In
June of 2015, I wrote:
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.
Since
then, the “three key factors” gauging the health of the US
economy have only worsened: Capital expenditure in the third quarter
fell by 3.8%, productivity on an annualized basis was only up .4% for
the third quarter, and profits suffered the largest (annualized
through the third quarter) decline since the 2008 downturn.
In
addition, the US manufacturing activity index (Institute for Supply
Management) has fallen to its lowest level since June of 2009 and
industrial production has declined for the third straight month
through November (the just released December data from ISM affirm the
first consecutive monthly contraction of the index of manufacturing
activity since 2009).
Capacity
utilization has dropped to 77%, the lowest in two years. Before 2007
and the onset of the economic crisis, it stood at 80%.
I
wrote in June of the stock market inflation generated by mergers and
acquisitions, stock buy-backs, and the obscenely low cost of
borrowing. The wealth effect of that inflation—its psychological
effect on spending—has receded. Market losses account for most of
the $1.2 trillion in erased wealth in the third quarter, as reported
by the Federal Reserve.
The
rout of junk bonds (high-risk, high-yield bonds) in 2015 only adds to
insecurity. While junk bonds only totaled $709 billion at the onset
of crisis in 2008, they totalled $1.3 trillion when investors began
to abandon them. Consequently the ratio of high-yield debt to
corporate earnings is close to a new high. A faltering equity market
is dampening investor euphoria.
I
warned in June:
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.
But
new start-ups hit powerful head winds in 2015, especially in the
tech/internet sector. As The Wall Street Journal
reports: “Technology and Internet companies that went public in the
US raised $9.5 billion in 2015, down from $40.8 billion in 2014…
the number of IPOs in the sector dropped by more than half, to 29
from 62.”
Clearly,
“yield-hungry” investors have miscalculated, as reflected by the
current sharp fall of the NASDAQ equity market.
Of
course, the US economy is also decidedly rocked by global
developments: the PRC economy is shaky at best, the EU is stagnant,
Canada is slowing, and the Russian and Brazilian economies are in
sharp decline.
While
consumer spending has buoyed the US economy, lifting GDP into
positive territory, the well-spring of
capitalism—profitability—continues to pose the critical problem.
The third quarter of 2015 suffered the largest annualized decline in
profits since the 2008 downturn. Third quarter profits were down 1.1%
from the second quarter and 4.7% from the same quarter in 2014,
demonstrating a persistent downward trend.
Interviewed
in Barron’s (December 21, 2015), David Levy of the Jerome
Levy Forecasting Center perceptively opined: “…But the one thing
that has actually caused the economy to weaken a little is sagging
profits. We’ve heard people use the expression ‘profit
recession’, but there is no profits recession without a real
recession. I see signs of things slowing as a result of that profits
decline…”
It
confounds me that progressive economists, many Marxists, and even
Communist Parties continue to locate the source of the ongoing, and
now deepening, capitalist crisis in “overproduction” or declining
consumption or demand. These notions are remnants of an earlier
pre-monopoly era or the influence of Keynesian thinking on Marxism
and the broader Left. The “overproduction” that is relevant to
capitalist crisis is the overproduction of capital which cannot find
a profitable home without gumming up the accumulation process.
The
demand-based theories serve as the centerpiece of social democratic
crisis theory. Yes, corporate revenue and consumer spending are now
stagnant or declining—not as leading indicators, but as
consequences of a general economic slowdown brought on by the
prospect of fewer profit opportunities. But it is a fall in
the growth of profits or a decline in the rate of profit that causes
capitalists to apply the brakes. If markets demonstrate greater
profitability (by awarding capitalists a greater share, for example),
capitalists will continue to invest, fuel the economic engine, even
in the face of the stagnant or declining revenues of the moment. Of
course falling revenues will eventually further retard the rate of
profit. But it is profit that propels capitalism or sinks it in its
absence.
For
Marxists, it is not simply the numbers that explain the future, but
the trends or patterns. Clearly the trends are negative. With central
bank tools largely exhausted, it is difficult to imagine an easy
escape from deepening crisis; it is difficult to see the coming year
as bringing anything other than economic hardship.
Given
the rise of the extreme right and the absence of a militant left in
most countries, the economic crisis threatens to pose formidable
political obstacles. And given the ubiquitous deadly conflicts and
increasing inter-imperialist hostilities, the new year demands a
heightened commitment to peace and social justice. That commitment
must go beyond the tinctures and band aids served up currently by
liberals and social democrats.
Zoltan
Zigedy
3 comments:
Strangely enough Prabhat Patnaik mentions the same thing in the Dec issue of Monthly Review
A very good article that contributes much to the discussion of the origins of the current capitalist crisis and which should inform the left that Keynesian reformists demands will not pull capitalism out of this one, nor do much to improve the lot of the working class.
Very good article, especially to serve as a reminder for the law of the tendency of the rate of profit to fall, until crisis hits.
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