----- Original Message -----
From: Sven Buttler <[EMAIL PROTECTED]>
To: MLL <[EMAIL PROTECTED]>
Sent: Sunday, May 28, 2000 7:20 PM
Subject: MLL: fwd: The aftermath of the 1997 'currency crisis' part 2
"The ambulances, the lawyers and the guards with chains swooped into Seoul
Christian Hospital without warning one day this summer. They loaded patients
onto gurneys and carted them all away, including a semi-conscious little boy
who had lain curled and silent in room 3B since his birth 9 years ago. They
chained down equipment and locked cabinets and doors. They took away
medicines and machines and all the things that had saved lives there, until
the economic collapse in South Korea made saving lives too expensive.
"When the hospital went bankrupt, all that was left behind was the
disbelieving staff: more than 200 nurses and pharmacists and medical aides
who had stuck by their patients and their hospital long after their pay
cheques stopped coming. They were owed an average of $7,000 each in back
wages, and when the owner tried to throw them into the street, they simply
sat down, too stunned to move and too scared to face life without a job.
"This is what the Asian economic crisis has brought to South Korea. Nearly a
hundred times a day somewhere in this country, someone's dream - a tennis
shoe factory, a corner grocery store, a giant automaker, a promising fashion
house, even a hospital - is crushed under the weight of the economic
collapse. Unpaid bills are paid too high, the 'closed' sign is posted,
workers are dumped and the economy slips a little lower.
"From the tropical islands of Indonesia to the mountains of Thailand to the
factories of South Korea ... the abrupt crash has shattered the lives of
tens of millions of people. ... Hunger and malnutrition are rising, more and
more children are dropping out of school, and child labor is increasing as
Asia's miracle dissolves into misery. And those who already were poor are
suffering more.
"Relentless waves of bankruptcies and unemployment are battering the region.
In Indonesia, there were about 5 million people unemployed last summer. By
the end of this year, that number is expected to reach 20 million. Another
one million have lost jobs in South Korea this year, and two thousand people
a day are losing jobs in Thailand.
"WESTERN INVESTORS OFTEN VIEW THE ASIAN FINANCIAL CRISIS IN TERMS OF HOW BIG
A THREAT IT IS TO THE FINANCIAL MARKETS. BUT IN ASIA, THE CRISIS IS WRECKING
SO MANY LIVES THAT THE FOCUS IS NOT ON INVESTMENT RETURNS BUT ON WHAT SOME
ARE CALLING 'A CLASS PLUNGE'.
"The first attempts at quantifying the human suffering in terms of school
drop outs and child labor, rising medical problems, poverty and hunger, are
not being made by the World Bank, Oxfam and other international relief
organisations and the individual countries themselves. ... 'It is no longer
a question of whether the region will recover in one year or two, but
whether the recovery will come in five or ten years,' said Charles Morrison,
President of the East-West Center". (Our emphasis)
The effects of the crisis have wiped out literally over-night the emerging
petty bourgeoisie. According to Peter Montagnon "in Thailand, the middle
classes - with their high expectations manifested in newly acquired golfing
skills and chattering mobile phones - are being wiped out by the recession.
Other countries, such as Indonesia and the Philippines, face excruciating
increase in poverty which adds to the risk of social disorder." (Financial
Times, 7 September 1999)
Imperialism, through the IMF bailout packages totalling nearly $120 billion,
made efforts to contain this crisis, to limit its damage to Asia. And, for a
while it looked as though the conjuring trick had worked. While most of the
Far Eastern capitalist countries lay prostrate, devastated by the malign
demons of market forces, stock exchanges in the principal countries of
imperialism soared to unprecedented heights. In July 1998 they were 60%
higher than in January 1997.
In view of the dire economic picture prevailing in the Far East at the time,
with the economies of those countries reeling from the hammer blows of a
deep recession, and the US trade deficit soaring to unprecedented heights,
it may appear a little strange that the stock markets in the US and Europe
should have gone from strength to strength. This, however, is only an
apparent paradox - not a real one. As Marx explained long ago, the fever of
speculation is only a measure of the shortage of outlets for productive
investment: the depressed state of industry is reflected by an expansion of
speculative loans and speculative driving up of share prices. The crisis of
overproduction is a reflection of the over-accumulation of capital, which,
unable to find profitable opportunities for productive investment, seeks a
way out in stock market and other speculative activity in an endeavour to
make a profit. The tendency for the mass of surplus value to increase at a
slower rate, as Marx showed, than the total capital employed is expressed in
the TENDENCY OF THE RATE OF PROFIT TO FALL, which only goes to show that
production for profit is an inadequate basis for the consistent development
of society's material conditions of existence.
The demand for the products of industry was falling in one sector after
another, from aircraft to cars, steel to oil, from the products of the
engineering industry to semi-conductors - everywhere. Combined with this,
the crisis in the Far East - Thailand, Indonesia, Malaysia, the Philippines
and South Korea - resulted in a huge flight of capital from these countries
to the imperialist heartlands. According to the Washington based Institute
for International Finance, there was an adverse shift in net private capital
flow to the tune of $109 billion (�65.2) billion) - representing more than
10 per cent of the pre-crisis aggregate GDP of these five countries. All
these massive sums, and more, since the Far East ceased to be a good source
of profitable investment, were pumped into the US and European stock
markets - which explains why these stock markets became so bullish and why
they rose by an incredible 60 per cent between the start of 1997 and July
1998.
In the second half of 1997, a massive flight of capital from the far east
went straight into the stock exchanges of the US and Europe, thereby
temporarily pushing up their prices. According to the Financial Times of 6
August 1998, a total of $126.2 billion (�76.4 billion) flowed into equity
funds in the first 6 months of 1998 - easily ahead of the $108.3 recorded in
the first half of 1997.
Since the buoyancy on the stock market bore little relation to the
productive base of the world capitalist economy, which continues to limp far
behind, it was only a question of time before speculative bubble bust, as it
did with a fall of 300 points in the Dow Jones Industrial average on 4
August, signalling an end, even if temporary, for reasons we shall come to,
of the 'great bull run', bringing to a grinding halt the so-called
Goldilocks economy, whereby corporate earnings moved higher and higher
without stoking the fires of inflation.
Twin shocks - crisis jumps continents
Then came the twin shocks of the Russian default and the near collapse of
the LTCM hedge fund - enough to wipe the grin off the faces of the
imperialist bourgeoisie.
The crisis, which started in Thailand in July 1997, had by the beginning of
July 1998, jumped continents, its first victim being Russia, which was
propelled into the whirlpool of a crash thanks to the combined effects of
the declining yen, a fall in the international oil price, fears of a Chinese
devaluation and the soon-to-follow slide on Wall Street.
The attempt to prevent the Russian collapse through a $22.6 billion IMF
rescue package proved no more effective than the proverbial attempt to empty
the ocean with a bucket. On 17 August, Russia effectively defaulted. The
Russian government devalued the rouble by a third, something that only three
days previously Yeltsin had vowed not to do. It imposed a 90-day moratorium
on some foreign debt repayments; and it decided to restructure the domestic
debt market.
Far from stemming the crisis, these measures only served to exacerbate it.
Not only did the foreign lenders to Russia lose their shirts (not a day too
early), but the measures precipitated a run on the banks, a further plunge
in the rouble and the Russian stock market. The rouble lost 60% of its value
in one week and the Russian stock market fell 80%.
The convulsions that followed these shocks sent the stock markets over the
next few weeks plunging into a frightening downward spiral. Shares in London
suffered their biggest fall since the crash of 1987 as fears about the
Russian financial and political crisis sent tremors through the world
markets. In just three days the FTSE 100 index fell 405 points, or 7.2%. At
its worst, on Friday 28 August 1998, it stood 1,000 points below its
all-time high of 6,179 recorded a few weeks earlier.
The Dow Jones Industrial Average fell dramatically. From its peak of 9,337
on 17 July 1998, it plunged to 7,286 - approximately 20% below its mid-July
level, losing all the gains it had made earlier in the year. Within less
than 3 months of the outbreak of the Russian crisis, the S&P 500 Index
dropped nearly 20%, the FTSE 25% and the European markets 35%. The Nikkei
225 average fell to a 12-year low.
Foreign investors in Russian bonds faced losses exceeding $33 billion (�20
billion) because of the Russian government's default. No wonder, then, that
shares suffered badly, as investors responded to fears over trading losses
and loan provision - German banks in particular had heavy exposure to
Russia. Following the Russian collapse, Deutsche Bank shares fell by DM
6.80, of 5.5%, to DM 115.80 ($66.33). Chase Manhattan closed down $6.125 at
$58.12, while Citibank fell $10.50 to $122.50.
"What we are witnessing now in terms of the breadth and depth of value [it
should be price] diminution is the biggest collapse in security markets
since the war," said Mr Deryck Maughan, joint head of Salomon Smith Barney,
following the 512 points plunge in the Dow Jones on Monday 31 August 1998,
as the dreadful news from Russia and Asia revived fears of a global slump.
Technology stocks were some of the biggest casualties, with Dell Computers,
whose shares had nearly tripled during the previous one year, losing 15%,
Microsoft 9% and Intel nearly 8%.
Equity markets in dollar terms fell in all other parts of the world too - by
29% in Argentina, 36% in Singapore, 40% in Mexico, 60% in Indonesia and 80%
in Russia.
Thus, what was described as a 'summer correction' turned into a full-blown
rout.
The bewildering speed with which the crisis spread from Asia, via Russia, to
the citadels of imperialism, obliged bourgeois economic commentators to
admit that the "Asian crisis is no local difficulty. It has spread, changing
trade patterns, depressing commodity prices and undermining financial
markets." ('Threats of depression', Martin Wolf, Financial Times, 26 August
1998). And that: "Already, therefore, this crisis has global significance.
It is imposing heavy pressure on the political and social stability of many
countries directly affected. It has raised questions about global capital
markets. And it is spreading almost everywhere via adjustments in trade,
declining commodity prices and the shrinking appetite for risk." (ibid).
Imperialist response to the stock market plunge
This nightmare scenario unleashed by the scale of the global crisis
precipitated by the Russian default and the near-collapse of the LTCM,
became clearer in the weeks following the Russian devaluation. Not only did
the so-called emerging markets implode, but, more depressingly for the
managers of the imperialist economy, the investors took flight from all but
the safest of American stocks - instead investing their money in gilt-edged
Treasury bonds, the yield on which fell sharply during this period. Over the
following two weeks stocks fell 7%. The entire world capitalist economy was
peering into the abyss. Then, as one bourgeois journalist put it, the
Cavalry arrived - in the form of co-ordinated interest rate cuts. Fearing a
potentially devastating market collapse, putting paid to US expansion, and
with it the only prop to global growth, the US Treasury, egged on by the
Clinton administration, sought to co-ordinate an international response to
address market fears. In this, the Treasury needed, and secured, the willing
co-operation of Mr Greenspan, the Chairman of the Federal Reserve, who
signalled his willingness to cut interest rates and thus help to sustain
artificially high equity prices, which in turn kept US growth and the world
capitalist economy afloat - pro tem.
In his now famous remarks to an audience in San Francisco on 4 September
1998, Greenspan said:
"It is just not credible that the United States can remain an oasis of
prosperity unaffected by a world that is experiencing greatly increased
stress."
This was a coded message that the Fed had changed its view as to the risks
to the US economy, since only a few weeks earlier and now had "to consider
carefully the potential ramifications of ongoing developments".
In parallel with the developments at the Fed, the G7 issued on September 14,
1998, a statement to the effect that "the balance of risk in the world
economy [has] shifted" away from inflation towards much slower growth. In
the words of the Financial Times:
"The strategy then was in place - the Fed was signalling interest rate cuts
in the offing. The rest of the world had signed on to a promise to promote
growth; markets were showing early signs of stabilising." ('Cooling the
global markets', Gerard Baker, Financial Times, 30 December 1998).
Meanwhile, on 23 September, while Greenspan, appearing before the budget
committee of the US Senate in Washington, was busy sending a reassuring
message to the much-troubled markets, two hundred miles away in the
Manhattan headquarters of the New York Fed, its President, William
McDonough, was sitting round a table in complete secrecy with some of the
biggest sharks in Wall Street, haggling over the terms of a deal to rescue
LTCM, brought to the brink of collapse by the Russian crisis - with
exposures of more than $200 billion.
Under the deal, some of the largest players on Wall Street agreed to
contribute $3.6 billion to avert LTCM's collapse, which would have
threatened horrendous global financial turbulence and ushered in a
world-wide recession in the autumn of 1998.
Following the LTCM rescue, the Fed, beginning with September 1998, made
three interest rate cuts of 0.25% in quick succession. Following the first
interest rate reduction in the US, according to reports, central banks in 22
countries, including Germany, France, Italy, Britain and several other
European countries, cut interest rates, in an unprecedented set of 55 steps.
13 October 1998- the date of the second cut in interest rates - was the
turning point in the temporary economic fortunes of world capitalism. The
Dow rose 300 points in the remaining 45 minutes of trading and continued to
soar the following week as traders became confident that the Fed stood ready
to man the pump of monetary stimulus and far less worried that the Central
Bank's emergency measure must be indicative of the situation being really
grave.
All this co-ordinated activity on the part of the US Treasury, the Fed, and
their counterparts in other countries, had the intended effect of first
arresting and then reversing the slide in equities in the US and across
Europe and other parts of the globe. By 25 November 1998, the Dow Jones
Index had returned to its 1998 high levels. Stock exchanges across Europe,
including London, quickly recovered the ground lost during the previous
three months.
Since then the Dow Jones has surged further ahead. On 16 March this year
[1999] it broke through the 10,000 barrier. At the time of writing it stands
at an unsustainable 11,028 mark. While the FTSE 100 is at 6191.
The Japanese and other Asian economies are also showing signs of a fragile
recovery. The South Korean economy, which shrank 6% in 1998, accompanied by
a 10% contraction in consumer spending and a 29% drop in investment, is
expected this year (1999) to grow by 5%. The Malaysian economy, having
shrunk 6.7% last year, is expected to grow 0.5% this year. Hong Kong is
expected to show zero growth this year, compared with a contraction of 5%
last year. The Indonesian economy is likely to contract by a mere 3%
following last year's plunge of 13.7%. Thailand's economy is set for a
growth of 1% in 1999, following a decline of 8%. And the Japanese economy,
after a decline of 3% last year, is like to grow by just over 1%.
Exceptional circumstances
The Fed was persuaded, and much helped by these exceptional factors in
opting for the policy of cuts in interest rates:
First, in view of the flight to safety from the Far East and Eastern Europe
into US bonds, there was not much danger of capital fight from the US
consequent upon interest rate reductions, for there was nowhere for it to
go.
Second, the huge inflows of capital into the US strengthened to dollar, thus
negativing any loss suffered by foreign investors in US bonds following
interest rate cuts.
Third, the willingness of many a European country to agree with the US to a
co-ordinated policy of interest reductions, partly because, having already
met the EU's convergence criteria for Monetary Union, they were in a
position to loosen monetary policy, and partly because they too were
convinced of the need for such action to avert a meltdown on the stock
exchanges.
Lastly, the collapse in commodity prices, resulting from a steep decline in
growth in East Asia and Japan, with its disinflationary effect, persuaded
the Fed not to worry unduly about fuelling inflation through reductions in
interest rates. At the end of 1998, Brent Crude oil fell below $10 a barrel
and non-oil commodities cost 70% less in real terms compared with two
decades earlier. Between the middle of 1997 and the end of 1998 alone,
copper prices collapsed by 40% and wheat prices by a quarter during 1998.
While revenues declined in the oil and other primary commodity producing
countries, huge amounts of extra wealth was transferred to imperialist
countries through low prices, further widening the gap between the rich and
poor nations of the world.
If the sluggish growth in the Eurozone, the Japanese recession and the
crisis in the Tiger economies had not exercised downward pressure on prices,
the surge in US demand (which grew by 5% in 1998 - up from 4.25% in 1997,
accounting for half of the increase in total demand) would certainly have
been inflationary enough to oblige the Federal Reserve to raise interest
rates and thus put a brake on growth and knocked the stuffing out of the
inflated equity valuations into the bargain.
Luckily for imperialism, US imperialism especially, the Japanese recession
and the Asian crisis by coincidence were perfectly timed. Writing at the end
of 1998, and explaining how the world economy escaped a global recession in
that year, Martin Wolf made the correct observation that the recession in
the world's largest creditor nation and the exuberant expansion in the
largest debtor nation complemented each other --thus preventing world
capitalism, if only temporarily, from stepping over the precipice:
"The global economy got through 1998 without a recession thanks to two
offsetting mistakes: an excessively expansionary US policy was balanced by
excessive contraction in Japan and other parts of Asia. In normal times, the
US expansion would have been much too inflationary. As it was, the impact
was cancelled out by unexpectedly severe contraction in Asia, and strong US
growth helped support Asian exports. Only an optimist would expect another
such miracle in 1999." (Cauldron bubble, Financial Times, 23 December 1998).
Stock market -driving force behind the US boom
Over the past few years, since the outbreak of the present crisis in the
summer of 1997 in particular, the strength of the dollar has enabled the US
to play the dual role of an engine of global growth and an importer of last
resort for the world economy. US consumers, buoyed by cascading paper
wealth, have been able to indulge in a spending binge without any need to
save since foreigners have been willing to step in with the necessary
capital for US investment.
Besides financing the huge US trade deficit, "These strong capital inflows
have helped finance a stock market and corporate investment boom at a time
when US households are spending in excess of their income. So the economy
has continued to grow despite a growing current account deficit that
reflects the shortfall of domestic savings against investment." ('The
wobbliest month', John Plender, Financial Times, 13 August 1999).
The unprecedentedly high stock market valuations have been the driving force
behind buoyant US spending, for households owning shares feel richer as the
prices of the shares they own go up, and they save less. This assumes great
significance in view of the fact that the number of households that own
mutual funds in the US has risen from 10 million at the beginning of the
bull market to 40 million today. "The average American household," according
to Richard Waters, "has more than a quarter f its wealth on the stock
market; more than half of its financial assets are in the form of shares.
Fifteen years ago, with the stock market suffering the after-effects of
1970s stagflation, equities only made up 8 per cent of household assets."
('Stock market odyssey', Financial Times, 17 March 1999).
Likewise corporations, finding their capitalised values increasing build new
facilities. "Research at the Federal Reserve suggests that the decline in
net private savings that lies behind the strong growth in domestic demand is
largely explained by increase in equity values." ('Greenspan's asset
markets,' Financial Times leader, 19 December, 1998).
Thus, while rising equity prices lead to buoyant spending, the latter in
turn, in the short term to be sure, drives equity prices up further still.
Equities in the US have done exceptionally well. The current stampede into
US stocks goes back to 1982, since when Wall Street has put in an
astonishing performance, with an average annual price appreciation of 14.5%
(only in 1990 and 1994 did the indices end down). During the past four
years - 1996 to 1999 - alone, the annual price appreciation has been 28%.
While US corporate earnings have expanded at about 7% over the past 17 years
(and for that matter, since the end of the Second World War), this accounts
for a mere third of the S&P's gains, the remainder coming from an expanded
price/earning (PE) multiple, which has risen from single digits to a peak of
38:1 earlier this year. If the Dow Jones index stood at 1,000 at the end of
1982, on 16 March this year it burst through the 10,000 barrier. If in 1982
equity prices were the equivalent of 25% of the US GDP, today they represent
a staggering 125% of its GDP.
Additional factors behind the phenomenal rise in equities
In addition to the huge amounts of foreign capital flowing into the US (in
1997 alone, $60 billion of foreign capital poured into US stocks - more than
the previous 9 years combined), three other factors have contributed to the
phenomenal rise in equity valuations. First, there are the take-overs and
mergers, which offer companies the opportunity of cost cutting, improved
market gains and achieving economies of scale. As investors recognise this
trend, blue chip shares have outperformed small companies - thus providing
added incentive for companies to grow even bigger by acquisition -
characteristic of the Dow's rise since the latest bull market is the
domination by a handful of companies. Since 1982, while corporations such as
Coca-Cola, Merck and Walt Disney have risen 40-fold, others have done far
less well.
Second, the practice of share buy-backs, which has been gaining strength
over the past decade, has an even larger effect in driving share prices up.
Companies, instead of hoarding surplus cash, which is productive of low
return in the current economic conditions, return it to shareholders in the
form of buy-backs. The rather low cost of borrowing presently, combined with
the fact that debt is tax-deductible, only encourages companies in this
practice - to the extent of persuading them to borrow money for the purposes
of buying back their own shares. It is hardly surprising, then, that over
the four quarters to September 1998, the US corporate sector accumulated
some $359 billion of debts - the highest ever figure for any 12-month period
(see Philip Coggan, Financial Times, 13 March 1999).
Not only were there very few new issues of shares, in the four quarters to
the end of September 1999 in the US there was net retirement of about $158
billion, while in Britain there was a reduction in the supply of equity to
the tune of �30 billion in 1998. With more and more large investors chasing
fewer and fewer blue chip shares, it is hardly surprising that their prices
have been pushed up beyond belief.
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