[Socialism Today, No 22, October 1997, p. 2-4]
East Asian Market Tremors – End of the Cycle or End of Cycles?
All the classic symptoms of an impending economic crisis are visible. Wall Street jitters, volatility on world stock markets. The collapse of Thailand’s speculative boom, followed by helter-skelter devaluations of other South East Asian currencies. At the IMF meeting in Hong Kong, Mohammed Mahathir, the Malaysian dictator, exchanged insults with George Soros, the Wall Street speculator-philanthropist, each blaming the other for the crisis. Meanwhile, the whole region is enveloped in a cloud of black, choking smoke as the modern Conquistadors ‘develop’ Indonesia’s primordial rain forest.
Another typical element of the pre-crisis syndrome is also present: denial. Not only is there no crisis, but (according to the gurus) there is a ‘new economic paradigm’, a ‘new economics’, which renders the old boom-slump cycle obsolete and promises growth and prosperity without limit, The 247 point drop on Wall Street’s Dow Jones share index, the biggest since 1987’s Black Friday, was just a ‘technical correction’ of share prices. The East Asian currency turmoil is just a storm in a tea cup which will soon blow over, far less dangerous than the 1994 Mexican peso crisis. This, according to the pundits, is because of ‘strong economic fundamentals’. They mean low inflation, stable or even declining labour costs and, above all, record levels of profits. Not only have the profits of the big corporations returned to the peak levels of the 1950s and 1960s, but the hyper-wealthy speculators (now dominated by the big financial institutions) are raking in a profits bonanza from privatisations ($600 billion worldwide since 1980), currency speculation ($1.2 trillion exchanged every day), and from investment (much of it highly speculative) in a handful of developing economies in East Asia and Latin America (now running at over $200 billion a year). ‘Happy days are here’. The finance-capitalists and their advocates (who now include most government and academic economists) are intoxicated with profit. This is the only rational way to explain the exuberant ‘bull‘ market on world bourses, which still continues to surge. In reality, the ‘economic fundamentals’ are far from strong. The recent rise of world stock markets has actually taken place on the back of the weakest growth of any business cycle since the end of world war two. Since 1990, the real (inflation adjusted) growth rate of the advanced Capitalist economies of the OECD has averaged two per cent a year, in contrast to the average growth of 4.5 per cent a year during the long upswing. This feeble growth has been accompanied by the en continuous rise of structural unemployment, now officially 36 million in the OECD countries and an estimated 800 million worldwide (according to the ILO). The living standards of large sections of the working class have been eroded, and there has been an unprecedented polarisation of wealth, both in the advanced capitalist countries and the Third World. In the US today, for instance, (excluding home ownership) half of one per cent of households owns more than the bottom 90 per cent.
These structural contradictions will inevitably set a limit to continued growth, which in turn will undermine profitability. The moment when the bubble will burst cannot be accurately predicted. But the gyrations on Wall Street and other stock exchanges are a warning of what is approaching. Some of the more sober investors are already preparing. It was recently reported, for example, that “Warren Buffett, the renowned American investor, has moved $2 billion into US treasury bills. This was regarded as a sign of Mr Buffett’s nervousness at the current high stock market prices”. (The Times, 22 September).
In the US, record profitability brought a flood of investment onto the stock exchange. The decline in interest rates, no doubt temporary, made shares more profitable than government bonds for a period. The total capitalisation of US equity markets (the total capital invested in company shares and traded on US stock markets in the US) rose from 53.8 per cent of gross domestic product (GDP) in 1990 to 108.7 per cent of GDP in 1996. It is now estimated to be around 140 per cent of GDP. Since 1991 the profits of companies listed on the ‘Standard and Poor 500 Index’ increased their profits on average at an annual rate of 20 per cent. This reflects not so much a growth of business, let alone a surge in productivity (which is growing at only one per cent a year), but intense cost-cutting, especially through the intensified exploitation of workers. In the second quarter of this year, for instance, Gillette announced a 15 per cent increase in profits on a revenue growth of barely one per cent. Coca Cola reported a 4.3 per cent decline in revenues – but a 12 per cent increase in profits. They are squeezing their way to greater prosperity on the backs of the workers.
Increased demand for shares pushes up share prices. The average price of S&P 500 shares was recently averaging 23 times earnings from dividends, compared with a post-1928 average of 14 times. Gillette shares have been selling at 59 times earnings, while Coca Cola shares have been selling at 46 times earnings.
Such inflated share prices cannot be sustained indefinitely. As share prices rise, the dividend yields inevitably fall as a percentage of the share purchase price. Since 1925, the dividend yield on S&P 500 shares averaged 4.38 per cent, while at the beginning of August 1997 the average yield was down to an all time low of 1.65 per cent.
Why do investors buy them at all? Partly because many continually play the market, buying and selling shares in order to realise capital gains on the sales. In addition to dividend payments, moreover, many corporations are now distributing profits to shareholders through the mechanism of buying back their shares at the current, inflated prices. The hyper-rich and the big finance houses are already loaded with government bonds, so why not profit from the stock exchange while the going is good?
But by any realistic measure, shares are grossly overvalued. Before his recent (no doubt temporary) conversion to the ‘new paradigm’ school, Alan Greenspan, chairman of the US Federal Reserve Bank, attributed the rampaging bull market to ‘irrational exuberance’.
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Recently a few of the older, wiser, and less intoxicated speculators have been warning that sooner or later there will be a ‘correction’, and not merely a technical one at that. Even before 14 August, Barton Biggs, chairman of Morgan Stanley Asset Management of New York, warned: “I have the feeling we are setting up for something out of the blue soon. Something with the stunning violence of a punch in the mouth when you aren’t expecting it” (New Yorker, 28 July 1997). The mid-August yo-yo was just a foretaste of such a ‘stunning punch’ – which is still to come. It could be within the next few months, maybe it will be a year or so. An Indian Summer like 1987-89 cannot be ruled out, but Germany and Japan no longer have the massive surpluses which were drawn on to expand the world economy after the October 1987 financial crash. After seven years of weak, uneven recovery, we are most likely witnessing the closing phase of this business cycle.
Just a few days after the dip on Wall Street, the currency crisis in South East Asia began to intensify. The massive flow of investment into the region ($95 billion out of $200 billion to developing countries in 1996) pushed up the value of the currencies of Thailand, Malaysia, Indonesia, etc. The crash of Thailand’s speculative property boom, together with the slowdown of these economies and growing trade deficits, provoked a flight from the Thai baht, the Indonesian rupiah and the Malaysian ringgit, with a ripple effect on other Asian currencies.
The exports of these countries were also squeezed by the rapid growth of exports from China, which devalued the yuan in 1994, cheapening its exports on world markets. This has triggered a round of competitive devaluations, with the possibility that China will devalue once again in order to maintain its share of world exports. Mahathir blames the crisis on speculation by ‘unscrupulous profiteers’ like Soros. Yet since the late 1980s, capitalist governments like Malaysia have relied on the flow of speculative investment from the US and Europe. Mahathir caused a fission of panic through the world financial markets when he threatened to make currency trading illegal and revert to controls on foreign investment. Such a policy is unlikely at the moment, but it is a warning of the direction in which many capitalist governments will move when they are really hit by the economic hurricane.
Leaders of the IMF, the World Bank and the US administration have intensified their demands for more deregulation, greater liberalisation of markets. But this in itself will not prolong the growth in the world economy. Despite the fact that he has made billions in speculation on the ‘free market’, Soros is now arguing against the notion of a fully laissez faire market system: “I consider it a dangerous idea. The instability of financial markets can cause serious economic and social dislocation” (Independent, 22 September). He is now reported to be investing heavily in agricultural land in Argentina, a solid asset for troubled times. Even more starkly, Soros stated: “International capital flows are notorious for their boom-bust pattern and I cannot believe that the present boom will not be followed by bust until history has proven me wrong” (The Times, 22 September). Soros is far more realistic that the advocates of the ‘new economic paradigm’, a profit-seeker’s fantasy.
Marxists do not make a mechanical link between economic crisis and political struggle. But in order to advance the struggle, we need clear perspectives, and those perspectives must be drawn from a realistic analysis of current trends in the economy and society. We should be prepared for major upheavals in the world economy in the next few years. The ideological complacency of the bourgeois will be shattered.
While the Wall Street jitters and Asian currency turmoil prefigure the coming economic crisis, recent movements of the working class – in Italy and France, in South Korea, in the US with the recent UPS strike, and elsewhere – are a foretaste of the explosive movements of the working class which will challenge the capitalist system’s rotten economic fundamentals.
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