Financial Times, 15 August 1998).
Unlike many in his audience, Claudel could see that far from turning the corner after the stock market crash of 1929, the capitalist world was plunging into an unprecedented economic depression and a period of dangerous political instability on a global scale.
Today too, far from turning the corner after the violent convulsions of the past four years, the world capitalist economy is headed for a descent into an economic depression of hitherto unknown proportions and a prolonged period of dangerous political convulsion, to the accompaniment of a most acute growth of inter-imperialist contradictions, leading to inter-imperialist conflicts of horrific proportions and bare-knuckle fights to corner the shrinking markets, sources of raw materials and avenues for investment and export of capital.
And it cannot be otherwise, for whatever its manifestation and superficial appearance, the crisis engulfing the world capitalist economy is a crisis of overproduction, brought about by the contradiction between social production and private appropriation. During each such crisis, including the current one, this contradiction comes to a violent explosion. This has been the case since 1825, the year of the first general crisis of capitalism, since when these crises have broken out periodically and during which production and exchange suffer violent dislocation. In the words of Engels:
“In these crises the contradiction between social production and capitalist appropriation comes to a violent explosion. The circulation of commodities is for the moment reduced to nothing; the means of circulation, money, becomes an obstacle to circulation; all the laws of commodity production and commodity circulation are turned upside down. The economic collision has reached its culminating point: The mode of production rebels against the mode of exchange.” (Engels, Anti-Dühring).
The fact is “that the social organisation of production has developed to the point at which it has become incompatible with the anarchy of production in society which exists alongside it and above it”; that during crises, the entire “mechanism of the capitalist mode of production breaks down under the pressure of the productive forces”; that during these crises, capitalism is no longer able “to transform the whole of this mass of the means of production into capital.” And this for the reason that in capitalist society “the means of production cannot function unless they first have been converted into capital, into the means for the exploitation of human labour power. The necessity for the means of production and subsistence to take on the form of capital stands like a ghost between them and the workers, it alone prevents the coming together of the material and personal levers of production, it alone forbids the means of production to function, the workers to work and live.” (ibid, p.379).
The tendency towards an unlimited expansion of production is inherent in capitalism, but this tendency comes up against a barrier, that of a limited market because of the impoverishment of the masses – a reflection of the basic contradiction between social production and private appropriation. Pending the removal of this contradiction through proletarian revolution, and society taking over the means of social production and using them consciously for the benefit of its members, capitalist crises cannot but continue periodically to wreak havoc with a vengeance.
In the words of Lenin, “Gigantic crashes have become possible and inevitable only because powerful social productive forces have become subordinated to a gang of rich men, whose only concern is to make profits.”
The deliverance of the expansive force of the means of production from the bonds imposed on it by the capitalist mode of production is the precondition for getting rid of the crises of overproduction which bring society “face to face with the absurd contradiction that the producers have nothing to consume, because consumers are wanting. Their deliverance is the one precondition for an unbroken, constantly accelerated development of the productive forces, and therewith for a practically unlimited increase of production itself.” (ibid, p. 387).
It is the job of Marxist-Leninists to imbue the proletariat with the knowledge and understanding contained in the above-quoted observations of Engels’, to convince it that only a proletarian revolution can end this filthy system, which starves and degrades, which subjects it to unemployment, homelessness, destitution, brutalisation and war.
[to be continued in the next issue of LALKAR]