Tottering on Another Brink

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

zoltanzigedy@gmail.com