In the capitalist bear-pit
by Martin Thomas
As I write, US share prices have been rising for a short while but are on average not much over half of what they were in March 2000, when the gaudy stock market boom of the 1990s first crashed. Trillions of dollars of nominal wealth have vaporised.
Has the stock market "touched bottom"? Was the latest great lurch downwards the last for a while? Even if it was, will production, investment, and jobs in the USA continue with only the relatively mild recession they have had so far, or will they crash too?
Share prices are a title to a part of the future profits of a company. On the whole and in the long term, share prices should be proportional to profits. Between 1997 and 2000, however, US share prices sky-rocketed while average profits were actually falling. By March 2000 the ratio of share prices to profits had ballooned to 32, though its historical long-term average is 13.2. Of the $15.6 trillion total nominal value of US non-financial corporations at that point, as measured by share prices, about $9.5 trillion was a speculative bubble.
Sometimes it can be a smart move for speculators to pay $200 for a company's shares where $100 would be the price for a normal proportion to profits. If the profits are going to triple - or if the company is going to report good news which makes people expect they will triple, and its share price will go up to $300 - then the speculator can buy at $200, sell at $300, and make a gain.
That happens all the time. It is normal in capitalism. If it happens across the board, pushing up not just particular share prices but the whole market, and for a sustained period, then we have a speculative bubble which must burst sooner or later. That happened in the USA.
Share prices have still not come down to a normal proportion to profits, so the odds must be that they will fall further, even if there are short-term recoveries for some weeks or months. WorldCom, Xerox and others have been shown to have been fiddling their books in order to make profits seem higher. The total profits figure got by adding up the figures reported by individual corporations is seriously out of line from the one which can be calculated by totting up outputs and costs across the economy, so there must be lots of others like WorldCom and Xerox. Far from believing that corporations' profits will rise, share-buyers may be coming to think that the profits are not even as high as they are claimed to be now.
On the face of it, a crash in share prices should lead quickly to a slump in production. Firms can no longer so easily raise funds for new productive investments by selling new shares, so productive investment slumps, dragging other spheres of production down with it. Consumer demand from the wealthy classes also slumps.
Marx, however, did not reckon that stock-market crashes would necessarily lead to slumps in production. "As regards the fall in the purely nominal capital, state bonds, shares, etc. - in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the individual capitalists - it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks and shares fall cheaply are mostly more enterprising than their former owners."
Marx's argument here is very shaky. In 1987, however, a huge stock-market crash did lead to no great fall in production. In hard fact very little of productive investment is financed by selling shares. Wall Street and the City function mostly as arenas for redistributing loot among the wealthy, not as means of mobilising funds for productive investment. Productive investment is mostly financed directly from profits. It can hold up while share prices crash - maybe even, perhaps, sometimes, be expanded by Marx's "enterprising parvenus".
In 1987, quick moves by the Federal Reserve Bank to ease credit kept production relatively buoyant. That credit-easing led to a new bubble, and then a real downturn in 1991-2, but a relatively mild one.
The same this time? There are reasons to doubt it. In the first place, an extraordinarily large proportion of the productive investment and consumer spending at the end of the 1990s was done on credit. It was not done directly by selling shares, usually, but by firms borrowing on the strength of their high share prices; however, a slump in share prices means a slump in that sort of credit.
By early 2000 the US economy was held up by three unprecedented spirals of credit: borrowing by companies, borrowing by households, and credit supplied to the US by foreign capitalists by way of them buying US shares and bonds.
"The credit system", as Karl Marx wrote, "appears as the main lever of over-production and over-speculation in commerce... the reproduction process, which is elastic by nature, is here forced to its extreme limits... The credit system accelerates the material development of the productive forces and the establishment of the world-market... At the same time credit accelerates the violent eruptions of this contradiction - crises - and thereby the elements of disintegration of the old mode of production."
Credit regularly inflates in booms and deflates in slumps. "[In] that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended... The rate of interest is still low, although it rises above its minimum...
"Those cavaliers who operate completely on a money credit basis begain to appear in considerable numbers. To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. It reaches its maximum again as soon as the new crisis sets in
"Credit suddenly stops then... the reproduction process is paralysed, and... a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital..."
The odd thing about the mild recovery in the US economy, after recession in 2001, which seemed to be going on before Wall Street's latest lurch downward, is that the process of swollen debt levels being slimmed down to normal proportions - usually a part of any recession, and a part essential for a subsequent upturn - has not happened. Debt levels are still high. That makes the US economy vulnerable.
Company bankruptcies are already running at record levels, with WorldCom and Enron only the biggest of many.
A dramatic implosion of still-ballooned credit - a full-scale industrial crash - must be quite possible. If that is avoided, maybe by deft action by the Federal Reserve, still the debt balloons are likely to hinder a solid resumption of growth any time soon. In other words, the USA could fall into the same sort of economic depression as Japan since 1991. The US authorities have more usable gambits against that threat than the Japanese authorities have had, because of the dollar's status as world money, but no guarantees.
A downturn or a crash in the USA will affect the world, in the first place because of the huge size of the US market. It will affect the world more immediately if it destabilises the dollar. Economic trouble in the US is likely to make foreign capitalists who have stashed their funds there think of moving them elsewhere. Result: lots of capitalists wanting to convert dollar assets into euros, or yen, or gold. Further result: the relative exchange rate of the dollar falls.
The sums involved are huge. As of the first half of 2000 foreign capitalists held $6.7 trillion of US assets, mostly readily-sold paper assets (shares, bonds, and so on). This amount dwarves central bank reserves. An outrush of funds from the US comparable to the inrush over the late 1990s could collapse the dollar's exchange rate. Since most world trade is done in dollars, that would cause huge dislocation. To avoid it, central banks would take extreme measures, with large probable impacts on production and jobs.
Marx put it like this: "A depreciation of credit-money... would unsettle all existing relations. Therefore, the value of commodities is sacrificed for the purpose of safeguarding the fantastic and independent existence of this value in money... For a few millions in money, many millions in commodities must therefore be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties."