The first global recession of the 21st century
The capitalist world did get that luck [which Mr. Martin Wolf spoke of in his article in the Financial Times on 23 December 1998 – see Part One of this article in the last issue of Lalkar] for a brief period but ran out of it, as it was bound to, a mere 15 months later. Wheels began to fall off with the Nasdaq’s plunge from its peak of more than 5,000 in the spring of 2000: on 20 December it had slid to 2,332. Since then it has maintained its downward march to stand at 1,725 on 12 April 2002. The Neuer Market in Germany is down 90% from its peak and the London Techmark has fallen by three quarters. By 22 March 2001, the Dow had fallen by nearly 20% from its peak in 2000. FTSE was down by 22%, German Dax by 33%, the French CAC by 30% and Japanese Nikkei by nearly 40%. As a result, $7 trillion were wiped off the global stock market valuations since their peak in 2000 – Nasdaq alone accounting for $4 trillion of stock market losses.
Only a few months before the Nasdaq’s free fall, the global equity markets were on Cloud 9, with investors convinced that the world economy, especially the US, would grow at an ever-faster rate, accompanied by low inflation and low unemployment, thanks to the technological miracle. They were further convinced that company profits could increase by 20% a year irrespective of the state of the economy. But, as the Financial Times of 2 January 2001 put it, “there’s a problem with living on Cloud 9: it’s a long down if you fall off.” The story of the two years since the spring of 2000 has been a prolonged, painful descent for most equity investors.
Five months later, the Financial Times correctly remarked:
“New-economy icons have been falling for months in the US, like revolutionary statues after a coup. The rubble from billion-dollar dot coms, million-dollar apartments and thousand-dollar suits continues to pile up in the streets as the business cycle asserts its tyranny over those who thought they had liberated themselves from the laws of [capitalist] economics” (8 June 2001).
The Financial Times of 23 June 2001 observed that the Fed’s interest-rate cuts had failed to solve the problem underlying the economy, for consumers remained heavily indebted and companies continued to grapple with unsold inventory notwithstanding huge write-offs by technology companies, adding that “Business inventories of unsold goods are larger than at any time over the past two years” and the share of US production capacity lying idle (25% in June 2001, as opposed to 16% 3 years earlier) has risen to its highest since 1991, and company profits had peaked. Optimism about a quick recovery alone had stood in the way of a worse rout in equity markets, remarked the Financial Times.
Suddenly gone were the easy investment conditions, as were the painless capital gains for investors. Suddenly, too, companies embarked on aggressive cuts in jobs. In October 2001, the US manufacturing output was 7% below its peak in June 2000. And with this, gone were the hopes that the US economy could keep growing forever by 4% or 5% a year, hand-in-hand with low unemployment and inflation, thus retrospectively calling into question the investment decisions made in earlier happy times.
Faced with harsh economic reality, the Economist, in its issue of 25 August 2001, was finally obliged to admit the arrival of the first economic recession of the 21st century, stating that the sharp slowdown of the US economy had already caused a recession in Mexico, Singapore and many other countries of Asia, which is in effect the factory floor to US IT companies, manufacturing everything from chips to peripherals – roughly a third of South Korean and Taiwanese exports consist of electronic goods. Noting that output was stalling in many countries, it went on to say that the global output “probably fell” in the second quarter of 2001 for the first time in two decades and that news from around the world was “getting gloomier”; that in the second quarter the German economy stagnated, while the growth in the euro area was probably barely above zero; that the Japanese economy went into a “steep decline” and the economies of many a country in East Asia and Latin America were in a state of alarming slump. Emphasising that the world was experiencing a crisis of overproduction (The Economist for obvious reasons avoids this precise Marxist term and prefers to call it an “investment-led downturn”), the Economist added:
“Global industrial production fell at an annual rate of 6 per cent in the first half of 2001.
“The picture may soon look even worse.
“Early estimates suggest that gross world product as a whole may have contracted in the second quarter, for possibly the first time in two decades.
“Welcome to the first global recession of the 21st century”.
Two weeks later, that most authoritative representative of British finance capital, the Financial Times, dealt with the current crisis of overproduction with specific reference to the telecoms crash, stating that a “…$1,000 billion (£700 billion) bonfire of wealth has brought the world to the brink of recession”. According to the Financial Times’ calculations, expenditure on telecoms in Europe and the US totalled more than $4,000 billion and, between 1996 and 2001, while banks loaned $890 billion in syndicated loans, another $415 billion of debt was supplied by the bond markets, and $500 billion raised from private equity and stock market issues. Further sums came from blue chip companies that “drove themselves to the brink of bankruptcy or beyond in the belief that an explosive expansion of internet use would create almost infinite demand for telecoms capacity”.
About 50% of European bank lending in 1999, says the Financial Times, was to telecoms companies, as were 80% of all the high yield or junk bonds issued in the US at the height of the boom. Five of the ten largest mergers or acquisitions were concerned with telecoms companies during the boom. The result was a glut of ‘bandwidth’ of such proportions that if the 6 billion inhabitants of the world “were to talk solidly on the telephone for the next year their words could be transmitted over the potential capacity within a few hours”.
Mobile telephone operators committed $200 billion in Europe alone to boost the bandwidth of their wireless internet services with no evidence that the technology would work or that there would be customers in sufficient numbers to use it.
No wonder, then, that the telecoms equipment manufacturers shed 300,000 jobs in the first quarter of 2001, with perhaps an additional 200,000 being shed by components suppliers and associated industries. Not surprisingly, the stock market value of all the telecoms manufacturers and operators fell by a huge $3,800 billion since its peak in March 2000. To put this huge sum in context, the combined losses on all the Asian stock exchanges during the ‘financial’ crisis of 1997-1998 were only $813 billion (see Financial Times, 5 September 2001).
The following day, the Financial Times returned to the subject with this observation:
“Hewlett-Packard’s planned takeover of Compaq is the most dramatic sign yet of how hard the most brutal downturn for 20 years is hitting the information technology industries. In personal computers, semiconductors and telecommunications, companies worldwide that had taken explosive growth for granted suddenly face saturated markets, chronic excess capacity and a faltering global economy.
“If IT industries are to resume profitable growth, they must first sharply contract. More plant closures, bankruptcies, job cuts and losses for banks and investors that financed the boom seem inevitable, threatening political discomfort for governments. But there is nothing they can usefully do to stop the process. Instead, they must ensure it speedily runs its course” (6 September 2001).
A day later, in an editorial entitled ‘The line goes dead’, the Financial Times returned yet again to the frenzy in the telecommunications industry, which led to “…a greater increase in telecoms debt over the past three years than the UK government accumulated over two centuries.” It noted that most of this investment had failed or would fail as overcapacity stood at 98%; market capitalisation of companies still in business had fallen by 60%; and the second-hand market for telecoms equipment had been marked by a collapse. The Financial Times, blaming this “extraordinary popular delusion” on a gigantic overestimate of demand for communications bandwidth hand-in-hand with a gross underestimate of the ability of technology to squeeze data down existing pipes, went on to add:
“As such, this bubble more closely resembles the tulip mania than the railways. In both cases investors lost their money – but rail travel at least left an infrastructure that changed society fundamentally. An incremental improvement in communication technology simply does not compare with the ability to travel.”
The slide in telecoms has by no means halted. On 2 April 2002, IBM shares fell 10% after a profits warning of a 12% decline in the first quarter and speculation that the US Securities Exchange Commission had been investigating its accounts. IBM is not alone. Rumours about dodgy accounting practices at General Electric, the largest corporation in the world by market capitalisation, hit its share price, with GE shares falling 9.3% in one day on April 11. Xerox was badly mauled.
Similar winds blew in Europe where shares in mobile phone companies plummeted as investors no longer chose to believe corporate messages suggesting that these companies were growth stocks. Vodafone slumped to a 4-year low and £15 billion were wiped off the value of its empire. Since March 2000, when its market capitalisation stood at £230 billion, it has lost £153 billion of its market value. After high-profile bankruptcies of ITV Digital and KirschMedia, shares in Vivendi Universal, the former French high flyer, hit a four-and-a-half-year low amid concerns about the company’s transparency. Ericsson’s share price plunged 24% on 22 April 2002, when it announced a larger-than-expected first-quarter loss and plans to cut 7,000 jobs. All this is taking place owing to overcapacity – lack of subscriber growth as a means of driving up revenues – as mobile phone penetration in Europe is running at almost 80%, which is dangerously close to saturation.
Investors have lost trust. Increasingly, the investors, with good reason, are questioning the trustworthiness not only of many individuals and organisations, but also of the supposedly established facts. Worrying for the capitalist establishment, “companies’ accounts are no longer seen as accurate – and not just in the case of Enron. There is evidence that US profits have been systematically overstated. US profits measured using tax returns peaked as a share of the national income in 1997, but reported earnings per share in quoted company accounts appeared to grow rapidly in 1998 and 1999” (Financial Times, 12 April 2002).
Companies are facing massive write-offs while their chief executives have enriched themselves. The Financial Times continues: “Supposedly independent analysis have been shown to provide advice to suit their employers’ needs rather than the clients’. Trust in their reputation was already damaged. But it was in ruins this week after the revelation that analysts at Merrill Lynch recommended clients to buy stocks they privately regarded as ‘a piece of shit'”.
The Financial Times concludes that evidence is mounting that any possible recovery cannot be relied upon to deliver rising equity prices.
Although the 1990s are portrayed as the wonder years for the world, especially the US, capitalist economy, the reality is quite different. The growth of the world economy was 3% in the 1990s, as opposed to 3.5% in the 1980s, 4.5% in the 1970s, and higher still in the 1960s. As for the US, its economy grew by 3.2% in the 1970s, 2.7% in the 1980s, and 3.1 in the 1990s. The growth in the 1990s, while higher than that of the 1980s, was lower than that of the 1970s and still lower than that of the 1960s. In fact, the higher growth was registered only in the second half of the decade between 1996 and 1999, when the US economy grew at the rate of 4% a year. In 2000, it grew by a huge 5.2%, which deluded many bourgeois commentators into talking nonsense about a new economy, a new paradigm, which had managed to eliminate the business cycle – just as the wheels were about to fall off.
Equally, although a great fuss is made about the allegedly miraculous productivity growth in the US, serious bourgeois commentators are fully aware that the truth is completely at variance with this assertion. Productivity in the US grew by 2.6% a year between 1953 and 1973 and by 1.3% a year between 1973 and the second quarter of 1999. Be it said in passing, throughout the second half of the 20th century, productivity growth in the US was consistently lower than in almost all the other imperialist economies; and between 1973 and 1995 it was low even by its own historical standards. However, it was claimed that in the 3 years up to May 1999, productivity in the US grew by 4.5%, compared with 1% in the early 1990s. Since then these figures have come under close scrutiny and have been revised down to 2.5% a year since 1996. Thus the mild improvement in productivity in the US since 1991 is no more than a reversal of the post-1973 productivity collapse. To describe this growth in productivity as ‘new’ is merely to distort the meaning of the expression beyond stretching point (see Financial Times, 18 August 2001).
Computers and telecommunications are by no means the most revolutionary of technological developments to date. Electricity, internal combustion, chemicals, communications and entertainments (radio, television and flying) were far greater and far more basic sources of improvement in productivity across the economy as a whole. If one looks at the whole business cycle of the 1990s, rather than half the cycle since the end of 1995, the average rate of growth in productivity in the US has been smaller than that claimed by the proponents of the ‘new’ era, who have simply used the allegedly ‘new paradigm’ to justify the stratospheric levels of Wall Street and to perpetrate a huge and unsustainable swindle on a gullible investing population.
“Our most prestigious investment houses have invented bogus mathematical formulas to justify stratospherical stock prices and have fed the inexhaustible appetite of … investors for internet businesses that are little more than concepts dressed up as companies”, wrote Ron Chernow, author of Titan: the life of John D Rockefeller in the New York Times in mid-April 2000 (quoted in the Sunday Times, 23 April 2000).
The telecoms sector was not alone in suffering from too much capacity. Overproduction overwhelmed one sector after another, forcing companies to cut production and hasten the onset of recession. Ranging from the Technology, Media and Telecommunications companies (TMTs) to the old economy sectors – chemicals, engineering – from services to manufacturing, the news is bad. As a result, in October 2001, in the US the output of manufacturing was 7% below its peak in June 2000; production in the OECD, composed of the 30 richest countries in the world, grew by a meagre 1% in 2001, while the world economy as a whole grew, too, by just 1% (as opposed to 4.2% in 2000) – notwithstanding massive cuts in interest rates by the Federal Reserve, from 6.5% to 1.75% in less than 12 months. Production in the eurozone grew 2% – in Germany less than 1% although the EU cut interest rates from 4.75% at the beginning of 2001 to 3.25% in November. German manufacturing output actually declined by 1.5%.
The UK economy, which is supposed to have done better than the eurozone and, if we are to believe Chancellor Brown, has lifted itself above the boom and bust which characterises every capitalist economy, is actually in a mess. The UK is running a current account deficit of £17 billion a year, while the deficit on traded goods is running at £30 billion a year. Consumer spending is rising while the export sector languishes; services are flourishing while manufacturing is in the doldrums. While the UK GDP grew by 2.2% in 2001, manufacturing output slid by 3% in the same year, with agriculture, forestry and fishing declining by an unparalleled 11.4% (obviously foot and mouth disease contributed to this precipitate decline). Boom now co-exists with bust. There is an explosion of consumer debt, rising faster than real GDP by a very substantial amount since 1995, aided by lower interest rates and lower inflation, which have reduced the cost of debt servicing. Household debt in Britain stands at £724 billion (11% of the annual household disposable income) and rising by nearly £7 billion a year. It has doubled in 10 years. People in Britain could spend all their income over the next 13-14 months just repaying their debts. Apart from the fact that they have to live on something, there is a small inconvenience of interest payments on these huge borrowings.
The position in some of the other imperialist countries is no better. In Japan, household debt stands at 130% of GDP, in the US 106%, and even in frugal and prudent Germany at 115%. Only in France and Italy is it much lower, where it stands at 71% and 43% respectively.
As for Japan, it finds itself in the third recession in ten years. What we are confronted with is a synchronised recession in all the three major centres of capitalism – the US, Japan and Europe. Most forecasts for 2002 are equally bleak. The US economy is expected to grow by 1.4%, the German by 0.7%, the eurozone by 1.5%, with the Japanese economy declining by 0.7%. With the collapse of the dotcom (these days referred to as the dotcon) bubble, the plunge in the Nasdaq and in the Neuer market, the state of the Dow and other indices which are simply marking time going nowhere and where every rally peters out no sooner than it has started, those who not so long ago talked about having put an end to the business cycle have suddenly discovered that the stock market and the capitalist economy are again, as ever, “subject to gravitational pulls it seemed to have defied for half a decade” (Financial Times, 11 January 2001).
The IMF says that the normal forces of recovery, combined with the above cuts in interest rates, ought to produce a growth of 2.5% for the US and 2% for the G7 from the fourth quarter of 2001 to the fourth quarter of 2002. The problem with this optimistic IMF forecast is that it fails to take into account the existing massive spare capacity and over-investment as well as the negligible household savings in the US, on which, in the absence of a Japanese and European recovery, the rest of the world relies as a buyer of last resort.
Far from signs of recovery, there is news of doom and gloom from every quarter and from every direction. Unemployment in the US, as in Japan, is increasing. In the US, in October 2001 alone, businesses slashed payrolls by 415,000 – the largest one month drop in more than 20 years. In the two months of October-November 2001, the increase in the number of unemployed in the US totalled 800,000, taking the increase for the year 2001 as a whole to 2.2 million – the biggest annual increase in the jobless total to date. Engineering companies in Europe have slashed their workforces. ABB, one of the world’s biggest engineering groups, has cut 12,000 jobs [now, at the end of October 2002, it is close to collapse, with an expected job loss of 50,000. On Monday 25 October, after a profits warning, its shares lost more two-thirds of their value and, as a result of the mounting economic difficulties, Europe’s second largest company by sales, which employs 146,000 workers world-wide, is being broken apart, cutting its five divisions to two core businesses – power technologies and automation, with the other three divisions (financial services, building products, and oil, gas and petrochemicals) being earmarked for sale]. Invensys, the UK-based engineering group, has shed nearly 10,000 jobs. These figures compelled the Financial Times of 3 November 2001 to state that the “…classic ingredients of recession – an extended period of declining employment, output and income – are all in place.” On top of this, household savings have declined as a percentage of disposable income, from 10.6% in 1984 to an estimated 0.3% in 2001. The current account deficit is unprecedentedly high at $450 billion (4.5% of GDP). The stock market valuations are, notwithstanding recent troubles, too high in historical terms, with the price/earnings ratio on the Standard & Poor’s Index close to 40. The worst case scenarios, based on solid facts, visualise a Wall Street crash, a steep fall in the dollar and a slump in consumer spending, with utterly ruinous consequences for the US and the rest of the capitalist world.
Japan, the second biggest economy, is suffering from falling trade, rising unemployment (now 5.3% of the workforce), high public debts to the tune of 130% of its GDP, an extremely fragile banking system, chronic over-investment in the past has saddled large sectors of the economy with excess capacity and an unwillingness to invest any further, a very high domestic savings rate (30% of income) accompanied by the consumers’ unwillingness to spend. Over the past decade, Japan has introduced ten stimulus packages, pumping $1,070 billion of public money into the economy in an attempt to restart growth, but this massive injection of funds has had little effect other than to send the government’s debt soaring to unprecedented heights. Personal consumption, which accounts for 50% of Japan’s economic activity, is flat and capital investment continues to fall. According to the Bank of Japan’s Tankan Survey, published at the beginning of April this year (2002), Japanese companies plan to cut capital investment by 8% this year as they continue to reduce excess capacity. Lending by Japanese banks fell by 4.5% in March, year-on-year, the 51st consecutive month of decline. The Japanese economy has been in three consecutive quarters of recession, while prices have been falling for three years at the rate of almost 2% a year (see the Financial Times of 11 April 2002); contracting by 1.1% in 1998, registering a meagre 0.8% growth in 1999 and a relatively healthy 2% in 2000, the Japanese economy finds itself in the midst of yet another recession – the fourth such recession since its bubble bust at the end of the 1980s. Over the six years to the second quarter of 2002, the Japanese economy has expanded by just 3% in real terms. During the whole decade of the 1990s, the growth rate of the Japanese economy has been an abysmal 1.7%.
As for its banking system, it is believed by experts to be ‘technically insolvent’, though still liquid. The world’s second biggest banking system is close to being bust, with problem loans probably far exceeding the equity of the banking system. Most Japanese banks, according to reliable estimates, will fail to meet the Basle capital adequacy criteria. Some will have negative capital. This does not bode well for, as Martin Taylor, who used to write the Financial Times’ ‘Lex’ column before becoming chief executive of Barclays Bank, once correctly remarked that “poorly capitalised banks are like haemophiliacs on an assault course” (Financial Times, 2 October 1995). Notwithstanding the fact that the banks have written off 72,000 billion yen of bad loans, and the government created a 70,000 billion yen support package, Japanese banks still hold in their portfolios several trillion yen (estimated to be 43 trillion yen, or 8% of the country GDP) of problem loans. The collapse in the last week of December 2001 of the regional Ishikawa Bank under a pile of loans is an eloquent reminder of deflation in a debt-laden financial system. To make matters worse, the fall in the Nikkei, which today stands at just above a quarter of its peak at the beginning of 1989, when it stood at just a few points below 40,000 (in April 1989, the Nikkei began its long, tumultuous decline from the giddy heights of bubbledom), has eroded the capital base of Japanese banks, since they have been traditionally permitted to count part of their equity portfolios as ‘capital’. Continuing deflation makes it harder still to deal with corporate debt, made worse by problem loans uncovered by the collapse of the 1980s asset (land and stocks & shares) price bubble.
To make matters worse for the global capitalist economy, world trade grew by 0% in 2001, as compared with 13.4% in 2000.
The 1929 crash
During the last two decades the US (and for that matter many another) stock market has witnessed a phenomenal rise. In the US, the Dow Jones Index has risen from 1,000 in 1982 to the present 10,000, having briefly risen to 11,700 – a whopping ten-fold rise during a period when the US national output has risen only 2.6 times. From 1994 to 1999 alone, the Dow rose by more than 200% while corporate profits rose by less than 60%. In just the three years between early 1995 and the second quarter of 1998, equity markets added roughly $6,500 billion to the total US household wealth. Only a third of the increase in the prices of US equities since 1982 is accounted for by the rise in US corporate profits, with the remaining two-thirds coming from a rise in price/earnings ratios, which investors have been willing to attach to those profits. If in 1982 prices of shares stood at 8.5 times their earning, by 1999 they had jumped to 34 times earnings.
The seemingly inexorable rise of equity prices in the US has an uncanny parallel with a similar rise in the US in the years preceding the crash of October 1929. The Dow, which stood at 106 in May 1924, rose to 245 by the end of 1927, reaching the dizzy heights of 449 on the last day of August 1929 – a rate of increase even faster than that witnessed by the Dow during the last six years.
Less than two months after hitting the 449 mark, the Dow began its precipitous decline, reaching the rock bottom figure of 58 on 8 July 1932. It was to take 10 years and a deep recession before the Dow recovered to the figure of 100. Here briefly is the story of the crash of 1929.
Everything appeared to be rosy in the US garden in 1928. On 4 December 1928, President Coolidge sent his last message on the state of the Union to the reconvening Congress. In it he said: “No Congress of the United States ever assembled … has met with a more pleasing prospect than that which appears at the present”, adding that the legislators and the country might “regard the present with satisfaction and anticipate the future with optimism” (quoted in J K Galbraith, The Great Crash 1929, p.30).
Echoing imperialist statesmen and basing themselves on the partial post-first world war temporary stabilisation of capitalism, traitors to the working class from the Social Democratic camp were preaching the theory of organised capitalism – a variant of Kautsky’s opportunist theory of ultra-imperialism. The most prominent purveyor of this theory was Hilferding. According to this theory, the growth of monopoly puts an end to the blind forces of the market, and thus to competition, anarchy of production and capitalist crises, making way for organised capitalism in which planned and conscious organisation predominates. Further, according to this theory, monopoly peacefully grows into planned socialist economy, thus obviating the need for the working class to overthrow capitalism. Addressing his Party’s Congress in 1927, Hilferding told the delegates that capitalism had in the main overcome the blind laws of the market and made way for an organised economy.
Partial stabilisation of capitalism might have led a superficial observer to believe that capitalism’s problems were over and done with. Any serious thinker, who followed the developments of world economy and politics, however, would have been of the opposite opinion. None of the contradictions between the principal imperialist countries, over which they had fought the first world war, had been resolved. Capitalist overproduction and the paucity of opportunities for profitable investment remained a recurrent problem, leading to trade disputes and a furious struggle for markets, resources, avenues of investment and export of capital. In addition, huge sums of money, fuelled by credit expansion, were thrown, as we shall see, on to the stock exchange as a way of averting a collapse in profits. The sums of money loaned to speculators climbed from $1 billion in the early 1920s to $6 billion in 1928. These could only provide a partial and temporary relief. When the inevitable crash came, it brought in its wake protectionism, fascism and a war of unprecedented proportions, in which the major capitalist powers fought a life-and-death struggle as the only way of safeguarding their respective interests.
Although Galbraith tells a fascinating story and charts the crash of 1929 accurately, he is unable to provide any scientific explanation for the crash, instead resorting to psychological theories such as mania and irrationality. This is all the more surprising in view of the fact that he himself cites impeccable figures indicating clearly that the US was gripped by a crisis of overproduction which, to begin with, like all such crises, manifested itself in the form of a financial crisis and a stock exchange meltdown.
Between 1925 and 1929, he say, manufacturing establishments increased from 183,900 to 206,700, with the value of their output rising from $60 billion to $68 billion. The Federal Reserve index of industrial production, which had averaged only 67 in 1921 (1923-25 = 100) had risen to 110 by July 1928 and 126 in June 1929. Business earnings were rising rapidly. However, by the autumn of 1929 the economy was well into a depression. By October 1929, the index of industrial production had declined to 117 – from 126 only four months earlier. Unsold stocks accumulated. This could not fail to find its reflection in the stock market, which it did very soon indeed. The crisis of overproduction and difficulties of realisation of commodities produces mass defaults resulting in the withdrawal and drying up of credit. It is impossible to expand credit without limit, for the debts have to be repaid, failing which credit is withdrawn instantly. When this happens on a mass scale, it produces a credit crunch, which in turn produces a rush to sell shares at prices far lower than the sums of money borrowed to purchase them – resulting in a crash on the stock exchange.
When on Monday 21 October share prices fell, Professor Irving Fisher stated that the decline represented only a “shaking out of the lunatic fringe” before going on to explain that the stock prices during the 1920s boom had not caught up with their real value and would go higher still for, inter alia, the market had not until then reflected the beneficent effects of prohibition (the equivalent, one must presume, of the present-day wonders of technology), which had moulded the American worker into being “more productive and dependable” (Galbraith, p.119).
Ignoring Professor Irving’s wishful thinking, it only took three days before the Black Thursday, 24 October, arrived – the first day of real panic, characterised by disorder, fright and confusion. Nearly 13 million shares changed hands at prices which shattered the hopes and dreams of their owners. By 11 o’clock the market had “degenerated into a wild, mad scramble to sell”, often with no buyers available to buy. Sunday, 27 October, witnessed sermons suggesting that the happenings of the previous week on Wall Street had been a much-deserved retribution visited on the Republic and on a people who, in the single-minded pursuit of mammon, had forgotten all virtue. Everyone believed that, with the “heavenly knuckle-rapping” over, speculation could now resume anew. But to no avail.
“Outside the Exchange on Broad Street a weird roar could be heard. A crowd gathered. Police Commissioner Grover Whalen … dispatched a special police detail to Wall Street to ensure the peace… A workman appeared atop one of the high buildings to accomplish some repairs, and the multitude assumed he was a would-be suicide and waited impatiently for him to jump” (ibid. p.121-2).
The decline in share prices was remorseless – hour after hour, day after day, week after week. Shares, which only a few weeks earlier were selling at $15 or $20, could be had for almost nothing. The rumour swept Wall Street that the Chicago and Buffalo Exchanges had shut. In quick succession 11 well-known speculators committed suicide. Any number of meetings of the most powerful financiers and statesmen, held for the purpose of supporting the market, proved utterly futile. Unable to make any sense of the “creative destruction” emanating from Wall Street, Simeon D Fess, the chairman of the Republican National Committee, made bold to say that the whole thing was a conspiracy to discredit the Republican Administration through the utilisation of the stock market. “Every time,” he said, “an Administration official gives out an optimistic statement about business conditions, the market immediately drops” (quoted in Galbraith, p.162).
James Walker, Mayor of New York, exhorted motion picture exhibitors to “show pictures which will restore courage and hope in the hearts of the people”.
Nothing could reassure the market. Tuesday 29 October was the most devastating day. With the volume of trading exceeding that on Black Thursday (24 October), it was accompanied by uncertainty, alarm and a perpendicular fall in prices. 16.5 million shares were traded and the index went down by 43 points, wiping out the gains of the preceding 12 months. If the first week of the crash had witnessed the slaughter of the innocents, in the second week it was the wealthy “who were being subjected to a levelling process comparable in magnitude and suddenness to that presided over a decade before by Lenin” (ibid. p.135).
The remarkable phenomenon of the Coolidge bull market was matched by the equally remarkable phenomenon of the “ruthlessness of its liquidation”. Calm had given place to panic, universal trust to universal suspicion, and fact to rumour.
“On La Salle Street in Chicago a boy exploded a firecracker. Like wildfire the rumour spread that gangsters whose margin accounts had been closed were shooting up the street. Several squads of police arrived to make them take their losses like honest men. In New York the body of a commission merchant was fished out of the Hudson. The pockets contained $9.40 in change and some margin calls” (ibid. p.141).
Five star hotels, from being the hunting grounds of the pleasure-seeking rich, were all of a sudden transformed into venues for ending their lives by the high-flown rollers proletarianised through the devastating blows administered by the stock exchange.
“Clerks in downtown hotels were said to be asking guests whether they wished the room for sleeping or jumping. Two men jumped hand-in-hand from a high window in the Ritz. They had a joint account” (ibid. p. 146).
On Wednesday 13 November 1929, the industrials index closed at 224. On July 8, 1932, it closed at 58. “No one any longer suggested that business was sound, fundamentally or otherwise. During the week of 8 July 1932, Iron Age announced that steel operations had reached 12% of capacity. Pig-iron output was the lowest since 1896” (ibid. p.161).
The Great Crash gave way to the Great Depression, which lasted, with varying degrees of intensity, 10 years. In 1933, the US GDP had shrunk by a third in comparison with 1929. It was not until 1937 that the physical volume of production reached the levels of 1929 – only to slide again. Until 1941 the dollar value of production remained below the level of 1929. In the ten years between 1930-1940, only once (in 1937) did the average number of jobless during the year drop below 8 million. In 1933, close to 13 million – about one in every four in the labour force – were out of work. As late as 1938, one person in five was still out of work.
It was not the US alone which was in the grip of an unprecedented depression. The Great Crash and the subsequent Great Depression swept in its wake the entire capitalist world. In comparison with the doom and gloom, despair and despondency, engulfing the entire capitalist world, the USSR, the land of socialism, alone stood as a shining beacon of rising production, rising employment and working class power, beckoning the world proletariat, by its sheer existence, to overthrow capitalism. As the capitalist crisis wreaked havoc on the economies of all the major capitalist countries, year by year the USSR registered world historic increases in industrial production. If industrial production be taken as 100 in the year 1929, the position of the countries under consideration was, in the year 1933, as shown in the table below.
Increase in Industrial production from 1929 to 1933
Figures taken from Stalin’s Report to the 17th Party Congress, January 1934.
By 1932, unemployment in Germany had reached 5 million (40% of the workforce); in Britain 3 million workers – just under a quarter of the labour force – were out of work. In the capitalist world as a whole, anywhere between 40-50 million workers were jobless. Several millions more worked only part time. In Europe the utilisation of industry had dropped to 40% of capacity.
In view of the above bleak economic picture, imperialist countries, not surprisingly, resorted to protectionism. During 1929-32, trade turnover, without which the capitalist economy cannot exist, declined by an unprecedented 65%.
Banks accumulated vast amounts of bad debts as their business clients found themselves unable to service their loans. In the US alone, the number of banks declined from 25,000 to 18,000 between 1929 and 1933.
German monopoly capitalism, terrified of the rising support for the communist party, hand in hand with the declining fortunes of the Social-Democratic Party, and fearing a proletarian revolution, took the fateful decision to back the Nazi party as the only way to save German capitalism. The Hitlerites, who in 1928 had only half a dozen members in the German parliament, bolstered by the financial, political and military support of German imperialism, secured 13 million votes and won 230 seats to parliament in 1932.
In the end, imperialism could find no way out of the crisis other than through the horrors of the Second World War, which brought untold material destruction and cost the lives of 50 million workers and peasants.
When it comes to explaining the real cause of the crisis, Professor Galbraith, one of the best of the bourgeois intelligentsia, is able to point to all kinds of peripheral causes, but not the one that really matters, namely, overproduction. If Galbraith, writing in the 20th century and a whole seven decades after the publication of Marx’s Capital, cannot provide the reader with a clue as to the cause of the 1929 Crash and the Great Depression which followed it, it would be futile to expect a proper explanation from Sir Isaac Newton, who began selling his £7,000 holding of South Sea shares in 1720. Sir Isaac, then the Master of the Mint, on being asked the direction of the market, replied “I can calculate the motions of the heavenly bodies, but not the madness of the people” (cited in Devil take the Hindmost by Edward Chancellor, 1999, p.69). In trying to explain the Great Crash in terms of irrationality, mania and psychology, Galbraith seems to have advanced little beyond Newton. Undoubtedly psychology plays its part but, far from explaining the irrational exuberance, it itself has to be explained by reference to material reality. Undoubtedly, Galbraith makes a correct point in approvingly citing from the New York Times of 9 September 1929 the following sentence:
“It is a well-known characteristic of ‘boom times’ that the idea of their being terminated in the old, unpleasant way is rarely recognised as possible” (op. cit. p.110). Although correct, this statement explains nothing except that in a rising stock market participants in it get carried away in their feverish activity and produce widespread and irrational exuberance.
Instead of seeking explanations of the social phenomena in material reality, even the best of bourgeois writers are forever inclined to search for explanations of reality in the realm of ideas. And this, so long after Marx scientifically demonstrated that speculative activity is merely an expression of the over-accumulation of capital and the drying up of opportunities for profitable investment in the productive sectors of the economy. The depressed state of industry consequent upon the fall in the rate of profit, forces the capitalists to resort to the export of this excess capital or to deploy it along the “adventurous road of speculation” on the stock exchange in a desperate attempt to prevent a collapse of profits. Hence the froth on the stock exchange, the frenzy of bidding up prices in the hope of finding a fool who will buy these stocks, who in turn hopes to find an even bigger fool in the shape of a prospective buyer – until the whole process comes to a scandalous halt and bankrupts those left wit these shares.
It is not the mad and irrational exuberance that summons gargantuan sums of capital to the stock market but, on the contrary, it is the over-accumulation of capital, the inability of the capitalist system of production to use profitably the mass of accumulated surplus value, which in the first place call forth the deployment of vast amounts of capital on to the stock exchange, which in turn, at a certain stage, leads to irrational exuberance and the mad rush to buy. A crash in turn brings the speculators to earth with a horrible bump and in the process reveals, at least to those who are willing to face reality, that it is not that the stock market crash has shattered production but the bubble preceding it merely served to conceal the failure within the relations of production characteristic of capitalism.
The tendency towards limitless expansion of production, which is characteristic of capitalism, comes up against the barrier of a market limited by the impoverishment of the masses.
“The real barrier of capitalist production,” said Marx, “is capital itself. It is that capital and its self-expansion appear as the starting and closing point, the motive and purpose of production; that production is only production of capital, and not vice versa, the means of production are not means of production for a constant expansion of the living process of the society of producers… The means – unconditional development of the productive forces of society – comes continually into conflict with the limited purpose, the self-expansion of the existing capital” (Marx, Capital Vol III, p.250, Progress Publishers, Moscow, 1966).
Hence the periodic crises under capitalism.
“The crises are always but momentary and forcible solutions of the existing contradictions. They are violent eruptions which for a time restore the disturbed equilibrium.”
The three principal centres of imperialist capitalism find themselves in a synchronised recession. While the US and eurozone economies have registered meagre growth, this has been accompanied by a decline in the stock market and the yen, with a rise in corporate bankruptcies, deflation, problem loans and an ominous fiscal deficit.
But the worst is still to come.
Although the US is trying its best to avert disaster through a series of measures, ranging from interest rate cuts (during the last year, it has cut interest rates 11 times to the present unsustainable level of 1.75%), tax cuts and a dramatic increase in military spending, it cannot for too long delay the corrections to its unsustainable current account deficit (CAD), negative private savings, excess corporate investment, the huge stock of net liabilities to the rest of the world and overpriced equities.
The US CAD, amounting to 4.5% of its GDP, means that it is spending to the tune of 4.5% in excess of its income. In other words, while the CAD persists at this level, the rest of the world must be persuaded to provide the US with a net capital inflow to the tune of 4.5% of US GDP. This capital inflow may assume the form of asset sales to foreigners, loans from them or the sale of stakes in US businesses. The result is a build-up of claims by foreigners on the US (see the Financial Times of 27 February 2002).
And this at a time when the US stock of net liabilities to the rest of the world (the net international position of the US) already has risen to a fifth of America’s GDP. At the end of 200, the US’s net liabilities stood at $2,187 billion. If we add to this the CAD of $450 billion in 2001, we get the sum of $2,600 billion. If the CAD rises further, as it is forecast to do, so will the US’ net liabilities to foreigners.
Hitherto the foreigners, principally Japan, newly industrialised Asian countries and oil exporting countries and the EU (especially through the spate of Mergers and Acquisitions activity during the last few years) have been willing to plug the gap left by the US trade deficit. For the last 6 years the strength of the dollar masked this process as its strength appeared to feed on itself, almost like a giant pyramid selling scheme. Strong overseas demand for US assets served to strengthen the dollar, thus increasing the returns received by the foreigners on dollar-based assets and fuelling further demand for the US currency. The truly weak aspects of the US economy – CAD and negative savings – simply took a back seat.
Things have, however, changed now. In the words of the Financial Times:
“Expectations of permanently high returns on US assets have been dashed, and not only by the fall in the stock market. Company profitability has been shown to be much lower than thought. Revisions to official figures show that profits have been falling as a share of national income since 1997. And productivity growth figures have also been revised down to the less than miraculous figure of 2.5% a year since 1996.
“In short, it is now much harder to argue that consistently high productivity growth will make US workers so efficient that the country can eliminate its current account deficit without a dollar depreciation. The International Monetary Fund is certainly sceptical. This week, it argued that the current account deficit of $450 billion was ‘not sustainable in the longer term'” (18 August 2001).
Last weekend (27 April 2002), the Financial Times returned to the question with the statement that the dollar was overvalued and therefore certain to fall, because the US spends more than it earns. There is no historical precedent to suggest that a country faced with an increase in foreign claims on its assets of the proportions faced by the US can continue to do so without a significant depreciation of its currency. “It is even harder for the world’s economy, sucking in more than $500 bn or close to 10% of the global gross savings every year. If the US attracted any less than this at the prevailing rate, the dollar would fall automatically.”
The Financial Times adds that the foreigners investing in the US have many reasons to be cautious – these being the underperformance of US equities this year in comparison with those of other imperialist countries, the fragility of US corporate profits and the unprecedentedly high stock prices. If sufficient capital flows are not forthcoming, as is only too likely in view of the above concerns, the dollar will not only decline, but its decline will be “far from limited or orderly”. The consequences of such a decline would be catastrophic for the US and the entire capitalist world, for if the foreigners were to withdraw their funds from the US, it would be like a gun pointed a the world’s biggest and most important financial market.
Then there is the question of negative savings. The wealth held in the US stock market increased by $12,000 billion between 1994 and 2000. This is equal to more than 6 years of normal gross savings in the economy. US citizens have stopped bothering to save when the stock market does it painlessly for them. The US private sector financial deficit stands now at a record 6% of GDP, as opposed to a historical surplus of 2-3% of GDP. This cannot continue forever. If this trend were to reverse, a serious recession would be unavoidable – not only in the US but in the rest of the world, for as US households cut consumption and build their balance sheets, they will be importing far less from the outside world and thus exporting recession to the latter. This is especially so as the US economy is the largest and has acted as a buyer of last resort and an engine of world capitalist growth.
There has been a rapid rise in US domestic spending. Since the mid-90s it has risen by over 5% a year, while real growth has been below that figure. The result has been a rise in the CAD. This is only possible because people believe their wealth is increasing through rising stock markets. Wall Street prices do not need to plunge; they merely need to continue to mark time, as they have been doing for the last two years, for retrenchment in private spending to take place. No wonder, then, that the Fed is terrified of a Wall Street crash followed by a devastating depression.
Such a crash and depression would destroy many a large fortune and eliminate some of the household names of the corporate world. In addition, it would devastate the lives of hundreds of millions of workers and peasants in the world, as well as destroying middle class prosperity, which is the bedrock of political and social stability in the imperialist countries.
In his book Irrational exuberance, Rober Shiller deals with a question that is of close concern to millions of people, namely, pensions and social security. Just as in Britain people can opt out of state pensions, US citizens are allowed to contribute to pension schemes known as Individual Retirement Accounts and company-sponsored schemes referred to as 401(K)s. The writer is worried that these and similar schemes for retirement security are encouraging ordinary people “to mimic the portfolio strategies long pursued by the wealthy”, while ignoring the fact that the wealthy, because of their riches, “have less reason to worry about losing substantial amounts in a market decline” (p.217).
He is alarmed at the fact that in 1996 “more than two-thirds of 401(K) pension plan balances were [invested] in the stock market”. He adds: “If the trend toward favouring the stock market for 401(K) investments has continued since 1996, the fraction of plan balances in the market today will be even higher. Many participants no doubt put virtually all of their pension funds into the stock market.
“Because so large a proportion of 401(K) investments is in the stock market, a sharp decline would have important consequences for many retirees. A decline of the stock market to less than half its recent value is not improbable. Given the meagreness of most social security benefits, and given that most retirees have little more than their pension plan, their house, and their social security benefits, these declines would indeed be noticed” (p.218).
As if this were not enough, a number of proposals have been advanced in the US to invest a portion of the Social Security Trust Fund in the stock market. In his 1999 State of the Union Address, President Clinton proposed that a quarter of this fund be invested in the stock exchange over a period of 15 years. George W Bush went further still by advocating a scheme that would allow people to opt out of social security tax obligations altogether and invest them personally.
50 million households in the US own shares directly or through mutual funds. The prosperity of these by and large middle class families is maintained through the rising equity prices. Something akin to it is happening in many other imperialist countries. With the increasing attempts at privatisation of social welfare in all the imperialist countries, the prosperous life of the middle class cannot be maintained except on the crest of a rising stock market. A stock market crash would thrust millions of such people into the ranks of the proletariat and thus undermine the very basis of social peace in the centres of imperialism. This mass of declassed petty-bourgeois, unless harnessed by the party of the revolutionary proletariat, could become easy prey to the demagogy of fascism. It would be an urgent task for the proletariat to win over to its side the newly-impoverished millions – not an easy task in view of the contempt it has for the working class – a contempt born out of fear of being thrust into the rank of the despised class.
The weak global economic growth and a slowdown in world trade has, not surprisingly, given rise to growing protectionism and rising tensions between the US and its main trade partners – especially over Washington’s decision to levy tariffs of up to 30% on imports of steel into the US. The EU and Japan are threatening to retaliate in kind. Each side, while swearing by the rules of the WTO (World Trade Organisation), is principally concerned with the defence of its own industry and commerce; each accuses the other of acting contrary to the provisions of the WTO.
Last year (2001) saw a record number of anti-dumping and safeguards investigations into imports. 348 anti-dumping investigations were initiated last year, compared with 251 in 2000 and an annual average of 232 in the 1990s. Safeguards cases (these are temporary trade barriers, put up in the face of sudden increases in imports) worldwide more than doubled, from 26 in 2000 to 53 last year.
As the crisis develops and deepens further, the various imperialist powers would resort, without doubt, to a full-fledged trade war which, unless prevented by proletarian revolution, cannot but in the end lead to a war of horrific proportions between imperialist groups. Thus it can be seen that imperialism faces the proletariat and the oppressed peoples with the simple choice: either submit to the dictates of capital, eke out a miserable existence and sink lower and lower, or pick up the glorious banner of Marxism-Leninism and overthrow imperialism.
Socialism – the only way out
In view of this, it is of the utmost importance to explain to the working class and the petty-bourgeois strata that crises cannot be eliminated while capitalism lasts, that the “solution can only consist in the practical recognition of the social nature of the modern forces of production, and therefore in the harmonising of the modes of production, appropriation and exchange with the socialised character of the means of production. And this can only come about by society openly and directly taking possession of the productive forces which have outgrown all control except that of society as a whole. The social character of the means of production and of the products today reacts against the producers, periodically disrupts all production and exchange, acts only like a law of nature working blindly, forcibly, destructively. But with the taking over by society of the productive forces, the social character of the means of production and of the products will be utilised by the producers with a perfect understanding of its nature, and instead of being a source of disturbance and periodical collapse, will become the most powerful lever of production itself.”
Further it is necessary to explain that “the capitalist mode of production more and more completely transforms the great majority of the population into proletarians, it creates the power which, under penalty of its own destruction, is forced to accomplish this revolution” (Engels).
Rather than allow ourselves to be destroyed by monopoly capitalism, the proletarians of the world must march along the only route that leads to their salvation – the road of the October Revolution.
Vanity of Vanities; all is vanity
“The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis” Herbert Hoover, October 25, 1929.
“I want you to know the economy, our economy, is fundamentally strong” George W.Bush, July 15, 2002.
While the shallow-headed political representatives of imperialism assure everyone that the capitalist economy is fundamentally sound and strong, the more thoughtful bourgeois commentators have begun to seriously question the allegedly healthy state of the economy. In the face of overwhelming evidence, indicative of the incurable crisis of overproduction, it is becoming increasingly difficult for any serious observer of the economic landscape (even if he be the most ardent advocate of capitalism) to maintain that the present-day capitalist economy is in a fit, healthy and robust state.
The short period of six months, since the above contribution was presented in Brussels, have witnessed wildly fluctuating stock markets, breathtaking corporate bankruptcies, corporate chiefs in handcuffs, the daily revelation of dodgy accounting practices and manipulation of corporate profitability, falling consumer confidence and accumulation of spare capacity (a crisis of overproduction), increasing unemployment, a declining dollar and the wiping out of $5,000 billion of paper wealth consequent upon a plunge in the equity markets.
According to the US Commerce Department’s GDP report, which appeared in the latter half of July, the US economy, without a shred of doubt, underwent a recession last year – with three quarters of negative growth and almost no growth in the GDP for the year in its entirety. Far worse, the report pointed out, the growth in the first half of this year was far less than had been believed hitherto, most of this growth resulting from inventory correction. In the second half of this year, with the industrial activity all but stalling, the likelihood of a double-dip recession (that is, growth collapsing for a second time, just as it appeared to be recovering) is real indeed. Unemployment in the US has jumped from 4% to 6% of the workforce – up from 5.5 million in January 2000 to 8.5 million today.
The data from the Commerce Department, by giving a glimpse of reality, set the scene for yet another plunge in the stock markets of the world. In a period of just ten days in July, the Dow Jones Industrial average index fell by a precipitous 1,000 points, pushing the dollar below parity with the Euro. On 22 July, the day WorldCom, until recently the second biggest long distance carrier in the US, filed for the biggest corporate bankruptcy in the history of US capitalism, the Dow fell to 7,785 – a fall of 3% – bringing it to a level 33% below its January 2000 peak. This was in addition to a fall of 7% in the previous week. The Standard and Poor’s (S&P) index of 500 leading stocks fell to levels 41% below those reached at the end of 1999, bringing delight to the camp of even the bourgeois critics of the US model of capitalism and tempting them to invoke the cry of Ecclesiastes: “Vanity of vanities; all is vanity”. The FTSE index of 100 leading stocks’ fall to 3,895 – then its lowest since September 1996, carried all the signs of “FTSE 4,000 liquidation issue”, an indication that the index was approaching levels that would prompt the forced selling of equities by life assurance companies to shore up their solvency positions in order to meet the regulatory criteria. At this point it was 42% down from its peak in December 1999.
Having gone down as low as 3,600 the Footsie 100 stood at 4,051 at close on Friday, October 5th and the TeckMark at 671, while the Dow Jones closed at 8,443 and the Nasdaq at 1,331 on the same day – having gone down as low as 7,286 and 1,114 respectively on October 10th. Let it be noted in passing that, as the stock markets plunged, with perfect timing, Greenspan, already the proud recipient of the Enron Award for Distinguished Public Service, was made a Knight of the British Empire, in the very week which saw his management of the American economy beginning to be seriously questioned. Perhaps it is unfair to single out Greenspan, for present-day bourgeois economics, as someone observed recently, is no more than a modern form of alchemy, with the practitioners in its black arts being nothing more than highly-paid witch doctors. Even such a defender of capitalism as the FT was forced, in the wake of the Enron bankruptcy and the then-impending WorldCom collapse, to observe in its leading article that: “Excess is built into the capitalist system. Periods of hubris, when false prophets claim that the laws of [capitalist] economics have been superseded, give way to nemesis. Then comes the period of catharsis, when the guilty are hunted down and new regulations are drafted” [‘Hubris, nemesis, catharsis’ 22 June 2002]
The European stock markets too went into a downward spiral, with the FTSE Eurotop 300 losing 5% and coming close to the worst levels of September 1998 following the Russian default and the near collapse of the Long Term Capital Management hedge fund. Since its peak in March 2000, the FTSE Eurotop 300 had fallen 46% by 22nd July. Dizzying falls were registered in Amsterdam, Paris, Zurich and Frankfurt. The European markets could hardly be expected to escape the fall out from the precipitous falls on Wall Street, for the international markets, through cross-border investment, are more closely correlated than in the past. In the words of the Financial Times “European markets are stuck with Wall Street like two Mafia victims with their feet set in concrete; they will have to sink or swim together” (‘Continental drift’, 24 July 2002).
Back in late 1999/early 2000, when tech markets were surging and indices such as the Nasdaq were setting new records, any item of corporate news appeared in a positive light. Strong economic data meant a leap in profits; weak data meant that the Fed was bound to cut interest rates. But now, says the Financial Times of 27 July “even the merest whiff of bad news or scandals is enough to send investors running for the exits”, adding that the “cult of the equity may not be discredited. But, for investors, it is no long a monotheistic world”. The misplaced euphoria of former days has given way to doom and gloom; dotcom millionaires, swashbuckling executives and market analysts, have crashed to the ground; and, in the light of a long line of accounting scandals, brought to light by the deepening recession, what used to be euphemistically referred to as synergy has now metamorphosed into a monstrous conflict of interest. In short, the scene is littered with battered and bruised markets and dealers with shredded nerves, and, underpinning all this, is a serious crisis of overproduction.
Companies which had become household names, have bitten the dust. Enron’s market capitalisation witnessed an exponential rise. In just 15 years, it shot up from $2 billion to $70 billion. Systematic fraud and manipulation of earnings played their part in this phenomenal rise. Enron’s shares, which in late 2000 traded at $85, plunged to $1 in November 2001. One month later, Enron filed for bankruptcy. WorldCom, which was to acquire world notoriety for a huge $7 billion of dodgy expenses, had at the beginning of 2002 assets worth $107 billion. In 1999, with a market capitalisation of $180 billion, its shares traded at $64. In June 2002, while its stocks plunged to 9 cents a share, it filed for bankruptcy.
Longest recession since Second World War
During August, the stock markets recovered somewhat. While the Dow on 29 August stood at 8,500, the FTSE reached 4,209. However, taking the two months of July and August together, we find that the markets melted down, melted up only to begin to melt down again. The short-term gains at the end of August were in no way inconsistent with the gloomy long-term picture. The rally at the end of August was similar to that experienced by the equity markets from September 2001 – lows to December – only to be followed by a renewed decline. Quite correctly, the FT observed that “The threat of a double-dip recession is still alive and well. Treat the rebound as a trading rally and not a long-term investment opportunity” (Financial Times, 24 August 2002).
Since then the markets have melted up a bit and melted down again. Every rally on the stock exchange vanishes before it has had time to gather strength. The threat of a double-dip recession is as alive today as it was two months ago.
These are three reasons for asserting that the stock market declines have far to go. First, even with the recent falls, the price/earnings ratio on the S&P 500 is almost three times its historic average. Second, there is too much overcapacity, wasteful investment (that is, under the conditions of capitalism), massaged revenue figures, undisclosed risks and fraud built into the current price/earnings ratios. Finally, the mounting US current account and fiscal deficit, and the attempt by the US to correct these imbalances, are bound to have a further depressing effect on the stock markets and the world economy.
A short-term rebound in the equity markets is no proof that the worst is over, for bear markets are traditionally littered with “suckers’ rallies”, which enable smart money to make an exit at a reduced loss. The present bear market has now run for 32 months, a period longer than all except three of the bear markets of the 20th century – those linked to the 1929-32 Great Depression and the onset and aftermath of the Second World War.
Commenting on the dismal end to a dismal third quarter for the stock markets worldwide, the Wall Street Journal of 1 October observed: “Even many optimists are resigned to the idea that 2002 could well be the third consecutive year of overall declines for the US stock markets – something investors haven’t endured in more than 60 years, since the industrial average fell during the years 1939-41. Some even are wondering what the odds could be of a fourth decline in 2003, an almost unthinkable streak that has happened only once, from 1929-32, since the industrial average was created in 1896.”
What worries the economic and political representatives of imperialism is that the present crisis may end in a collapse of some major banks, for “just as an opera is not over until the fat lady sings, many bear markets do not end until there is some kind of crisis in the financial system, such as the collapse of many US banks in the 1930s…” (‘Bear Necessities’, Financial Times, 6 July 2002).
The Financial Times assures that this won’t happen because, learning from the past, the financial institutions are better placed to emerge from the present crisis unscathed. One of the reasons that the recession has not become deeper still is the buoyant state of the housing market. While business investment has collapsed and equities plunged, investors have shifted to the property sector causing a housing market bubble; the rising house prices have enabled consumers to transfer their equity-extracting tactics to the housing market and thus carry on spending. A crash in the property market, which is sure to arrive, will, while burying house owners and other investors in real estate under a mountain of debt, will leave many a financial institution badly exposed. A collapse of the property market is only too likely to trigger a banking crisis and a systemic failure. It is a sign of the times that several European banks have already announced soaring bad debt provisions, heightening investor fears about the financial sector’s exposure to failing companies in Latin America and elsewhere. As a result, shares in all major banks fell on 1st August. Whether the authorities take action to puncture the bubble through increases in interest rates or simply let it run until the market pricks it – either way a disaster awaits the world-capitalist economy. The puncturing of the bubble by the Japanese authorities and the subsequent property and stock market crash, followed by a decade of economic stagnation, on the one hand, and the active participation of the US Federal Reserve in sustaining the surging US stock markets, but ending up in a stock markets plunge nevertheless, on the other hand, serve as an eloquent proof that the capitalist economy cannot but land in the ditch of a full-fledged recession at the end of a break-neck steeple chase of economic growth and soaring stock and property markets.
With the Dow Jones trading at the level of 1998 and the S&P 500 and Nasdaq down to 1997 prices, the investors, have seen their stock portfolios plunge over the past five months. Not surprisingly, then, they took nearly $14 billion out of the US equity mutual funds in June alone (see Financial Times, 23 July 2002). Disgruntled foreigners are following the same course. Saudi investors alone have pulled out close to $200 billion from the US – a sum representing 30% to 40% of the total Saudi investments in the US.
As if all this was not enough, the IMF was obliged to mark the 5th anniversary of the present crisis, which broke out in the far east, with a $30 billion bail-out loan with the purpose of breaking the vicious circle of falling Brazilian currency, spiralling debt and plummeting confidence which is battering one of the world’s biggest emerging markets. With this loan, the ambition of the IMF and its imperialist shareholder countries to limit crisis-lending looks more like a forlorn hope than a realistic goal. Even with this huge loan, serious bourgeois analysts are of the view that Brazil stands less than an even chance of avoiding default on its $250 debt. In granting this loan, the IMF has flouted the G7 group of imperialist countries’ own plan of action, announced with such a fanfare only last April in Washington, which decided on stricter rules on rescue-lending and an orderly mechanism for restructuring the debt of debtor countries. Instead fears concerning “irrational nervous markets and the destabilising regional impact of Brazil’s economic difficulties have, it seems, overridden doubts about protecting Brazil’s reckless investors” (‘A brave bail-out’ Financial Times, 9 August 2002).
Brazil’s debt accounts for 60% of her GDP, 35% of this debt falls due within one year. If the bail-out fails, “it will destroy not only Brazil’s economy but also the IMF’s raison d’être” (Financial Times, 9 August 2002).
The truth is that Brazil’s solvency hovers on the edge of a knife. Continued sluggish economic growth (further reinforced by stringent government spending), slippage in the budget deficit or higher interest rates could easily trigger another crisis.
The Brazilian bail-out was motivated solely by political considerations even though it encourages reckless lending. The Brazilian economy is far too important to be allowed to collapse. If it fails, and there is a good chance that it will, the consequences for the capitalist economies throughout the region will be fearful. The imperialist financial institutions are at a loss as to what more can Brazil do, for, unlike Argentina (already in the grip of a severe crisis), it (Brazil) has adhered closely to the IMF targets to limit its budget deficits.
In the end, the fate of the global capitalist economy rests on the American consumer – world’s consumer of last resort. Here, three powerful forces are at work which suggest that the American consumer is close to being caught in a vice, which will turn the virtuous cycle into a vicious one, namely the destruction of paper wealth, the long-overdue US current account adjustment and income shocks from a wave of redundancies as companies go in for cost-cutting (as payroll accounts for 70% of the costs, no cost-cutting is possible without widespread redundancies). Especially at risk will be the managerial sections of the workforce for they account for 25% of all white-collar jobs in the US. This white-collar shakeout, hand in hand with the plunge in stock markets, would spell an end to the bubble-induced extravagance of the American consumer, with devastating consequences in Asia, which is so dependent on exports to the US. Retreat by the American consumer would threaten the region with a deep recession and social explosion. All bourgeois hopes now rest on the arrival of the “Fifth Cavalry” in the form of an investment recovery, but there is “certainly no sign yet of the distant hooves of a relieving force” (Financial Times leader, 6 August 2002). Nor could there be such a sign in view of the existing huge spare capacity.
A crisis of faith
Commenting on the revelations concerning a string of corporate frauds, dodgy accounts, mis-stated earnings and plunging stock markets, the Financial Times of 20 July 2002, in its leading article, assures us thus:
“This is not a crisis of capitalism. It is its corrective mechanism at work. Today’s plunging markets and state of disbelief are the linear descendants of the prior bubble and the prior belief. The credulous are being punished”, adding that “it was the public’s credulity that made the reign of the crooks and deceivers possible” (‘Infectious greed’). In other words, we are all sinners. Why blame poor old capitalism for our own greed, stupidity and credulity!
There are, however, others, including some Financial Times writers, who have other ideas and are deeply disturbed by the crisis of capitalism. Faced with an economy going into a nosedive, confronted with a stream of corporate frauds, face to face with the fact that the executives and directors from the 25 largest US public companies to go bankrupt since January 2001 made a $3.3 billion fortune by selling (because they were armed with inside knowledge) their stock options just prior to a plunge of their respective companies’ shares – faced with all this they are unwilling to be lulled by the soothing words of the Financial Times’ leading article. The late Peter Martin, writing in the Financial Times of 17 July (just before his death), characterised the present turmoil as a “crisis of faith” comparable to that experienced by Victorian Christians as they sought to grapple with the teachings of Darwinian science and as epitomised in Matthew Arnold’s Dover Beach. For Arnold, as for the believers, the Sea of Faith was once at full tide:
“But now I only hear
“its melancholy, long withdrawing roar”.
It would be difficult to disagree with such a perceptive observation, especially made as it was by someone with such impeccable bourgeois credentials.
A month later, writing in the Financial Times of 17 August, Niall Ferguson, a diehard reactionary, was forced by the weight of evidence around to admit that “Marx’s insights into capitalism can still illuminate”, that behind the “bubbles and the busts of the capitalist system there is the class struggle; and that class struggle is the key to modern politics”, and that “many of the defects he [Marx] identified in 19th century capitalism are again evident today”, adding that “in the past 20 years, there has been a significant increase in inequality in the pre-eminent capitalist economy, the United States. In 1981, the top 1 per cent of households owned a quarter of American wealth; by the late 1990s, that single percentage owned more than 38 per cent, higher than at any time since the 1920s”.
Having made the above correct observations, Mr Ferguson endeavours to distort that Marx got it wrong in saying that the class struggle was between the bourgeoisie and the working class. Oh no!, he says. It is today, he asserts, between the “CEOcracy” (referring to the strata of Chief Executive Officers of companies) and the “suckers” (shareholders). Since 50% of the American households own shares, the include vast layers of the petty-bourgeoisie and the well-off sections of the working class. The robbing of these vast sections of the population cannot but give a tremendous boost to the class struggle between the bourgeoisie and the working class – including the soon to be proletarianised petty bourgeoisie.
Be that as it may, Mr Ferguson goes on to observe that Marx would also have “appreciated the intimate links” between business and government (in this case the Bush administration). “This truly is one of those moments in history”, he says, “when the nexus between economic interest and policy is laid bare”. Further comment would be superfluous.
Counter imperialist war with a war on imperialism
Not only is the US economy in trouble; so are the economies of Japan, which has been stagnating for over a decade, and that of Europe. In Germany, with over 4 million unemployed, unemployment continues to be stubbornly above 10%. In Britain, although the unemployment is officially low at 953,000, thanks to the manipulation of figures, British manufacturing went into a painful recession, with 144,000 workers losing their jobs in 2001 alone. All across the economic battlefield there is nothing but devastation as far as the eye can see – corporate profits under siege, prices flat or declining, corporate bond yield spreads climbing up and “a chill over corporate boards from the new American sport of Chief Executive bating” (Financial Times, 6 August 2002).
Whatever the Financial Times and other economic and political representatives of the ruling class may say, monopoly capitalism is in deep trouble. It is heading for an unprecedented slump, to get out of which the leading imperialist powers are bound to resort to unprecedented trade wars, wars on the oppressed peoples and against each other. For the proletariat and the oppressed peoples the only way out of the impending crisis is to equip themselves, organisationally, ideologically and politically to counter imperialism’s war with a war on imperialism and rid humanity of this beast which for so long has drenched the earth with the blood of several tens of millions of people.