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Forever blowing bubbles?
What is happening to the world economy?
The world capitalist economy has been buoyed up by
a tide of liquidity, a flood of cheap credit. This has fuelled the
frenzied financial speculation of the last few years, a profits bonanza
for the super-rich. Underlying this, however, are unsustainable
imbalances and deepening contradictions in world economic relations.
LYNN WALSH looks in depth at the processes taking place.
AT THE END of February, world stock exchanges and
other sectors of the financial markets (company bonds, debt securities,
commodity futures, etc) suffered a sharp fall, opening a period of
jitters throughout the global financial system. The dip was apparently
triggered by a 9% fall (27-28 February) on China’s two main stock
exchanges, Shanghai and Shenzhen. The fall in China was precipitated by
investors’ fears that the Chinese government would increasingly curb the
flow of credit for purchasing shares, undermining the recent surge in
share prices (up 130% in 2006).
But the effect of the fall on China’s stock
exchanges was far in excess of their weight in world financial markets.
China undoubtedly plays an increasingly important part in the world
economy. But Chinese stock markets account for a tiny share of the total
capitalisation of world stock markets. The total capitalisation of all
China’s stock exchanges is only about 5% of the valuation of US markets.
Morgan Stanley Capital International (MSCI) estimates that Chinese
shares that can be purchased by international investors (as opposed
those restricted to domestic investors) constitute about 11% of the
total ‘emerging markets’ index, and a mere 0.9% of the MSCI all-world
index. This means that China’s stock exchange capitalisation is smaller
than South Korea or Taiwan, and about the same level as Russia and
Brazil. "China’s sway over global stock markets", remarked one
commentator, "is more psychological than fundamental. [China’s stock
market] resembles more of a casino than a legitimate investment venue".
(Michael Sesit, China Not Yet in Driver’s Seat, International Herald
Tribune, 2 April)
Falls on China’s stock exchanges, however, prompted
a worldwide retreat by speculators from high-risk investments,
reflecting widespread fears that shares and other financial assets are
significantly overvalued and due for a ‘correction’. Shares appear to
have suffered most in this retreat, but junk bonds, commodities futures,
debt securities, in fact the whole range of financial assets, were
affected.
The result was a tremor rather than an earthquake.
In the US, for instance, about $580 billion was wiped off the value of
US stocks in the 28 February fall. However, the Savings & Poor 500
Index, the broadest of Wall Street’s share indices, was down 3.5%,
whereas a correction is considered to be a 10% drop, and a slump over
20%. (Wall Street fell 21% in a day during the October 1987 crash.) But
this was the biggest fall in the US since the puncturing of the dotcom
bubble in 2000-01, a reminder to speculators that playing financial
markets still involves risk.
The February jitters were not so much a question of
contagion, a situation where events in one region have a knock-on
effect, spreading to other parts of the world financial system. It was
more a question of synchronisation, with the stock exchange fall in
China reminding speculators that the same conditions exist throughout
the world. The rapid, simultaneous fall of markets indicates the extent
to which financial markets have become globalised – today, the whole
global financial system functions virtually as a single market.
Investors in February, moreover, were affected by
several other important factors. Most important were additional signs of
a slowing down in the US economy. At the end of January, gross domestic
product (GDP) growth for the fourth quarter 2006 was revised down to
2.2% (from the provisional 2.5%), in contrast to 5.6% growth in the
first quarter of 2006. This slowdown was mainly because of the slump in
the US housing market, which has been a key factor in sustaining
consumer demand. The housing slump, moreover, provoked a crisis in the
‘sub prime’ loan market, in which high-interest loans are extended to
borrowers who cannot even afford home loans at regular interest rates.
Some of the companies and banks involved in the sub-prime market
announced huge losses, while others have been forced into bankruptcy.
There are widespread fears among serious capitalist commentators that
the sub-prime crisis will spread to other sectors of the financial
system. The sub-prime loan crisis certainly has the potential to provoke
a wider financial crisis.
The jitters were also intensified by reported
comments of Alan Greenspan, formerly head of the Federal Reserve Bank,
to a group of investors. The press reported that he warned that "the US
appeared to be at the end of a long expansion and that such times
usually brought with them the seeds of recession". Still regarded by
many as an infallible guru, Greenspan cautioned that "investors are in
danger of being too complacent and too confident that the benign mix of
low inflation and steady economic growth would continue". (International
Herald Tribune, 3 March 2007)
Recent company reports, moreover, were indicating
that, after 19 quarters of 10%-plus increases in profits, growth in
corporate profits for 2007 is estimated to slow to 4% or 5%. "The last
time this kind of decline happened", commented Business Week, "was April
2000, a month after the start of the bear market and eleven months
before the economy fell into recession". (Volatility is Back, Ominous
Signs Loom, 12 March 2007)
The prices of financial assets have been hugely
inflated by frenzied speculation on the basis of ever growing quantities
of cheap credit. The record growth of the world economy is heavily
dependent on a series of bubbles. The financial system appears to have
become more and more divorced from the real economy, the production of
goods and services. Nevertheless, the bursting of the bubbles – a
financial crash – would have a devastating effect on world economic
growth.
A speculation frenzy
THERE HAS BEEN an orgy of frenzied financial
speculation during the last three or four years. A third of corporate
profits in the US come from the finance sector. It has been on an even
bigger scale than during the late 1990s, when the US and world economy
appeared to be propelled by the so-called ‘dotcom’ boom, speculation in
shares in information and communication technology companies that pushed
share prices way beyond any realistic prospect of profitability.
Currently, moreover, financial speculation has penetrated every corner,
every nook and cranny of the global economy. Today, there is not just a
bubble, but a series of bubbles: shares, property, foreign currency,
emerging markets, commodities, junk bonds, utility companies,
take-overs, and so on.
They have been blown up by the seemingly endless
supply of cheap credit and the aggressive, competitive activity of the
big speculators. This time round, many super-rich individual speculators
(who have not forgotten their huge losses in 2000-01) have retreated
from the more risky markets, taking refuge in government bonds or simply
sitting on their huge piles of cash (in bank deposits). Financial-market
activity has become increasingly dominated by the big players: hedge
funds, finance houses (like Goldman Sachs, Morgan Stanley, Merrill
Lynch, etc), and private equity companies. At the same time,
traditionally more cautious finance institutions, like mutual funds,
insurance companies and pension funds, have been following the example
of the adventurous predators, searching for higher yields while interest
rates are low. Exploiting small price differences between different
types of financial asset and different regional markets, these
institutions amplify their profits by using huge amounts of credit to
finance trading in huge volumes (often up to two-thirds of their
investment is actually credit or, in fact, debt). Fifty years ago, the
debt of the US financial sector was zero. Today, it is the equivalent of
100% of the US GDP.
Every type of asset, whether company debt or
commodities like oil and grain, have become ‘securitised’, that is,
bundled into packages represented by a piece of paper, a security, that
can be bought and sold on fast moving financial markets. These markets
are highly liquid, and funds can move in and out at an incredible rate.
Derivatives, a special type of security that derive
their value from underlying assets (various types of options, futures,
swaps, etc, related to currencies, commodities, debts, shares, etc, etc)
have become one of the main vehicles of speculative activity. They were
developed to spread risk between a large number of financial market
players, and they appear to do so under buoyant market conditions. They
are, however, extremely complex financial instruments, and even experts
admit they have no idea where the risk will end up. What happens when
there is a major correction or a crash? "The tide of global liquidity",
commented Tony Jackson (Financial Times, 6 February), "is deforming the
credit markets", and no one "knows where the risk is sitting in the
system".
Company shares (or equities) are the most favoured
form of investment. In general, they provide a higher return than bonds
and many other investments. With very few new share issues, however,
there is a shortage of shares on the market, and so share prices have
been pushed up (although in real terms they have not yet regained the
peak levels of the late 1990s boom).
Share price has become a crucial indicator of a
corporation’s ‘success’, and so many companies have been buying back
shares to keep up the value of the remaining shares. In recent years, 29
out of 30 companies listed on the Dow Jones Industrial Average
repurchased some of their own shares. In 2006, Dow Jones Industrial
Average buybacks amounted to $370 billion, four times the 2003 total. It
is estimated that in the first nine months of 2006 a record $600 billion
US shares were removed, overall, from US stock exchanges. In many cases,
the companies concerned borrowed the cash required to buy back a
proportion of their shares. This process makes a mockery of the idea
that shares raise capital for new company investment. In reality, most
investment comes from retained profits or borrowing.
Many shares have been removed from the market
through takeovers (so-called mergers and acquisitions), especially
through ‘leveraged buy-outs’ by private equity firms. In 2006 in the US
there were $420 billion-worth of leveraged buy-outs, ‘leveraged’ meaning
debt-financed, with the debt being landed on the acquired company.
High risk investments
BECAUSE OF THE shortage of shares and the relatively
low return from government bonds (ten-year US treasury bonds have been
averaging a 4-5% return) big speculators have turned to more risky
markets in search of higher yields (profits). There has been a huge
growth of investment in junk bonds, that is company bonds that are not
rated ‘investment grade’ but considered to be high risk. "Since the
start of the year, we have seen a notable surge of new investor
positioning in emerging market corporates", mainly junk bonds.
(Financial Times, 21 February) In the past, junk bonds returned 8-10%
more than government bonds, reflecting the risks involved. But in the
last few years, the risk premium has fallen to around 2%. Speculators
have become increasingly complacent, acting as if risk was a thing of
the past. "The amount of debt carrying the highest risk of default is
rising as a proportion of the junk bond market, prompting fears the next
cycle of corporate failures could be more severe than the last".
(Financial Times, 15 January)
Martin Fritzen, writing in Leverage World,
commented: "I don’t think anyone seriously disputes that a lot of
precariously financed deals have been sold into the market in recent
years". The problem, he said, is that "liquidity is there when you don’t
need it, in the high-yield market". Moreover, the biggest growth of the
junk bond market has been in so-called ‘emerging markets’, in many cases
semi-developed economies where there is very little scrutiny of the
companies issuing the bonds.
In the last few years there has been a big increase
of investment in the housing market, particularly in the sub-prime
sector where returns have been high. Housing debt has been packaged into
so-called ‘collateralised debt obligations’ (CDOs), complex financial
instruments which package together bonds of varying degrees of risk.
Huge quantities of high-yield CDOs have been purchased by hedge funds
and other big speculators on the basis of cheap credit, particularly
from low interest lenders in Japan.
This sector of the debt market was supported by the
housing bubble in the US and elsewhere. While prices were rising and
mortgage credit rapidly expanding, huge profits could be made from
trading in housing debt. But the US housing slump and the meltdown of
the sub-prime mortgage sector threatens a much wider instability of
financial markets. "Analysts worry that the sub-prime meltdown could be
the catalyst that brings the era of easy access to cheap debt to a
close". (Financial Times, 16 March)
Chen Hooi, of EON Capital, Kuala Lumpur, comments:
"The US sub-prime concern has cast a great shadow over Asia. The worry
is that it could spill over and cause the US economy to slow down, and
this will cause a domino effect on the world economy". (New York Times,
14 March)
"Another [concern] is the rapid growth of
derivatives. The problems in the sub-prime mortgage sector have focussed
attention on the slicing and dicing of risk using sophisticated
instruments such as collateralised debt obligations and credit default
swaps. Banks have used these to shed credit risk, but it is not clear
where all that risk now lies". (Market Turmoil, Rethinking Risk, The
Economist, 28 February)
It was quite accurate for Tim Lee, a strategist at
pi Economics, to describe the whole financial system as "the equivalent
of a gigantic Ponzi scheme". Charles Ponzi was a US fraudster who
operated an investment scam in 1920, offering investors exceptionally
high returns that could only be paid out from payments from new punters.
The whole scheme depended on continual growth, and inevitably collapsed
when Ponzi could no longer pay the promised return – and then the fraud
was exposed.
The Buttonwood column of The Economist (17 March)
commented on this: "The American housing market seems to be suffering
from the unravelling of a Ponzi-type system. Sub-prime loans were
offered on generous terms that, implicitly or explicitly, depended on
rising house prices. The banks that made these loans bundled them up and
sold them in the credit markets to investors, eager for high yields.
This was supposed to make the financial system more secure by dispersing
risk more widely.
"But look what is happening now. The buyers of these
loans are asking the original mortgage-writers to buy them back. But
these home lenders do not have the money to do so. The confidence that
sustained the balance sheets has evaporated, leaving many in dire
trouble".
Over-accumulation
THE IMMEDIATE SOURCES of the tide of liquidity are
the loose monetary policies of the central banks and the recycling of
the huge surpluses of exporting economies (China, Japan, South Korea,
etc) and, more recently, the oil producing countries. The liquidity
tide, however, is not merely a monetary phenomenon. If the central banks
were merely printing money, there would be a massive inflation of major
currencies, in spite of the reduction in the prices of manufactured
goods from low cost countries.
Behind the liquidity tide there is a deeper source,
the over-accumulation of capital. Capitalists only invest their money if
they can find profitable fields of investment. Since the last phase of
the post-war upswing (1945-73), capitalists have found it increasingly
difficult to find profitable fields of investment in production. Despite
the growth of new products and new sectors of the economy, in many
sectors there is an over-capacity in relation to money-backed demand.
Billions of people lack basic necessities, let alone luxury products.
But they also lack the income, and therefore the purchasing power, to
buy the goods and services available within the framework of the
capitalist economy.
Nevertheless, since the 1980s the capitalist class
has intensified the exploitation of the working class, in particular by
increasing the share of profits in national income at the expense of
wages. As profits have soared, the ‘excess’ of capital has become even
more conspicuous – and the capitalists have increasingly turned towards
financial speculation, the buying and selling of existing paper assets
rather than investment in new productive capacity. It is the excess of
capital arising from over-accumulation (showing the fundamental limits
of the capitalist system) that underlies the tide of liquidity. Gambling
in the casinos of world financial markets is primarily a struggle for
the re-division of profits between the hyper-rich players involved in
the speculative activity. The driving down of wages, however, further
undermines the market for capitalist goods and services, aggravating the
problem of over-accumulation and preparing the ground for inevitable
crises in the system.
The tide of liquidity
MOST COMMENTATORS attribute the tide of
bubble-producing liquidity to the loose monetary policy of the central
banks, beginning with the US Federal Reserve, formerly under the
stewardship of Greenspan. Undoubtedly, this has been an important
immediate source of liquidity. In response to a series of crises, the
central banks repeatedly lowered interest rates and expanded the money
supply, pumping huge amounts of cash into the world financial system in
an effort to prevent a breakdown. This was done after the 1997 Asian
crisis, again in response to the bankruptcy of Long Term Capital
Management hedge fund in 1998, again (on a massive scale) after the
collapse of the dotcom boom at the end of 2000, and once again by the
Federal Reserve to prevent an economic shock following the 9/11 attacks
on the Twin Towers and the Pentagon.
The injection of additional liquidity undoubtedly
cushioned the effects of financial instability and economic slowdown.
The loose monetary policy of the central banks was buttressed by a
number of important factors. China, Japan and other Southeast Asian
exporters have had recurring trade surpluses with the United States and
other advanced capitalist countries. They have recycled their surpluses,
using their foreign exchange reserves to invest in US government bonds
on a vast scale in order to sustain the US economy as the world’s
‘market of last resort’. Clearly, this is done in order to protect their
own economic interests. At the same time, it provides a source of
relatively cheap credit to the US government, US corporations and US
consumers. Without the recycling of these huge surpluses, the US would
not have been able to sustain its trade deficit, currently running at
over $800 billion a year (reflecting the fact that the US actually
consumes more than it produces, on the basis of credit).
Another source of the global liquidity is the
so-called ‘carry trade’, linked especially to Japan. As a result of a
decade or more of economic stagnation and deflation (with falling
consumer prices), the Japanese government adopted a policy of zero or
near zero interest rates. International speculators have been able to
borrow yen at a very low cost, change them into dollars or other
currencies, and invest in higher yielding financial assets throughout
the world. The carry trade has been a major source of credit for
speculative activity. (The carry trade also had the additional advantage
for Japan of preventing the yen from increasing its value, which would
make Japanese exports more expensive on world markets.)
In the last few years, moreover, the major oil
producing states have accumulated vast foreign currency surpluses as a
result of the soaring price of oil and gas. Oil rose from an average
price of $25 a barrel in 2002 to $66 in 2006 and remains on about the
same level this year. The combined current account surplus of the oil
exporters shot up from only 0.1% of global GDP in 1999 to 1.4% last
year. Over the last five years, there was an income transfer from oil
consuming countries to oil producing economies of $1.8 trillion, about
4% global GDP. A large proportion of these surpluses, mainly but not
exclusively held in dollars, have been recycled into world financial
markets as governments and corporations in the oil producing economies
have been investing in the advanced capitalist countries, not only
buying government bonds but increasingly speculating in financial
markets. (Serhan Cevik, Tracking Petrodollars, Morgan Stanley Global
Economic Forum, 14 February 2007)
The petrodollars have become an increasingly
important source of cheap credit in the global economy.
Capital versus labour
INTERNATIONALLY, THE capitalist class has generally
restored its profitability to the peak levels of the post-war upswing.
The share of wages in national income has been brutally squeezed,
especially for the least skilled sections of workers but also
increasingly for technical workers as some services are outsourced to
countries like India. In the ‘G7-plus’ group of advanced capitalist
countries (US, Japan, Euro-12, Britain, and Canada) real compensation
(wages plus benefits) as a share of gross domestic income (GDI) fell
from 56% in 2001 to a record low of 53.7% in 2006. The Bank of
International Settlements (BIS) comments: "The secular [long-term]
decline in inflation has gone hand in hand with great restraint in
nominal wage growth… and wage shares in the total economy have fallen by
5% over the past three decades or so". (BIS Annual Report 2006, p18)
The surge in profits at the expense of wages is very
clear in the US. One commentator writes: "…wages and salaries now make
up the lowest share of gross domestic product since 1947, when the
government began measuring such things. Corporate profits, by contrast,
have risen to their highest share of GDP since the mid-60s – again that
has come chiefly at the expense of American workers". (Harold Meyerson,
Devaluing Labor, Washington Post, 30 August 2006)
Referring to the recovery in the US economy since
the collapse of the dotcom boom in 2001, the Economic Policy Institute
comments: "The rise in corporate profits’ share is, by far, the largest
that has occurred 19 quarters after a business cycle peak since world
war two, and it is almost eight times as large as the average shift that
has characterised previous recoveries. If these shares had remained
constant, labour incomes as an aggregate would be $346 billion higher
today". (EPI Snapshot, 30 March 2006)
Unlike the situation during the post-war economic
upswing, accelerated productivity growth has not resulted in any
improvement in labour’s share of the wealth produced. In the US,
productivity grew at an average rate of 2.8% a year, double the weak
1.4% gain during 1974-95. Stephen Roach, of Morgan Stanley, comments:
"Fully ten years into a spectacular productivity revival, real wages
remain nearly stagnant and the labour share of national income continues
to move lower". (Labor Versus Capital, Global Economic Forum, 23 October
2006)
This shift in favour of profits at the expense of
wages is the fundamental reason for the sharp growth of inequality both
in the advanced capitalist countries and many developing countries such
as China. Under capitalism, wealth is produced by the exploitation of
workers’ labour power in the production process. Workers are only paid
part of the wealth, or new value, that they create. The remainder,
‘surplus value’ in Marxist terms, is expropriated by the capitalist
class, the private owners of the means of production. The sharing out of
the surplus between wages and profit is determined by the class
struggle. In the post-war period, because of the balance of forces at
that time, workers were able to improve their share, and relatively high
productivity growth allowed for a simultaneous growth of profits and
real wages.
Since the end of the post-war upswing, however, the
balance of forces has swung against the working class. This is a result
of a combination of economic and political factors.
The decline of heavy manufacturing industries,
especially in the advanced capitalist countries, undermined the basis of
the ‘heavy battalions’ of the organised working class. Newer sectors of
industry and especially services have relied on casual, part-time
workers. Under neo-liberal policies there has been a general attack on
trade union rights resulting in a weakening of trade union organisation.
The weakening of the working class is also bound up
with the political retreats, particularly the set back in consciousness
following the collapse of the Stalinist states after 1989. The
confusion, disorientation and weakening of the traditional workers’
organisations undoubtedly created favourable conditions for the
capitalists’ neo-liberal offensive against the working class.
At the same time, globalisation has also weakened
the working class internationally. There has been an approximate
doubling of the labour force integrated into the world capitalist
economy during the last decade, with China, India and Russia
contributing around 1.5 billion additional workers to the global
workforce. Potentially, this means an enormous increase in the size and
social weight of the working class internationally. Under current
conditions, however, with neo-liberal conditions and a weakening of
working-class organisation and consciousness, the rapid expansion of the
labour force in cheap-labour countries has tipped the balance in favour
of the capitalists. When workers in China, for instance, are paid only
around 3% of the wage levels of workers in the advanced capitalist
countries, outsourcing – or the threat of outsourcing – to low wage
countries can be used to undermine the bargaining power of workers. At
the same time, the increased flow of immigrant workers in countries like
the US or Britain, another aspect of neo-liberal globalisation, has
undoubtedly slowed wage growth.
Weak capital investment
DESPITE RISING PROFITABILITY and the prevalence of
business-friendly neo-liberal policies, however, the rate of capital
accumulation in the advanced capitalist countries (including Japan,
South Korea, Taiwan, etc) has continuously declined since the late
1960s. The annual growth of fixed capital stock (which takes account of
the depreciation or obsolescence of worn out capital) in the United
States fell from 4% in the 1960s to 3% in the 1990s and only 2% between
2000-04. In Europe, the growth rate fell from 4.6% in the 1960s to 2.6%
in 2000-04. Even more dramatically, the growth rate of fixed capital in
Japan, seen as a ‘super-accumulator’ during the post-war upswing, fell
from 12.5% in the 1960s to 4% in the 1990s and 2.1% in 2000-04. (China,
of course, is an exception to this trend, with growth accelerating from
1.9% in the 1960s to 10.9% in the 1990s.) (See Andrew Glyn, Capitalism
Unleashed, p86)
There has been a decline in capital investment (‘capex’
– short for capital expenditure – in financial jargon) despite the fact
that (1) the global labour force has been approximately doubled in the
last decade with the accelerated development of China and India, etc,
which has significantly lowered the capital-labour ratio (the amount of
capital employed per worker); and (2) the accelerated depreciation of
capital stock because high-tech equipment becomes obsolescent faster
than previous equipment, thus requiring a higher level of capital
investment even to maintain the net capital stock.
Until very recently, there has been little
discussion of this phenomenon in the financial press, but a number of
Morgan Stanley financial analysts have recently highlighted "the
(curiously) low capex/capital stock in the world".
"There has been a curious reluctance on the part of
the corporate sector in the world to invest in physical assets, ie,
capex has been surprisingly low, despite the fact that the global
capital-to-labour ratio is artificially depressed". (Stephen Jens,
Global Economic Forum, 23 February 2007) He also notes that, outside
China, investment rates in Asia (Japan, Taiwan, South Korea, etc) "have
collapsed, even including the massive investment that has taken place in
China in recent years".
Jens and other capitalist analysts point to a number
of explanations. There is, they comment, intense uncertainty about the
prospects for the global economy, and fears that US economic growth,
dependent on inflated asset prices, may collapse. Multi-national
corporations, moreover, appear to be extremely cautious about expanding
capacity in ‘emerging markets’ (Brazil, Russia, Vietnam, etc), due to
uncertainties about political and economic stability.
Another factor, however, is linked to the dominance
of finance capital. Low levels of capital expenditure, referred to
approvingly as ‘capital discipline’, help keep corporate profits high,
boosting companies’ valuation on the stock exchange.
Several Morgan Stanley analysts warn that ‘capex
anorexia’, unless reversed, will increasingly slow down the growth of
the world economy. Capital accumulation is key to productivity and
output growth. Gerard Minack notes that "investment spending has been
strangely muted through this cycle despite record-high profit margins
and returns on equity, as well as relatively low interest rates". (The
Global Capex Debate, Morgan Stanley Global Economic Forum, 16 February
2007)
This capex anorexia is in spite of the so-called
global savings glut, the huge gap between funds saved from profits or
other forms of income and capital investment in developing the means of
production.
In the Morgan Stanley ‘capex debate’, Stephen Roach
notes the increased flow of corporate cash from advanced capitalist
countries to "offshore investments in green-field capacity in low cost
developing economies". This would imply, he comments, that "the domestic
portion [of corporate investment] would then go to share buy-backs or
replacement of worn out or obsolete capacity. Perhaps the best one can
hope for in the maturer countries is enough ‘replacement’ spending
simply to maintain the capital stock – hardly the grist for a powerful
capex pickup that the bulls see as all but inevitable".
Because of the rapid development of new technology,
especially computers and software, equipment currently becomes obsolete
very quickly. It requires growth in equipment spending of between 6-7%
in real terms in the US, just to maintain the capital-output ratio at
its current level. Richard Berner comments: "The capital stock of
equipment and software [in the US] has actually been declining in
relation to GDP over the past four years. Real non-farm business output
rose by an average annual rate of 3.9% over that period, while the real
stock of equipment and software rose by an average annual rate of 3.5%.
Nonetheless, to achieve that, the gross investment in equipment and
software rose at an average 6.2% rate".
Berner further comments: "There is no mistaking the
distinct cyclical downshift in capex growth – especially in equipment
and software – over the past three quarters. Such spending crawled at a
miserable 1.4% annual pace over the last nine months of 2006, compared
with a 9.5% annual rate over the previous two years". (Global Economic
Forum, 16 February 2007)
In his own comment on the ‘capex conundrum’ (Global
Economic Forum, 9 March 2007), Berner comments: "Corporate America seems
increasingly unwilling to boost capital expenditure despite moderately
positive fundamentals…" Berner also considers that it requires roughly
6% of growth in real equipment spending in the US just to keep the
capital-output ratio constant. This is because of "the large scale of
existing capital stock and the heavy depreciation for today’s
quickly-obsolete equipment".
The capital stock of equipment and software has
actually been falling in relation to GDP over the last four years.
Andrew Glyn comments that "the investment boom of the later 1990s halted
the seemingly inexorable trend in the growth rate of the capital stock
which had begun in the late 1960s. Moreover, when the boom came to an
end in 2000 capital stock growth plummeted more steeply than ever
before". (Capitalism Unleashed, p134)
The capitalists face a dilemma. If capital
investment continues at a rate barely sufficient to maintain the
existing capital stock, future growth rates and productivity will
inevitably be undermined. On the other hand, a significant increase in
the rate of capital expenditure would reduce the current ‘savings glut’,
pushing global interest rates higher. This would undermine the basis of
the bubble economy, the series of bubbles on which the world economy has
floated during recent years.
At the moment, however, there is little sign that
the big corporations are interested in boosting the rate of capital
accumulation. Public (stock-exchange quoted) companies are spending vast
sums of money to buy back their own shares in order to increase their
value and the flow of profits to shareholders. For instance, during the
fourth quarter of 2006, US (non-financial) corporations bought back a
record $701 billion (at an annual rate) of their equity (shares net of
new shares issued), while incurring a record of $605 billion in debt to
do so. (See Berner, Global Economic Forum, 9 March 2007)
Corporate executives and super-rich speculators are
far more interested in gambling with existing financial assets, paper
securities, than in real capital investment to develop new productive
forces.
Where will it all end?
SINCE THE RECESSION that followed the collapse of
the dotcom bubble in 2000-01, the world economy has bounced back,
growing at around 5% a year. Corporate profits have soared. ‘The
market’, the big financial firms that play the global casinos, are
mostly full of optimism. Everything is for the best in the best of all
capitalist worlds. This is in spite of serious international imbalances,
in reality deep contractions, in world economic relations. There is the
unprecedented disparity between the deficit of US capitalism and the
foreign currency reserves of the major exporters, China, Japan, and the
oil producers, who use their reserves (in the main) not to develop their
own domestic economies, but to invest in the US and other advanced
capitalist countries, in order to underwrite the consumer markets on
which they depend.
The US external deficit and the reliance of US
consumers on debt, are unsustainable in the long run. The massive
accumulation of reserves by China, Japan and other Asian exporters is
also unsustainable. At a certain point, the continued and possibly
accelerated fall of the dollar will trigger a flight from dollar assets,
provoking turmoil (at the very least) in the world financial system.
The US economy is slowing down, and may possibly
well fall into recession. Optimists believe that the slack will be taken
up by the growth of domestic growth in Europe and Japan, and by the
takeoff of domestic growth in China. This misses the point that these
countries have, directly or indirectly, become decisively dependent on
the US market. A structural relationship has developed between US
debt-driven consumption and the Asian exporters, who underwrite the US
deficit. A smooth rebalancing, with a reduction of the US deficit
(involving a contraction of US growth and consumption) and a diversion
of Asian and oil-producers’ surpluses into their home economies would
require a very painful adjustment, one that could provoke a convulsion
in the world economy.
Underlying the deficit-surplus relationship,
moreover, are even deeper economic and social contradictions. There is a
deepening chasm, globally and within rich and poor countries alike,
between the super-rich capitalists and the mass of the population, the
workers, labourers and small farmers who toil to produce the wealth.
This extreme class polarisation poses the threat of social and political
upheavals, a threat recently recognised by the more far-sighted
capitalist strategists. At the same time, the falling share of wages in
national income and the erosion of mass living standards is further
restricting the market for capitalism. There is not a simple, unvarying
relationship between wage levels and the market for capitalist goods.
Nevertheless, in the last analysis, the capitalists have to sell the
goods and services they produce in order to realise surplus value in the
form of profit.
Despite the favourable conditions for capitalism
since the collapse of the Stalinist states, the system has not overcome
the problems of over-accumulation. In fact, it has become even more
acute. The rapid growth China’s economy, moreover, has not reversed this
tendency. Over-accumulation is not just a short-term, conjunctural
problem. It expresses an organic crisis of the system. Capital, as Marx
predicted, has reached an impasse within the framework of private
ownership of the means of production and the nation state, despite the
increased integration of the global market. Only planning, under the
democratic control of the working class, will make it possible to
develop production to a higher stage, satisfying social needs rather
than the greed for profit and to organise production on a global basis.
The orgy of speculation, a symptom of over-accumulation, ultimately
reflects the historic limits of capitalism.
But, it may be asked, if there are such acute
balances and deep contractions in the system, how is it that the world
economy continues to grow (at least in terms of GDP growth if not broad
economic well-being)? How do the capitalists apparently surf through
squalls of financial volatility and sail through episodes of economic
turbulence?
One of the main factors in this situation is the
flood of liquidity. Between 2002-06, global liquidity increased by an
estimated $3.9 trillion, over half of it from Asia, around 40% from oil
producers. The cheap credit arising from this flood has blown up the
bubbles that have kept the world economy afloat. The ‘wealth effect’
from the US housing bubble, the debt-financed transfer of higher
property values into consumer spending, sustained the growth of the US
economy. There has been a similar effect in Britain, Australia, and many
other countries.
The global wealth effect from parallel bubbles
(commodities, junk bonds, emerging markets, etc), funnelling wealth into
the pockets of the super-rich and boosting the incomes of some
middle-class strata, has been a key factor in sustaining growth in many
countries. These bubbles – together with the weakness of working class
forces – have, for the time being, allowed the capitalists
internationally to surmount the deeper problems they face.
The bubble phenomenon, however, can only postpone
crises, not eliminate them. Crises will unavoidably erupt when the
underlying contradictions of the system assert themselves decisively.
The longer they are postponed, the deeper they are likely to be.
Regrettably, it is not possible to predict the timing of crises or the
particular processes and pathways through which they will unfold. But
the idea that speculative investment is now virtually risk free, that
the capitalist business cycle is dead, are the delusions of people
intoxicated by the fizzy profits of the recent period.
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