I've a great deal of time for Niall Ferguson. His book "The Cash Nexus:
Money and Power in the Modern World 1700-2000" is fascinating (for those
who like that sort of thing) and he shoots down many modern myths such as
that economics determines the course of history, and suchlike.
His article in the FT this week-end is a pretty good condensation of where
we (that is, America) are now and I show it below for those who may perhaps
be experiencing far worse weather than we are over here (quite the best
summer's afternoon we've had this year with a full turn-out of butterflies
and other stage extras) and feel like curling up with something for 10
minutes or so.
However, excellent though the article is, I can't help feeling that
Ferguson himself is falling prey to the most recent myth in the fourth
paragraph from the end ("The crisis of . . . ") -- that all will be well
and that the American economy will regain its usual bounce quite soon (the
corollary being that the "authorities" such as Greenspan know what to do).
On the contrary, I feel that the recession is already becoming a deflation.
The average investor is not going to extend his trust -- and certainly not
his money -- to big business for a long time to come. I think Paul
Krugman's worries at the end of his article in today's NYT are going to be
much nearer the mark. I suppose I might as well follow with his article as
well.
<<<<
FULL MARX
By Niall Ferguson
Not many MBA courses include readings from Marx's Capital. Not many CEOs
could quote from The Communist Manifesto. But there are times when it pays
even the most passionate believers in capitalism (and I count myself among
them) to heed the bearded Cassandra. Times like these: the worst bear
market since the Great Depression - although Marx himself would have
preferred to call it a "crisis of capitalism".
As a prophet, Marx was, of course, a washout. He was also a class traitor,
taking the side of the proletariat when he himself was the quintessential
19th century bourgeois. His socialist utopia turned out to be a corrupt
tyranny, which expropriated the wealth of the middle class only in order to
enrich a new class of apparatchiks.
Even so, Marx's insights into capitalism can still illuminate. From his
unlikely vantage point in the old British Library Reading Room, inspired by
an idiosyncratic mixture of German idealism and British political economy,
Marx got one thing right. Behind the bubbles and busts of the capitalist
system there is a class struggle; and that class struggle is the key to
modern politics.
This may read like heresy, especially in the pages of the Financial Times.
But a little reflection on the current crisis of capitalism will show
otherwise. Not that today's class struggle bears much relation to that of
Marx's day. The present conflict is not between grasping factory owners and
the immiserated working class. It is a conflict within the bourgeoisie - a
class which has grown hugely since Marx's day, in ways he never
anticipated, but which has divided even as it has expanded.
First, a crash course on Capital. Long, verbose, abstruse, this ranks as
one of the most unreadable books of all time. Much of it is intended to
demonstrate that labour is the source of all value. Skip that. The bottom
line is chapter 32, in part VIII of volume one, where Marx argues that the
history of capitalism is the history of expropriation and the concentration
of wealth - the means of production - in the hands of an ever-decreasing
minority.
For Marx, the defining characteristics of capitalism in his own time
included "the centralisation of capital", "the expropriation of the mass of
the people by a few usurpers" and "the entanglement of all peoples in the
net of the world-market, and with this, the international character of the
capitalistic regime". In other words, widening inequality and globalisation.
These characteristics, however, were precisely what made capitalism
crisis-prone. Its periodic busts, he hoped, were the preliminary tremors
heralding a final and violent collapse.
Forget Marx's utopian prophesy that capitalism would be succeeded by
socialism, with all property redistributed according to the workers' needs.
The real point is that many of the defects he identified in 19th century
capitalism are again evident today. In the last20 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.
At the same time, the world's commodity, labour and capital markets have
become significantly more integrated: in particular, the vast scale of
today's international capital flows recalls the first age of globalisation
in the late19th century.
As for the susceptibility of our own capitalism to crisis, the figures
speak for themselves. The Dow Jones index is down 26 per cent since its
peak back in January 2000. Just a few months before that peak, a couple of
notorious bubble-blowers published a book predicting that the Dow Jones
would reach 36,000 in the foreseeable future. Far from tripling your money,
if you were naive enough to follow their recommendation and track the Dow
from the day their book came out, you would have made an average
inflation-adjusted annual return of minus 11 per cent.
True, we are still a long way from a new Great Depression: between 1929 and
1932 the Dow Jones fell by some 89 per cent. Nor can it be said that the US
is going through a Japanese-style collapse: between December 1989 and July
1992 the Nikkei 225 fell by just under 60 per cent.
Nevertheless, the fact is that at one point last month the Standard & Poors
Total Return Index was more than 46 per cent below its peak. And even after
the recent rally, the Nasdaq is still down 74 per cent from its peak.
We have yet to see what the macroeconomic ramifications of this asset price
slump will be. The chairman of President Bush's Council of Economic
Advisers, Glenn Hubbard, last month estimated that the fall in American
share prices could reduce economic growth by up to 0.7 per cent over the
next year. Unemployment in the US has already risen from 4 per cent to just
under 6 per cent. Retail sales sagged in the first half of 2002.
Certainly, it is hard to believe that American consumers will be able to
carry on saving at the amazingly low rates we have seen since the
mid-1980s. By 2000, net private savings had fallen from a long-run average
of between 9 and 12 per cent of net national product to less than 4 per
cent. This was one of the hidden motors of the 1997-2000 boom. But as
Americans contemplate losses on their investments of between a quarter and
three-quarters, they are likely to start saving again. And that can only
mean a decline in their hitherto prodigious consumption.
The global implications of a slowdown in the vast American economy are
alarming. The other key element of the late-90sbubble was the willingness
of foreign investors to pour money into the US, funding an enormous balance
of payments deficit. These foreign investors are now staring at income
statements spattered with red ink. And they have more to worry about than
American investors, because a slide in the dollar exchange rate threatens
to make those losses even bigger. If the experience of the 1980s is
anything to go by, the dollar could fall steeply as foreign investors sell
off. The resulting reduction of American imports would further hurt the
rest of the world.
Not that you should prepare for the death-knell of capitalism just yet. I
was in New York during the very worst week of the recent sell-off and came
away with a consoling list of reasons to stay cheerful.
First, the US stock market has simply retraced its steps back to mid-1997,
when Alan Greenspan coined the phrase "irrational exuberance". Everyone
secretly agreed with him, so no one is too surprised that the subsequent
bubble has burst.
Second, compared with the last great bear market of the 1970s, we are free
from the spectre of inflation. Annual consumer price inflation in the US is
barely 1 per cent. The Fed's target interest rate is down below 2 per cent,
the lowest level for 40 years and a boon for borrowers, not least those on
flexible mortgages.
Third, the American financial sector is in far better health than its
Japanese counterpart back in the 1980s. The balance sheets of US banks
carry fewer dud assets and bad debts. Just to put his money where his mouth
was, a New Yorker friend of mine told me over breakfast - after one of the
worst days in recent stock market history - that he had just invested tens
of million dollars in the shares of big American banks.
Above all, the Fed is not the Bank of Japan. It wasn't until July 1991,
more than 18 months after the Nikkei began to nosedive, that the Japanese
central bank started to cut interest rates. By contrast, the chairman of
the Federal Reserve started to cut rates back in October 2000, and they
have been going downwards ever since.
So relax: the recession was last year, and you barely felt it. Growth this
year is still on course for 3.5 per cent. This is the kind of crisis of
capitalism Argentinians can only dream about.
Still, you don't need to believe in another Great Depression to take a
neo-Marxist view of the current crisis. For there is no question that the
bubble economy of the last decade has brought about a quite astonishing
transfer of wealth from one class to another: not from the working class to
the bourgeoisie, but from one part of the middle class to another. To be
precise, from the sucker class to the CEOcracy.
The sucker class is a large one. More than half of American households now
own shares; in 1987 the proportion was about a quarter. Much of this
expansion in share ownership happened between 1997 and 2000. So a
substantial fraction of American households bought shares at or close to
the peak of the market. Their portfolios are now worth significantly less
than their original investment.
The beneficiaries of the bubble are the CEOcracy - mensuch as Andrew
Fastow, who was chief financial officer of Enron, and Bernie Ebbers, the
former chief executive of WorldCom. But the CEOcracy includes not just the
chief executives of collapsed companies, but the whole range of insiders
who knew enough to cash in their shares and share options before the bubble
burst.
During his testimony before the Senate Banking Committee last month, Alan
Greenspan provided a convenient list of the other members of this class:
"lawyers, internal and external auditors, corporate boards, Wall Street
security analysts, rating agencies, and large institutional holders of stock".
With each fresh revelation of fraud and fiddled accounts, the extent and
nature of this vast expropriation of the suckers by the CEOs becomes more
apparent. The key devices were share options, which simultaneously gave
executives an incentive to boost share prices by fair means or foul and
allowed them to understate what was in effect remuneration in the company
accounts. Related to this were the lax rules governing auditing and
accounting, which encouraged firms like Andersen to cook the books in
return for the promise of future fat fees. Nor should we forget the
spurious independence of non-executive directors.
Marx would also have appreciated the intimate links between the CEOcracy
and the Bush administration. This truly is one of those moments in history
when the nexus between economic interest and policy is laid bare. Consider
the case of George Bush and the Harken Energy Corporation, which sold a
Hawaiian subsidiary, Aloha Petroleum, to a group of Harken insiders for
$12m, all of which it booked as income - despite the fact that $10m was
simply an unsecured IOU from Harken to itself. Less than three months after
the Harken accounts were published, George Bush sold 212,140 of his shares
in the company, netting a tidy $849,000. If the full extent of Harken's
losses had been known, those shares would certainly have been worth far less.
When quizzed about this last month, Bush replied: "There was an honest
difference of opinion . . . Sometimes things aren't exactly black-and-white
when it comes to accounting procedures."
True enough when your accountants are Arthur Andersen. But as far as US
watchdog the Securities and Exchange Commission was concerned, the deal was
all black.
In the words of Princeton economist Paul Krugman: "The current crisis in
American capitalism . . . is about the way the game has been rigged on
behalf of insiders." Back in the 1990s, "crony capitalism" was the label
smug Americans stuck to the former tiger economies of Asia. But if ever
there was a crony capitalist, it is the current US president.
The crisis of American capitalism is therefore more social than economic,
more moral than material. It is not that the US economy is about to
collapse into a 1930s-style slump. Enough has been learnt from the past to
avoid repeating the fiscal and monetary policy errors that turned recession
into depression (though after the Bush administration's recent decisions to
raise steel tariffs and farm subsidies, the same cannot be said for trade
policy).
It is the social structure of American capitalism that is in real need of
attention. You do not have to be a Marxist to see that something is amiss.
Indeed, it is precisely those who believe most fervently in capitalism who
should be most insistent in demanding a shake-up.
As Marx might have said, had he taken the right side in the class war, the
bourgeoisie united will never be divided. But right now the American middle
class is split unevenly between suckers and CEOs. What's more, history
suggests that when the suckers strike back, they usually demand regulations
far stricter than is good for capitalism itself.
After all, Marx himself was once an unlucky day trader, whose dreams of
making a "killing on the Stock Exchange" in the 1860s came to nothing. And
look at the revenge on capitalism he took.
Niall Ferguson is Professor of Political and Financial History at Oxford
and Visiting Professor at the Stern School of Business, New York University
>>>>
MIND THE GAP
By Paul Krugman
How much has Japan's economy shrunk since its bubble burst? It's a trick
question; Japan's economy hasn't shrunk. It had only two down years over
the past decade, and on average it grew 1 percent per year.
Yet Japan's is a genuinely depressed economy. Because growth has been so
slow, an ever-increasing gap has opened up between what the economy could
produce and what it actually produces. This "output gap" translates into
rising unemployment and accelerating deflation. Slow growth can be almost
as big a problem as actual output decline.
Now the non-trick question: What would a similar analysis say about the
United States?
The U.S. economy's "potential output" — what it could produce at full
employment — has lately been growing at about 3.5 percent per year, thanks
to the productivity surge that began in the mid-1990's. But according to
the revised figures released a couple of weeks ago, actual growth has
fallen short of potential for seven of the last eight quarters.
The conventional view is that we had a brief, shallow recession last year,
and that recovery has begun. But the output gap tells a different story:
Two years ago we went into an economic funk, and it's not over. In a way
the whole double-dip controversy is a red herring; the real question is
when G.D.P. will start growing fast enough to narrow the output gap. And so
far there's no sign of that happening.
There's no mystery about the causes of our funk: the bubble years left us
with too much capacity, too much debt and a backlog of business scandal. We
shouldn't have expected a quick and easy recovery, and we're not getting one.
Some readers have already guessed where I'm going with this. The U.S. stock
bubble in the second half of the 1990's was just as big as Japan's bubble
in the second half of the 1980's. Will our two-year funk turn into a
five-year or ten-year funk, the way Japan's did?
A loud chorus is already shouting "We're not Japan!" Half the time,
depending on what I had for breakfast (rice and pickles?), I'm part of that
chorus. But let me share some disquieting thoughts.
Back when I first got professionally obsessed with Japan's problems, around
four years ago, I made myself a mental checklist of reasons that Japan's
decade of stagnation could not happen to the United States. It went like
this:
1. The Fed has plenty of room to cut interest rates, which should be enough
to deal with any eventuality.
2. The U.S. long-term budget position is very strong, so there's plenty of
room for fiscal stimulus in the unlikely event interest rate cuts aren't
enough.
3. We don't have to worry about an Asian-style loss of confidence in our
business sector, because we have excellent corporate governance.
4. We may have a stock bubble, but we don't have a real estate bubble.
I've now had to strike the first three items off my list, and I'm getting
worried about the fourth.
More and more people are using the B-word about the housing market. A
recent analysis by Dean Baker, of the Center for Economic Policy Research,
makes a particularly compelling case for a housing bubble. House prices
have run well ahead of rents, suggesting that people are now buying houses
for speculation rather than merely for shelter. And the explanations one
hears for those high prices sound more and more like the rationalizations
one heard for Nasdaq 5,000.
If we do have a housing bubble, and it bursts, we'll be looking a lot too
Japanese for comfort.
A recent Federal Reserve analysis of Japan's experience declares that the
key mistake Japan made in the early 1990's was "not that policy makers did
not predict the oncoming deflationary slump — after all, neither did most
forecasters — but that they did not take out sufficient insurance against
downside risks through a precautionary further loosening of monetary
policy." That's Fedspeak for "if you think deflation is even a possibility,
throw money at the economy now and don't worry about overdoing it."
And yet the Fed chose not to cut rates on Tuesday. Why?
Last year some economists began privately referring to the Fed chairman as
"Greenspan-san." The joke faded out as optimism about recovery became
conventional wisdom. But maybe it's not a bad nickname after all.
>>>>
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Keith Hudson, General Editor, Handlo Music, http://www.handlo.com
6 Upper Camden Place, Bath BA1 5HX, England
Tel: +44 1225 312622; Fax: +44 1225 447727; mailto:[EMAIL PROTECTED]
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