[Socialism Today, No 28, May 1998, p. 2-4]
Japanese capitalism is sliding into a slump. We predicted this in January, when many economic pundits were still dismissing the Asian crisis as a little local difficulty. Now our prognosis has been confirmed by the president of the giant Japanese electronics group, Sony. Japanese industrial leaders are not known for their melodramatic statements. But Mr Norio Ohga warned (2 April): „The Japanese economy is on the verge of collapsing. If the economic situation continues to decline … this will no doubt have a damaging effect on the world economy“. He compared prime minister Hashimoto with US president Hoover on the eve of the Great Depression. „I am concerned that if Japan falls into a deflationary spiral it would affect the Asian economies. In that case, not even the US economy would be able to maintain its healthy state“. Ohga’s statement breaks what one commentator calls „a conspiracy of silence, notably at the regular meetings of the central bankers in Basle, to keep the urgency of Japan’s economic woes under wraps“. (Guardian, 4 April) A deep recession in Japan will aggravate the crisis throughout East Asia, and in time it will have a major impact on the US economy.
On Wall Street, it is true, the financiers are still speculating as if there will be no tomorrow, pushing the Dow Jones Share Index over the 9,000 mark and predicting that it will break 10,000 long before the millennium. This profit- crazed euphoria, however, cannot conceal the symptoms which are increasingly appearing which indicate that the US capitalist economy is approaching the end of the current business cycle. Despite absurd claims from the pundits that the business cycle has now been abolished and capitalism has entered a period of unlimited growth, the conditions are being prepared for a downturn in the US economy. Only the timing and the depth of the coming US recession is in doubt. But when it begins, the slide will undermine the key remaining prop of world economic stability. Moreover, in a period of volatile capital flows across the globe, the fallout from the massive overvaluation of shares on US and European stock exchanges, combined with the effects of debt deflation in Asia, are quite likely to provoke a major financial crash. Last Autumn’s gyrations on world financial markets were just a foreshadowing of what could develop in a matter of months.
Japanese capitalism, the world’s second largest economy, is not merely facing a cyclical downturn. It is paralysed by a deep structural crisis. The very factors which allowed Japan to build up massive industrial capacity, to capture key export markets in manufactured and high technology products, have now turned into their opposite, becoming fetters on further growth. For instance, the big banks, directed and effectively insured against losses by the state, channelled the savings of workers and the middle class into the hands of the big industrial groups. But the strategy of ‚over-loan‘ has now produced an insupportable debt mountain. Moody’s, the US credit-rating agency, has recently downgraded the credit-status of the Japanese banks. It reports that the country’s ten largest banks have $182bn in loans outstanding to East Asian borrowers, more than 13 times their combined profits. The Moody report itself sent shock waves around world financial markets. and it will now become more expensive for Japanese banks and corporations to borrow money.
In the 1980s, the Japanese state machine deliberately fostered the country’s speculative bubble. The phenomenal inflation of land and property values, which dramatically increased the collateral of the banks and industrial groups, allowed the big companies to massively increase their industrial capacity on the basis of extremely cheap credit. The bursting of the bubble after 1990, however, with land and share values falling by two-thirds or more, has rendered many industrial companies and finance houses incapable of financing their debts. Only the ‚convoy system‘, whereby companies in the same groups support one another, and massive state assistance, has prevented a flood of major bankruptcies. In this situation, it is virtually impossible for the big companies to expand their production.
Corporate profitability is plunging (estimated down 15% over last year), and so it is not surprising that the big manufacturers are cutting back their capital expenditure. The estimated fall this year will be 7.2%, the biggest for many years. But in some sectors the falls will be much higher. For instance, in semiconductors, where there is massive world-wide over capacity, the fall is likely to be up to 40%. The Financial Times (4 April) warns that these figures are probably optimistic: the situation is going to get much worse. Clinton, like Mr Ohga, is now demanding that the Japanese government steps in with a public expenditure package to stimulate growth. But there has already been a series of five packages (worth around $360bn). A huge proportion went to infrastructure projects, like roads and railways, in reality huge subsidies to the big construction cartels. Most of the rest went to prop up the collapsing banking system, including completely bankrupt finance houses.
After decades of urging people to save (at miserably low interest rates), the government is now urging them to spend, spend, spend. But people are fearful of hard times to come. Unemployment is rising, life-time job security is being eroded, and the social safety-net is minimal, Confidence in the system has been shattered by the economic crisis and the exposure of virulent corruption at every level of enterprise and government.
There is no chance, despite pressure from US and European leaders, of Japan acting as a locomotive for the world economy. On the contrary, Japan’s crisis will compound the effects of the East Asian slump. Not only are Japanese banks calling in their loans from the rest of Asia, but the stagnation of Japan’s domestic economy is depressing the market for East Asian exports. Now, some of the more thoughtful commentators are beginning to contemplate the knock-on effects of the Japanese crisis on the US economy. From the end of the long post-war upswing in 1973, the Japanese trade surplus was recycled to finance both the US Federal government deficit and a massive share of US company borrowing. It is not hard to imagine the effects if Japanese lenders begin to sell US treasury bonds in order to cover their own liabilities. There are some signs that this is already beginning to happen, though at the moment Japanese investors can earn much more on US bonds than they can at home. But as soon as the dollar begins to fall, which it will when the US economy begins to move into recession, Japanese banks and corporations (like other investors internationally) will begin to dump dollar assets. For the first time since the take-off of the Reagan deficit in the early 1980s, the US will face enormous difficulties in financing its deficits.
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Is it really plausible to predict a downturn in the US economy? Share prices keep breaking new records. Inflation and unemployment are both at record low levels, In 1996 and 1997 productivity (output per worker/hour) grew by 2% and 1.9% respectively, double the meagre rate of the 1980s and early 1990s. This allowed both corporate profits (11.7%) and wages (6.5%) to increase while price inflation slowed to under 1%.
Hardly a crisis approaching? These buoyant figures, however, which are not exceptional for the peak of a business cycle, are not a reliable guide to future developments.
While the stock exchange has been soaring, for instance, corporation profits have been markedly slowing. Not long ago, economic forecasters were predicting a 10% average increase in profits this year, but the current prediction for the top 500 US companies has now been revised downwards to a mere 1.1%. This reflects the slowing of US exports, which have been hit by both the high dollar and the collapse of markets in Asia.
While the speculators hail the latest productivity figures as confirmation of the long-awaited ‚productivity miracle‘, supposedly based on the marriage of new technology with the free market, it is impossible to take this jubilation seriously. As in previous growth spurts (e.g. 1983-87), the productivity growth mainly reflects the acceleration of output growth (5.9% in the US domestic non-financial sector last year). The productivity gains, moreover, have been mainly in manufacturing, while productivity growth in the service sector is still close to zero. When output slows, productivity will return to the miserable 1% trend of the previous period. Then there will be sharpened conflict between the bosses and the working class over the distribution of the wealth produced.
With export markets beginning to dry up, the US capitalists will be increasingly dependent on sales to the home market. However, this too must be approaching the limits of its growth. On average, US workers have only just returned to the income levels of the late 1980s after the recession of the early 90s. Now, households are generally dependent on longer hours, several jobs, and more members of the family working. Household spending is heavily dependent on consumer credit, which has now returned to the peak levels of the late 1980s. Any increase in unemployment and return to a squeeze on wages will have a devastating effect on workers‘ living standards.
The meteoric rise of share prices offers no assurance for the future. The disparity between the prices of shares and the stream of dividend income they command is greater than ever before. While prices continue to rise, of course, speculators can still realise profits through buying and selling their shares. But this contradiction cannot be sustained indefinitely – in fact, the crunch will probably come quite soon.
The stock exchange boom is stimulated by past gains, not a serious assessment of future performance. The rise in share prices is fuelled by the massive flood of capital into the stock markets. While the profits on share trading are higher than the return from government bonds, investors will continue to speculate, even if they have to do it on credit. Sourcing the flood of capital into financial markets is the enormous transfer of wealth from the working class and the middle strata to the super-rich capitalist elite which owns and controls the banks, finance houses, and big corporations.
„A small class of stock holders has done rather well for itself”, writes John Gray in the Financial Times (23 March), „While middle-class incomes have largely stagnated. A new class of working poor people has emerged, while the condition of the underclass has failed to improve. As a result, the US now resembles some Latin American countries more than it does any European society (aside perhaps from the UK)”. A downturn in the economy will have explosive repercussions throughout US society.
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There is still no shortage of up-beat forecasts for the world economy. The World Trade Organisation, for instance, recently pronounced that the South East Asian crisis would make no more than ‚a small dent‘ in global economic activity. The growth of world trade, they say, may slow from 9.5% in 1997 to around 6-7% this year. The five worst hit countries in South-East Asia (South Korea, Thailand, Indonesia, Malaysia and the Philippines) account for only 3.6% of world GDP, about 7% of world trade, 6% of global foreign direct investment and less than 4% of gross international bank lendings. (Financial Times, 24 March) This view, however, is based on the rather optimistic assumption that the crisis can be ‚contained‘, and it takes no account of the dynamic knock-on effects.
In an upswing period, various positive growth factors tend to reinforce one another to produce an acceleration. When the growth trajectory passes its limits, however, and reaches a breaking point, the opposite process begins to develop. One negative factor reinforces another, producing a downward spiral. In contrast to the World Trade Organisation, the IMF’s latest World Economic Outlook admits that the effects of the East Asian crisis are turning out to be much greater than they expected. For the third time since last July, the IMF has revised downwards its economic forecast for world growth. Output is now predicted to rise by 3.1% this year, 1.2 percentage points below October’s forecast.
The flight of capital from the crisis-ridden ‚emerging markets‘, for instance, has hit Latin America and Eastern Europe as well as East Asia. World oil prices are falling (currently down to about $12 a barrel), which reduces the import bill for the advanced capitalist countries. On the other hand, it cuts the income and therefore the spending power of the oil-producing countries on world markets. Despite fractionally faster growth in some of the European economies (where share markets have recently followed the US trend), growth rates are still depressed by the imposition of the Maastricht criteria, and are unlikely to rise above 2% annual growth. European capitalism will not save the world economy from a new recession.
A transition from upswing to downswing is under way. An economic collapse in Japan or a sharp downturn in the US economy could tip the world economy towards a deep recession. This may take many more months, but it could come much sooner.
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