> The irrational exuburence has become even more
>irrational. "This crazy stock market", said the head of a big Wall
>Street investment bank: "People are mystified by it". But, comments the
>inteviewer, "As the Dow nears the magic five-digit barrier, it makes
>sense to stop arguing with this market and try to accept it on its own
>terms". (International Herald Tribune, 16 March 1999) Less intoxicated
>strategists and commentators, however, know very well there is certain
>to be "a relatively sharp and disruptive market adjustment" coming.
>
> But the Federal Reserve policy makers (and the US
>Treasury) are trapped within the stock-market bubble. In his
>congressional testimony last June, Greenspan hailed "a virtuous circle"
>of "rising equity values� providing impetus for spending and, in turn,
>the expansion of output, employment and productivity enhancing capital
>investment". At the same time, he warned that "rising expectations" of
>future corporate earnings and increases in equity values have "driven
>stock prices sharply higher� perhaps to levels that will be difficult to
>sustain unless economic conditions remain exceptionally favourable -
>more so than might be anticipated from historical relationships". (The
>Independent, 12 June 1998)
>
> Following the fourth quarter spurt and the rebound of
>the stock market, Greenspan's dilemma is even more acute. As one
>commentator put it, "the stock market has shot up quite on its own.
>Instead of leading the market, the real economy now follows it".
>(International Herald Tribune, 11 January 1999)
>
> It is now almost impossible, in the present situation,
>for the Federal Reserve to implement a further cut in interest rates (to
>avert further international turmoil) - because it would whip-up even
>further the near frenzy that already exists on US stock exchanges. On
>the other side, raising rates to dampen the 'irrational exuberence' is
>equally difficult - it would almost certainly burst the speculative
>bubble, tipping the US economy into a sharp recession. It is estimated
>that a 30% fall in share prices over 12 weeks, for example, would reduce
>economic growth by around 2.3 percentage points, a painful slowdown in
>itself. But this computer-model estimate does not take account of the
>dynamic, shock-effect of a fall on the stock exchange - which could well
>be much more than 30%. Given the key role that rising stock prices
>played in fuelling consumer spending and business investment, a sharp
>fall could trigger a very sharp downturn in he US economy.
>
> A stock exchange crash, moreover, which is likely to
>come through a series of gyrations rather than a single crash, will
>shatter the confidence and the astounding complacency of US capitalism.
>"When the bull market ends", writes one columnist, "the impact on the
>America economy and psyche will be much greater than it would have been
>before so many Americans pinned their hopes for the future on Wall
>Street's advance". (International Herald Tribune, 16 March 1999) Not to
>mention that many people - especially the small investors - will be
>totally ruined.
>
> A new-era economy?
>
> BUT AREN'T EVER-HIGHER share valuations justified by the
>boom in high-tech industries, which are fuelling long-term,
>non-inflationary growth? Under the heading 'The Bubble Won't Burst', a
>former governor of the Federal Reserve (Wayne Angell) claims that
>current economic evidence "indicates that America has at last arrived in
>a new era economy� in which high-tech industries make earnings gains
>that justify ever-higher valuations". (Wall Street Journal, 4 February
>1999)
>
> The new-era optimists point in particular to the spurt
>in productivity (the amount that a worker produces in an hour) growth at
>the end of last year. In the fourth quarter of 1998 productivity rose at
>an annual rate of 3.7%. There was a similar spurt in the fourth quarter
>of 1996, when productivity rose by 4.2%. For 1998 as a whole, however,
>labour productivity rose by 2.2%, with manufacturing productivity up by
>4.3%.
>
> But most commentators are sceptical about claims that
>computers are finally producing their much promised efficiencies. "Most
>experts say that a robust economy and strong demand have forced
>companies to squeeze more production from their workers, often by
>running equipment at full capacity". (International Herald Tribune, 11
>February 1999)
>
> The latest figures bring the annual rate of productivity
>increase since July 1990 to 1.4%. This is only fractionally higher than
>the 1.1% a year average increase for the entire 1980s cycle. It is still
>way below the 'golden age' average of 2.9% a year increase during
>1959-1973.
>
> "The late cycle rise in productivity", writes Jeff
>Madrick, "can be explained by the fact that when the rate of GDP growth
>suddenly rises, productivity will also usually rise at an above-trend
>rate as well. Business is stretching thin all its resources to meet
>suddenly rising demand. Workers are working harder as businesses cannot
>take on new hires fast enough� In such one- or two-year situations, it
>is usually not productivity that is pushing the economy faster, but
>demand that is pulling more productivity out of the nation's
>businesses". ('The Treadmill Economy', The American Prospect,
>November/December 1998)
>
> In the first half of 1998, productivity gains accounted
>for only 40% of the growth of business output, while gains in hours of
>work accounted for 60%. During the rapid growth of the post-war upswing
>period, productivity accounted for closer to 70% of the gain in output,
>while increases in hours worked accounted for about 30%.
>
> The US growth spurt of the last two-and-a-half years
>has been based on more workers working longer hours. This reflects the
>problems the majority of workers have in making ends meet, following
>years of stagnant or declining wages. On the other hand, the bosses have
>been able to hire more workers without significantly raising wage
>levels, at least until the very recent period. In other words, the
>recent boom has been based not on new technology and productivity
>growth, but overwhelmingly on the intensified exploitation of workers.
>
> Despite the corporate profits boom, average real growth
>of GDP during the 1990-1998 business cycle has averaged only 2.43% -
>compared with 2.75% in the 1980-1990 cycle. Both these figures are way
>below the levels of the post-war upswing (5.38% during 1948-1953 and
>4.33% during 1960-1969). Even the Wall Street Journal, in one of its
>saner editorials, was forced to concede "America has not been able to
>create a new golden age". (30 March 1998)
>
> Since 1997 there have been some modest gains in
>earnings for a broad layer of workers, including unskilled workers and
>minorities. The demand for labour has forced the bosses to concede some
>increase in nominal wages, while lower prices have increased the real
>value of workers' pay. This has done nothing, however, to close the
>widening chasm of inequality that has opened up in the US since the
>early 1980s.
>
> On the basis of an analysis by Edward Wolff of New York
>University, "the wealthiest 1% of households now control nearly 40% of
>total wealth. By contrast, the bottom 40% of households control a
>pitiful two-tenths of a percent of total wealth. If housing (a necessity
>rather than a liquid asset) is subtracted from the calculations, the
>bottom 40% of families have more debt than assets. Moreover, from
>1983-1995, the poorest 40% of households lost 80% of their wealth,
>while the wealthiest 1% of households gained 17%". (New York Times, 4
>January 1999)
>
> "The downside of US (labour) flexibility", writes one
>commentator, "is growing income inequality and fraying of the safety
>net, factors that could tear society apart when the wave ends. What
>rises higher falls deeper". (Robert Levine, International Herald
>Tribune, 17 March 1999)
>
> The coming crash
>
> THERE ARE SEVERAL trends, within the US and
>internationally, which will undermine the current boom in the coming
>months. Corporate profits are falling in the US (down 3% in 1998), as
>sales are eroded by falling sales or lower profit margins (due to
>overcapacity and increased competition from cheap imports). The big
>corporations are still paying out high dividends to shareholders, but
>are increasingly having to borrow money (issuing company bonds on the
>money market) to finance new investments.
>
> "For much of the recent expansion", comments Charles
>Clough (chief investment strategist at Merrill Lynch), "businesses
>could finance capital expansion, cover dividends and have cash left
>over. Ominously, in 1997 that began to change - heavily committed to
>capital spending, businesses began to haemorrhage cash, and many must
>now borrow heavily to plug the deficit. Since 1996, non-financial
>corporations have doubled the amount of new bonds they are issuing, to
>$36bn annually". (New York Times, 17 November 1998) Much of the borrowed
>money has come from overseas lenders, which accounts for a big chunk of
>the US's $220bn 'current account deficit'.
>
> Despite the recent spurt in productivity growth, most
>of the growth during the recent expansion came from growth of employment
>and working hours. The expansion of the labour force and the working
>year is almost certainly approaching its limits. Apart from anything
>else, there is a demographic problem: employment is growing
>approximately twice as fast as the growth of the labour force. There are
>already signs that this effect has begun to push up the wage levels in
>the last couple of years. As it is extremely difficult for businesses to
>put up prices (because of intensive competition), this is likely to cut
>into their profits.
>
> Although many households have increased their assets
>through the rise in the stock market, they are nevertheless relying on a
>record level of credit to sustain their living standards. The ratio of
>total debt to disposible income increased from 77% in 1986 to 92% in
>1997, and is now around 100%. Home equity loans account for the largest
>share of this debt, but some of these loans (which are cheaper than
>consumer credit and allow tax-deductable interest payments), have been
>used to finance other purchases (eg motor vehicles). Many of the top 20%
>of households have bought shares on the basis of loans (given that
>interest rates are much lower than the return from share ownership).
>Credit card debt has also risen, with about 12% of households having a
>debt/interest repayment burden over 30% of their annual income. These
>levels of debt may be sustainable in an upswing, but (as after the 1980s
>debt-driven boom) they will deepen and prolong the coming downswing.
>
> The 1990s consumer boom has reduced the savings rate of
>US households to virtually zero, down from around 6% in 1993 (itself an
>historically low level). This is nothing to worry about, many
>commentators argue, because at the same time the distribution of capital
>gains from share trading has raised the average 'net worth' of
>households to a record level of six times disposible income (though this
>is extremely unevenly distributed, of course, concentrated in the
>wealthier households). But as soon as the stock market falls - or there
>are widespread fears that it is about to fall - the more affluent
>consumers will stop spending and begin to rebuild their savings
>accounts. A turn from consumption to saving will amplify the general
>effect of a stock exchange downturn.
>
> Both the trade deficit and the current account deficit
>have grown markedly during this upswing. The trade deficit ($164bn) is,
>in itself, not unsustainable, given that it is around 2.5% of GDP. The
>deficit indicates the important role that the US plays as a market for
>exporting economies: without it the crisis in Asia, Latin America and
>even Europe would be much deeper. The $220bn current account deficit
>(the difference between incomings and outgoings on trade, repatriation
>of profits and other financial transactions), however, is more
>problematic. The payments deficit is sustained on the basis of the
>massive inflow of capital into the US, which is still seen as a
>profitable, 'safe haven' for capital. This flow has not only financed
>the trade deficit, but has provided the capital for financial investment
>and consumer expenditure.
>
> In the past, however, overseas investors were mainly
>putting their money into US government bonds, which were seen as a
>rock-solid investment. Now most of their money is going into corporate
>bonds and stocks, which are potentially much more risky. Any slowdown in
>the US economy (with a fall in profits), particularly if (as is likely)
>it is accompanied by a fall in the value of the dollar, and the flow
>could be reversed - with profound consequences for the US economy.
>Without the incoming flow of funds from overseas, the gap between US
>income and expenditure would have to be closed by domestic loans (which
>would mean much higher interest rates) and savage cuts in investment,
>state spending, etc.
>
> As a result of running huge trade deficits over a long
>period, the US has sunk deeper and deeper in debt internationally. Since
>the early 1980s, US foreign liabilities - claims held by private
>investors and central banks (which hold reserves in US government
>securities) - have strongly outgrown US assets abroad. In 1980 the US
>was still a net creditor, with net claims on the rest of the world equal
>to around 7% of GDP, a post-war peak. Last year, the net debt of the US
>was 29% of GDP: the US owed the rest of the world $2.3 trillion more
>than the rest of the world owed US capitalists (Left Business Observer
>No.88, 25 February 1999)
>
> How much longer will this situation be sustainable?
>International trends will put increasing pressure on the US economy.
>World financial markets appear to have stabilised in the last few
>months, and there has been no shortage of claims that 'the worst is
>over'. In reality, the slump (already gripping over 40% of the world)
>continues to spread. Japan, the second capitalist power, is now in its
>eighth year of zero or near-zero growth, with no real signs of revival.
>At the same time, China is clearly heading for a crisis - which could
>trigger a new phase of the general Asian crisis (Asia accounts for 30%
>of US exports). A devaluation of China's currency, the reminbi, under
>pressure from cheaper Japanese exports following last year's
>devaluation of the yen, could trigger another wave of competitive
>devaluations. Even cheaper Asian exports, moreover, would further widen
>the US trade deficit.
>
> In Latin America (which accounts for 20% of US
>exports), the crisis in Brazil is only just beginning. Far from being a
>'rescue', the IMF's package of $41.5bn loans to Brazil merely allowed
>foreign investors to get their money out of the country before the slump
>sets in. The flight of capital, together with $20bn cuts carried out by
>Cardoso's government, will push Brazil into a deep downturn. This will
>inevitably pull down other Latin American countries, including the
>continent's second biggest economy, Argentina.
>
> Since the Asian crisis broke out in 1997, the US has
>acted as a 'market of last resort', purchasing an increasing amount of
>goods from Asia, Latin America and Europe - cushioning them against the
>effects of the crisis. This cannot continue indefinitely.
>
> Both internal contradictions and the growing pressure
>of spreading world crisis will undermine US growth - the last remaining
>pillar sustaining the global economy. The galloping bull market will
>come to an end. The world financial system, together with production and
>trade, will be thrown into deep crisis. How long this will take cannot
>be precisely predicted, but there can be no doubt that, in the coming
>months, the US economy will enter a serious downturn - which will plunge
>the world economy into a new phase of crisis.
>
>--
>-------------------------------------------------------------------------------
>
>Andy Lehrer mailto:[EMAIL PROTECTED]
>
>Check out the Socialist Alternative website
>http://socialistalternative.net
>
>Join SALT-L, the Socialist Alternative mailing list:
>http://socialist.listbot.com
>
>
__________________________________
KOMINFORM
P.O. Box 66
00841 Helsinki - Finland
+358-40-7177941, fax +358-9-7591081
e-mail [EMAIL PROTECTED]
http://www.kominf.pp.fi
___________________________________
[EMAIL PROTECTED]
Subscribe/unsubscribe messages
mailto:[EMAIL PROTECTED]
___________________________________
