[BRC-NEWS] Sunny Summer Optimism

j w Wed, 03 Sep 2003 09:28:44 -0700

FROM: <www.marxist.com>

Sunny summer optimism
By Michael Roberts

As I write, the world’s stock markets are hitting their highs
for the year. Optimism rules in this sunniest and hottest of
summers. The bulls (investors who reckon stock prices are going
to rise) are in the ascendancy and the bears (those who
forecast falling share prices) are in their caves.

The world’s stock markets peaked back in March 2000 at the
height of the euphoria over the hi-tech revolution and the dot.com
mania. The stock markets then fell dramatically, nearly matching the
fall in 1929-32 and mirroring the collapse of the Japanese
stock market after 1989. Their value plummeted over 60% in the next
three years and for three years in a row share prices were
lower at the end of the year than they started – 2000, 2001 and 2002.
They have not fallen four years in a row since 1929-32 and no
economist or Wall Street soothsayer was prepared to predict
such a calamity for 2003.

The optimists were shaking in their boots when Bush launched
his attack on Iraq. The stock market reached new lows. However,
after ‘victory’ was declared, investors were hugely relieved
and went on a buying spree. Market prices jumped 25% and in
Germany they leaped an astronomical 60%.

Investors were encouraged to buy by the actions of the two
great financial players in the economy: the central bank of the US,
the Federal Reserve Bank, and the US government. The
septuagenarian guru of finance capital, Mr Greenspan, Chairman of the Fed,
announced a series of interest rate cuts and pumped billions of dollars
into the banking system. The Bank of Japan followed suit and
even the conservative European Central Bank came in with rate
cuts. Businesses and houseowners were told: buy, buy, buy
because you can borrow all you want and at historically low rates of
interest. Indeed, the big three auto manufacturers in the US
announced unbelievable discounts on their cars, along with no
deposit and no need to pay for three years and then at low
interest rates. In effect, they were giving the vehicles away!

At the same time, that Texas ranger Bush announced tax cuts
that would be paid out immediately in cheques to every household and
massive increases in arms spending and ‘homeland security’ to
boost the production and profits of the arms manufacturers,
security companies and anybody who could get a government contract.

No wonder the optimists bought the stock market. The stock
market was predicting that, thanks to Messrs Greenspan and Bush, the
US economy was set to boom. And virtually every economist in
the US is predicting at least 3-4% economic growth in the
second half of this year compared to the weak rise of 1.5-2.0% in the
first half.

Is this optimism justified? Are the US and the world set to
turn the corner? The global economy will boom, Iraq will be
pacified, the Middle East will follow the road map to peace and, above
all, corporations will make big profits and stock market
investors will make a killing. That’s the theory.

But hold on a minute. Are things so rosy? Take the US economy.
In the second quarter of this year, it grew at a rate of just
2.4%. That was faster than the 1.2% in the first quarter, so
the optimists were happy. But when you look at the figures, the
reason for the faster growth becomes clear: ‘defence’ spending
by the government. That was up 44% over the previous quarter.
If you take out Bush’s spending on arms and the war in Iraq
from the equation, the economy grew no faster than in the first
quarter.

It’s the same with profits. This is the Achilles heel of
capitalism. Without profit, capitalists won’t invest in replacing equipment
and they won’t employ people. At the height of the tech boom
in the late 1990s, the margin of profit made on each unit sold
by US companies was, on average, 13.5%. By the time of the
depth of the recession and 9/11, that margin had fallen to an
historic low of 7.5%. Corporations could not sell their goods or
services and they could not raise their prices either. They were
desperate and they saw only one way out: cut costs.

>From the moment Bush gained the presidency (through his electoral ‘coup’) at the beginning of 2001 to this summer of 2003, US
companies have sacked over 3m Americans. They also stopped investing. The
result was that they got costs down sharply and the profit
margin rose – from 7.5% to 8.5%. That’s all.

It’s not enough. Why did so many have to pay the price of their
job for so little profit gain? The answer is that US, European
and Japanese corporations have still not been able to raise
production much and have been totally unable to raise prices. Indeed, in
business circles, prices are falling, not rising. Deflation is
already there. In Japan, overall prices have been falling for
years. In the US and Europe, prices of goods sold in the shops
have also been static or falling. Only prices of services like
healthcare, insurance, banking, etc., have been rising.

The manufacturing sector of the advanced capitalist world
remains decimated. It cannot raise prices in the shops because
consumers expect bargains, and consumers expect bargains because out in
Asia there is a huge manufacturing colossus that is destroying
the markets of the old capitalists in the West in sector after
sector. China is swamping the world with textiles, toys and now
electrical goods and increasingly even computers and hi-tech
products. As a result, China is forcing down prices across the
globe.

It shows up in the profit results of US corporations. The stock
market optimists have been ecstatic over the recent profit
results of the second quarter. On average, the top 500 companies
boosted profits by nearly 10% compared with last year. But the average
hides a nasty reality. Virtually all that profit was made by
just two sectors: banks and oil companies.

Despite all promises, oil prices have stayed high after the
Iraq war as Iraq has failed to come back on stream into global
production. So oil companies have continued to reap in windfall profits.
But it is in the finance sector that the real killing has been
made.

Low interest rates made it possible for banks to lend huge
amounts to Americans who in turn borrowed to buy houses or remortgage
the cost of their existing house. It has been massive business.
Everybody wants to lend money and everybody wants to borrow
money.

Well, that’s not entirely true. Sure, the US government wanted
to borrow money to pay for its wars and houseowners borrowed
on their houses. But big business did not borrow to invest or
employ people because vast swathes of industry and services
were making no profit at all. It’s a vicious circle. Profits are
made by the moneylenders, but the productive sectors make none.

It’s a shocking thing to know that General Motors, employing
over 180,000 Americans made little or no profit on selling its
cars but it made millions on lending car buyers the money to
buy its cars. In the second quarter it made $901m in total
profit, but its finance division made $834m of that! Even more shocking
is that General Motors makes more profit from its own mortgage
business than from selling cars. That’s the ultimate in the
unproductive nature of finance capital.

What profits that were made in industry were achieved not by
increased sales but by cutting back the workforce and stopping
investing. American manufacturers on average have made idle one
in every four of their machines and laid off the workers who
used that machine.

But don’t worry, says Mr Greenspan. It is a matter of debate
whether manufacturing is important to an economy like the US
where over 60% of jobs and output comes from what are called
services. Mr Greenspan told the US Congress recently that what
matters is that “economies create value”. So it doesn’t matter
where the profit comes from as long as you make it. If General
Motors makes more from lending money than from making cars, so
be it. This spake the guru of finance capital.

But this economic theory is one of bankruptcy. Without the
productive sectors of an economy that makes things, services will not
survive. Insurance depends on manufacturers, car owners, and transport
companies. Private healthcare depends on companies like GM
shelling out on benefits for its employees. Wars by government depend
on manufacturers making weapons. Services depend on industry.

It’s no good saying, well we’ll leave the making of things to
countries like China who make them cheaper (because they pay
their workers a pittance) while we ‘design’ things and just
lend money. That only works in a truly global world under socialist
planning. In a capitalist world, there are national and private
interests that must be satisfied above global cooperation. Does
the US government want its weapons made by Chinese companies?
Of course not. Does Mr Greenspan really want China to make all
the cars and let General Motors shrink and shrivel and with its
hundreds of other companies that depend on it? No.

That is why optimists: the stock market, Mr Greenspan and Mr
Bush are blowing in the wind. Look at industry across the
advanced capitalist world. It is in deep trouble. Germany and France
have just announced a second quarter in a row of falling national
output, mainly because of weak industry. UK manufacturing has
been on its knees for several quarters. Japanese industry after
over a decade of slump is still showing limp signs of life.

If Greenspan and Bush were so confident about US economic
recovery, why are they desperate for the Chinese to revalue their
currency? They’ve been bleating on about this for months. China cleverly
ties its currency to the US dollar. So if the dollar weakens,
so does the Chinese renminbi. The result is that China’s
exports stay cheaply priced in the US, unlike those of Europe in the
last year when the Euro jumped in value by over 20% against the
dollar. The US wants China to end this practice of pegging its
currency to the dollar so they can sell more goods in China
and, most important, US manufacturers can start to compete on price
against Chinese imports in the US. Fat chance! The Chinese have
ignored the Americans. They have no intention of losing their
grip on world manufacturing.

And yet the US must have economic growth. It is make or break
for Bush, Greenspan and for swathes of US industry. Bush and
the Republicans have launched an imperialist adventure across
the world. Just as the US struggles economically, the political
strategists of American imperialism have gone for broke. They
are trying not just to police the world but to rebuild it in
the American image of the free market. The running sore of the
Middle East is to be solved by imposing a peace on the
Palestinians. The petty irritations of tin pot dictators like Saddam who do
not toe the American line are to be crushed. If Kim in North
Korea or the mullahs in Iran carry on the way they are, they
will receive the same treatment. Thus we have a new Roman
Empire.

But, as the Roman emperors found, ruling the world with a fist
of steel and moulding it into thousands of Roman cities is very
expensive. It needs permanent armies and permanent
constructions (Hadrian’s Wall etc). So the Republicans have now embarked on
an arms spending spree unprecedented in America, even more than
in the days of Vietnam. They are not just equipping armies;
they plan to spend billions ($600bn is the low estimate) on
rebuilding Iraq. There will be more to find if they have to reunite the
two Koreas.

As a result, the US government is set to spend about $500bn
more than it raises in taxes each year for the rest of this decade.
That compares to a surplus of $150bn it was running just two
years ago. How will it find this money? Well, there is an easy
way. It borrows it by issuing bonds that the banks and big
business buy. They do so because they are secure in the knowledge that
the American government will never refuse to pay its debts.
Even so, the more the government borrows, the more interest it will
have to pay.

And here’s the rub. The interest demanded by lenders to the
government is rising fast. It has jumped a full 1% from 3.5% to 4.5% in
just one month. That means the government must find more money
each year to pay its interest bills, either by raising taxes
or by borrowing more. Even more serious, rising interest rates
on government bonds drives up mortgage rates. That’s because
the mortgage agencies who have big holdings of government bonds
will want more from houseowners as the value of the bonds
falls. And indeed, mortgage rates are rising sharply in the US.

That spells disaster. What growth the US economy has had in the
last two years has come from spending by Americans on cheap
goods in the shops. And Americans have been ready to spend because
the value of their houses has been rocketing. House prices are
up about 6-8% a year (much less than the 25% in the UK, but
high by US standards). Americans have been cashing in. They’ve been
remortgaging their properties at ever lower interest rates and
then spending the extra money from cheaper mortgage payments.
But if mortgage rates start rising, then the spending money is
going to disappear, along with the jobs that have already gone.
And if Americans stop investing in houses, the housing boom
could soon turn into a bust.

And Americans have never been so much in debt. Household debt
is now 125% of annual income on average. If the cost of
financing that debt starts rising, then the shopping spree will be over
and defaults will mount. That spells disaster for all those
banks, government agencies and even General Motors that have lent the
money. Only this week, a small mortgage lender in California
closed its doors – the first leaf falls before a cold winter.

And while over the summer Bush has sent cheques in the post to
Americans (using borrowed money), the 50 state governments are
getting ready to raise taxes across the board. That’s because
most US states are getting deeper into deficit like the Federal
government. Asked to finance medical care schemes, education
schemes and now energy construction schemes (after the blackout
across the north-east), they have also been asked to keep taxes
down. The result is growing deficits.

The worst hit is the state that hosted the hi-tech, dot.com
revolution in the 1990s. Then it was spend, spend for programmes and cut,
cut for taxes. Now California has a deficit of $38bn, or
one-third of its tax revenues.

The state is still resisting the inevitable – raising, not
cutting taxes. Instead it is hoping that the Terminator (another poor
film actor like Reagan in the 1960s) will save the day. But
other states are already hiking charges. So the irony is that St
Peter Bush’s tax cheques are being taken away by St Paul’s increased
council taxes. And Mr Greenspan’s interest rate cuts at the Fed
are being reversed by President Bush’s empire-building free
spending at the White House.

The result will eventually be low growth, higher interest
rates, more job losses and the continued spectre of deflation, driven
by Chinese imports and weak consumer spending at home. The
current super-sunny summer optimism will give way to dark, cold winter
misery.

August, 2003

[BRC-NEWS] Sunny Summer Optimism

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