It's
no secret that investors are frightened. A fog of uncertainty hangs
over US equity markets, with Wall Street mavens reassuring each other
that the course ahead is promising. Activity is down and performance
volatile, with institutional investors and fast traders catching
small waves at the end of trading days. Fear over Greek negotiations
and a possible Federal Reserve increase in interest rates haunt the
investment banks, fund managers, and other institutional investors.
US
commentators hopefully hail any modestly positive economic news-- an
encouraging employment gain here, a small spike in consumer spending
there. At the same time, they are deathly afraid of a dampening
interest rate hike. Frequent bad news -- like the first-quarter drop
in GDP in three of the last five years -- is either dismissed as
weather related or conveniently attributed to other non-systemic
factors.
Cautious, wary signals crop up in newspaper headlines: “Postcrisis Financial-System Risk Casts a Darkening Shadow” (WSJ, 4-9-15), “A World Awash in Almost Everything” (WSJ. 4-25/26-15), “Tech Investors See the Froth, but None Dare Call It a Bubble” (NYT, 5-25-15). Warnings about “bloated” stocks by the Fed chairman, and alarm over declines in business investment, industrial production and worker productivity, all cast a shadow over the cheer leading of stock purchase evangelists and other financial hucksters.
And
then there is the eccentric David Stockman-- President Reagan's
former budget director-- who makes a convincing case regularly that
the sky is falling. He forewarns:
What
is coming, therefore, is not their father’s inflationary spiral,
but an unprecedented and epochal global deflation...
What
ultimately stops today’s new style central bank credit cycle,
therefore, is bursting financial bubbles.
That
has already happened twice this century. A third proof of the case
looks to be just around the corner. (4-5-15)
Where
Are We Headed?
Despite
riding a lucky hunch before the 2008 crash, I believe Marxists should
avoid the speculative temptation of announcing impending crashes. The
fashionable practice of revealing a “tipping point” is just that:
a fashion, and not science. One should follow the sage advise of
Marxist political economist, Alfred Evenitsky: “...if one is a
Marxist intent on understanding the underlying forces which move and
shape the capitalist economy, the ‘trigger,’ while not
insignificant, is of less importance than the underlying economic
configuration which is being ‘triggered.’ This is a difference in
emphasis and point of view, but it is more than that. It is also a
difference in the depth of analysis, for ‘triggers’ are in their
nature surface phenomena and provide few clues to the subterranean
forces they release.”
So
what are the subterranean forces shaping the US economy (and the
global economy) in mid-year 2015?
Comparisons
with earlier downturns-- 1980, 1983, 1991, 2002-- show that the
post-2009 “recovery” is by far the most tepid and problematic.
Significantly, each successive decline has delivered a successively
weaker rebound, culminating in the tentative, stumbling growth after
2009.
Clearly,
the enormous boost that global capitalism (and especially US
capitalism) received from a several-decades-long tonic of classical
and state-monopoly policies (deregulation, privatization, the easy
substitution of workers from cheap labor markets, and state
intervention on behalf of the monopolies), along with the demise of
the economic community of European socialism and the concurrent
expansion of global markets, is reaching exhaustion. The historically
unprecedented oddity of roughly one-third of the world's population
joining or re-joining the global market economy in little more than a
decade provided a powerful thrust to a struggling capitalism mired in
a toxic swamp of high inflation and slow growth. Neo-liberal ideology
fit the moment well, bringing a seductive world view to potential
elites throughout the formerly socialist world and to other countries
with a tempered stance towards capitalism.
But
that unique moment is passing and those who were convinced that
“there is no alternative” are surely having second thoughts. The
triumphant capitalism of several decades earlier now seems far less
sure-footed.
From
the perspective of working people, the post-2009 “recovery” is no
recovery at all. Change in average hourly earnings is trending below
its generally pathetic long-term performance over the last
thirty-five years; non-farm payrolls, disposable personal income, and
consumer spending growth largely trail previous expansions; and total
household debt is marching steadily toward the previous high of the
third quarter of 2008.
Both
the harsh discipline of unemployment and the lack of effective
representation (no mass political voice, frail class-based
organizations) batter the US working class. The growth of employment
since 2009 exists largely in the low-wage, temporary, and contingent
sectors, exerting little pressure on employers to raise wages and
benefits. Chastened by the financial crisis, workers have been
hesitant to take on mortgage and credit card debt. But this cautious
posture has been more than offset by exploding student loan and
automobile loan debt. Consequently, household debt has skyrocketed to
levels unseen since 2007 (only 6.5% below its 2008 peak).
For
those on the other side of the class divide, the post-2009 period has
been most generous, thanks to high profits, low interest rates,
exploding equity prices, improving home prices, and friendly
government policies. The Dow Jones Industrial Average has recovered
smartly from its February, 2009 low of around 7,000 to over 18,000 in
May of this year-- an increase of well over 150%!
How
can the stock market grow so explosively when Gross Domestic
Product-- an, at best, exaggerated measure of real value generation--
grew by only 21% in constant dollars in the same period? What magic
lies behind the good fortune befalling the ownership class?
The
explanation of explosive stock market inflation begins with the
enormous concentration of wealth in the hands of those buying and
selling equities. The capitalist imperative to invest, to pursue a
return, drives money back into a market filled with “bargains.”
And “free” money, available through virtually interest-free
loans, amplifies the surge in stock purchases. Publicly traded firms,
flush with cash and able to fund investments with “free” money,
buy back caches of their own stocks, inflating the price of stocks
remaining in the market. Firms also pump up their dividends with their
bloated cash reserves. And most significantly, the Federal Reserve's
policy of quantitative easing-- gobbling up financial instruments and
depressing the yield on bonds (and driving up their prices!)--
effectively herds investors seeking attractive returns into equity
markets.
That
equity prices have departed dramatically from economic reality is
easily shown. Traditionally, investors grow suspect of equity prices
when they exceed historical relationships of price-to-earnings (the
p/e ratio). The p/e of the Standard and Poor's 500 has reached 17.5,
well above its 10-year average of 15.8 and sufficient to strike alarm
bells.
For
comparative purposes, another gauge of the sustainability of equity
pricing is the so-called Buffet indicator, the ratio of the Federal
Reserve's estimate of corporate capitalization over the concurrent
gross domestic product. In 2015, the ratio topped 1.32 (corporate
capitalization 132+% of GDP). Immediately before the 2008 crash, the
ratio was approaching 1.15. Before the 2000 “dot com bubble”
burst, the ratio was 1.53, a level easily within reach in the next
year or two given the current trend. Clearly, equity inflation has
taken the stock market into a danger zone associated with the last
two downturns.
Do
the apparent dangers signal economic speed bumps or serious systemic
issues?
Policy
makers-- limited by ideology and class loyalty-- sought to escape the
jaws of the 2008 crisis by pumping up the prospects of corporations
and the ownership class. The corporate bail-outs (too often
conditional upon downsizing and layoffs), the near-zero interest-rate
policies, and a host of other corporate-friendly moves paved the way
for the consequent surge in profits and the stock market frenzy.
These
policy makers were counting on corporate coddling and painless credit
to encourage firms to invest vigorously. They were determined to
create a climate with investors and corporations choking on cash,
with ready access to interest-free loans, and anxious to make even
more money through hiring and expansion.
Indeed,
with massive layoffs, labor productivity jumped as production
continued and the hours worked declined (raising the rate of
exploitation), fixed business investment grew at a satisfactory rate,
and profits exploded (S&P 500 companies' earnings soared 30% in
2010).
But
this jump-start was not sustained. Federal Reserve policies (low
interest-rate policies and quantitative easing) encouraged
corporations to satisfy stockholders through mergers and
acquisitions, stock buy-backs, and dividends rather than invest in plants or hiring. Consequently, corporations
successfully decoupled market capitalization from earnings
performance. Since 2011, corporate capital returns (to investors)
have exceeded capital expenditures. As profit growth declined since
the 2010 explosion, stock values nonetheless continued to climb, leaving
investors overjoyed.
Broadly
speaking, the three key factors of fixed business investment,
productivity and, corporate profits have been trending downward for
three to four years. First-quarter 2015 fixed investments fell 3.4%,
not surprisingly, output per hour (productivity) fell by 3.1%, and
earnings were expected to barely move. These three interdependent and
fundamental indicators underscore the critical weaknesses in the US
economy. Capitalism has wrung as much sweat as it can from workers,
managers are reluctant to invest in new or advanced means of
production, and US corporations are experiencing a decline in the
rate of profit.
Are
the problems besetting the US economy and confounding bourgeois
economists fleeting or deeply embedded in the 21st
century capitalist system?
A
recent Wall Street Journal
(World Awash in Almost Everything,
4-25/26-15) makes some interesting, relevant observations. Authors
Josh Zumbrun and Carolyn Cui note: “The current state of plenty is
confounding on many fronts... Global wealth-- estimated by Credit
Suisse at around $263 trillion, more than double the $117 trillion in
2000-- represents a vast supply of savings and capital, helping to
hold down interest rates, undermining the power of monetary policy.”
They
might add that this extreme accumulation of capital also overflows
existing channels of profitable investment, exerting downward
pressure on profit growth and encouraging ever riskier investment
choices. Capital will not remain idle. In an environment of
over-abundance, conventional profit opportunities become scarcer and
investors reach desperately for yield.
As
with pigs foraging for truffles, too many foraging pigs reduce the
chances of any individual pig finding the treasured fungus.
Profit-seekers -- like truffle-seekers -- will go to any length and
take any risk to secure their goal. Today, there are 65 venture
capital investments of over $1 billion each (CB Insights says there
are 107), drawing funds from yield-hungry retirement funds, mutual
funds, and hedge funds. Whatever the number, all agree that the total
capitalization of these investments in firms that are little more
than start-ups approaches or exceeds the capitalization of the
similar “dot com” firms that blew up in 2000. Like the “dot
com” fiasco, capital is flowing freely to almost any garage
enterprise with little more than a rough business plan and a clever
idea. The search for yield is that intense.
As
New York Times
writer Conor Dougherty (Tech
Investors See the Froth, but None Dare Call It a Bubble,
4-25-15) comments:
But
the tech industry's venture capitalists - the financiers who bet on
companies when they are little more than an idea - are going out of
their way to avoid the one word that could describe what is happening
around them.
Bubble.
Once
again, the US economy suffers from a case of hyper-accumulation
coupled with a declining rate of profit, seducing investors into
riskier and riskier bets. As with the lead-up to the 2000 downturn
and the 2007 crash, too much capital is pursuing too few attractive
investment opportunities. Consequently, rampant speculation follows,
risk intensifies, and the profit-making engine runs off the rails.
From
time to time, we all need to be reminded that the capitalist system
runs on profit and the confidence that profit-making opportunities
will be available tomorrow. Even Marxists need to be reminded that
Karl Marx placed the process of accumulation and its tendencies at
the center of his analysis. Careful study shows that the challenges
to continued profit growth have not been wrung from the US economy.
As investors have emigrated from traditional productive sectors or
service areas of the economy in search of further investment
opportunities, they have shaken the system's foundations with risk
and insecurity. But given the dynamics of 21st
century capitalism, given the enormous concentration of wealth that
relentlessly and necessarily seeks to grow ever larger, investors
must
accept more risk and insecurity. There
is no alternative, to steal a quote
from the enemy. Therefore, they must
continuously put the capitalist system in harm’s way.
For
those who-- like the popular social democratic thinker, Thomas
Piketty-- think that we can redistribute the obscene concentration of
global wealth through tax policies and set capitalism merrily on its
way... think again. Should, by some miracle, the ownership class
surrender their grip on the state, capitalism would, in time,
reproduce the inequalities that lead to the concentration of capital
and crises. That's its nature. As the great song writer Oscar Brown
Jr. reminds us:
“Take
me in, tender woman," sighed the snake
"Now
I saved you," cried the woman
And
you've bit me, even why?
And
you know your bite is poisonous and now I'm going to die"
"Ah
shut up, silly woman," said that reptile with a grin
“Now
you knew darn well I was a snake before you brought me in...”
Zoltan
Zigedy
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