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HEADLINES such as “World stocks fall to two-year low” that appeared in the Wall Street Journal recently have many wondering if the tepid recovery from the 2007-8 crash is finished.
Since midsummer, the Shenzhen Composite, FTSE 100, Stoxx Europe 600 and other benchmark exchanges have steadily declined, with the US Standard and Poor’s joining them over the last few weeks.
As author Akane Otani notes, “After a punishing October, major indices in Europe, Japan, Shanghai, Hong Kong, Argentina and Canada are languishing in correction territory — a drop of at least 10 per cent from a recent high. The US is teetering on the edge of joining its peers …”
Like gross domestic product (GDP) and the unemployment rate, composite equity performance is a limited measuring stick of the economy’s health, though it is favoured by popular mainstream pundits and celebrity economists. As such, all three become the grist for the bourgeois political mill. Invariably, they soon obscure more than they enlighten.
So what do the markets tell us?
In some parts of the world, they signal that stimulus programmes have failed to revive stagnant economies (eg EU, Japan). Additionally, measures of manufacturing growth have declined for nearly every segment of the global market since the beginning of the year (emerging markets, EU, Japan, etc, excepting the US).
Recent EU quarterly GDP figures confirm the European Union’s persistent stagnation — the aggregate growth for the European Union’s 19 members was a mere 0.6 per cent, the lowest in five years.
For the US stock market, on the other hand, highs and lows are more intertwined with policy decisions, financial manipulation, and speculation. Thus, the market euphoria of the last few years did not reflect real economic fundamentals and the current volatility does not foretell an imminent collapse. Instead, US stock exchanges have thrived on nearly free money and a Federal Reserve that removed all of the “asset” flotsam and jetsam lingering in the wake of the 2007-2008 collapse.
But the usual shakeout of less profitable, damaged firms was incomplete, thanks to the availability of money at interest rates suppressed by the central bank, the Federal Reserve. The low interest rate environment was especially favourable to high-tech firms (slow to show sufficient revenue growth), emerging markets (hungry for low interest foreign loans) and small capitalisation enterprises that should have sunk into oblivion because of investment unworthiness after the meltdown.
For the behemoths of monopoly capital, low interest rates in the wake of the crisis allowed for an orgy of mergers and acquisitions and stock buybacks that electrified equity markets without creating any socially useful results. In others words, the era of interest-free money buoyed up a leaking capitalist ship that predictably converted the gift into market “value” and profit.
Wiser heads in the Federal Reserve understood that, if it continued to be a wet nurse for mature capitalist enterprises, asset inflation would continue unabated. Investors would wake up and see that there was no “there” there and punch a hole in the market bubble.
Consequently, the Fed began a programme of gradual interest-rate increases to slow the promiscuous borrowing that was fuelling asset inflation. Industries such as technology, finance and communications were particularly vulnerable to this programme since their earnings growth stood well beyond their more modest growth of revenue.
Nothing shows the weakness of the overheated market more than the initial public offerings (IPOs), the first stock offerings of newly public companies. So far in 2018, fully 83 per cent of IPOs have been conducted for companies that have lost money in the last 12 months, a figure greater than that leading to the dot-com crisis year of 2000.
It is no wonder that the Federal Reserve, fearing an asset bubble, has put the brakes on. And it is no wonder that capitalists are caught between the responsibility of managing capitalism as a system and the ecstasy of operating with free money, the contradiction between systemic discipline and unrestrained accumulation.
But if the stock market is a not so reliable guide to the health of the US economy, what are more reliable markers?
On the surface, the US economy is uniquely healthy in the midst of global stagnation or decline. The television hawkers of economic news herald the GDP growth rate in the second (4.2 per cent) and third (3.5 per cent) quarters of this year — numbers well above the post-crash averages. Similarly, the pundits are in awe of the officially reported low unemployment level. And they point to the less impressive but welcome growth of wages in recent months as further evidence of a vibrant economy. They are less forthcoming — embarrassed, perhaps — about the explosion of already robust earnings (profits) in 2018.
This photo-shopped picture of the US economy will probably benefit Trump and his candidates in the elections. The warm and fuzzy picture is conveyed by the so-called leading indicators, but if we open the bonnet and look more closely at the capitalist economic engine, we get a somewhat different picture.
Behind the 2018 GDP growth are several contingent factors, including the Trump tax cut, but unacknowledged by many is the increase of government spending, largely military. Nearly half of the year-to-year growth-rate increase to April was accounted for by government spending alone, two-thirds of which was directly for the military. The bipartisan endorsement of an obscene military budget pumps up Trump-era growth as it has for many previous presidents — remember Reagan?
Fully 1.22 points were added to the 4.2 per cent second-quarter growth solely from global trade, the overseas purchase of US products like soya beans before the onset of the Chinese retaliatory tariffs.
And third-quarter GDP growth was equally a result of consumer spending (highest growth since 2014) and the aforementioned growth in government spending.
Despite the hollow celebration of rising wages, the aggregate numbers mask an important reality. Labour Department figures show that the greatest growth in weekly earnings accrue to the bottom 10 per cent of earners (+5 per cent) and the top 10 per cent (+3 per cent), while 80 per cent of US workers now see their incomes grow at a level only marginally above their cost of living.
While growth in income for the bottom 10 per cent is welcome, it results only from the tight labour market in low-paying jobs, the largest source of job growth since the crash. The pressure on that segment underscores the hollowness of the employment recovery.
The US capitalist “recovery” has relied on the availability of low-wage labour. The collapse of 2007-8 generated a veritable reserve army of unemployed willing to accept low-paying jobs, absent of union militancy. Consequently, the capitalists have felt no need to invest in productivity-enhancing equipment — it is cheaper to hire minimum-wage workers than invest in new machinery. Therefore, the last decade has experienced tepid growth in labour productivity demonstrated by 32 straight quarters (eight years!) of sub-2 per cent productivity growth but strong profitability — unprecedented in the post-World War II era.
Most of the growth in consumer spending is fuelled not by workers’ pay but by additional borrowing and more people working more hours. US household debt hit a new high in the second quarter. Debt continues to rise faster than income for the average US citizen.
Contrary to the promises of the Trump administration, the deep cut in corporate taxes along with the 21 per cent increase in profits in the third quarter have produced little increase in business investment. Growth in business investment was a mere 1 per cent in both August and September.
A key measure of core industrial production — durable goods orders excluding military orders — declined 0.6 per cent in September.
Retail spending — a core element of consumer spending — rose by only 0.1 per cent in both August and September.
Two other critical components of consumer spending — auto sales and home sales — are flashing danger. Auto sales declined steeply by 6 per cent in September after a mostly sluggish year.
And home sales, a huge element in the US economy has tanked. New-home sales declined in September by 5.5 per cent, the slowest rate in two years and the latest month of a four-month slide.
Existing home sales, a far bigger part of the housing market, declined by 3.4 per cent in September, the latest month of a seven-month slide!
So, what to expect?
While it is true that Trump has been somewhat corralled into being a conventional right-wing Republican, but with his own uniquely vulgar and infantile stamp on the presidency, he retains unconventional elements of populist nationalism — the tacit confession that the empire is in trouble and the need to “Make America Great Again.” Both stances play into Trump’s economic policy in unusual and contradictory ways.
Like archetypal right-wing President Reagan, tax-cutting and deregulation drives a Corporation Über Alles approach.
Like Reagan, the current administration uses defence spending as the central stimulus for the economy. Since such a policy needs powerful enemies, the two parties have collaborated to concoct Russia and China as the countries to play the role of bitter enemies. The threat of war against China and/or Russia justifies far more spending and weapons sales than a war against jihadists in sandals or weak countries with ancient Soviet equipment.
Trump’s nationalism rejects alliances, pacts and submission to international constraints, regulation or authority. Instead, it embraces the economics of sanctions and tariffs. It substitutes the blatant behaviour of a bully for the formerly fostered notion of global co-operation. If other countries deny US hegemony, the US will demonstrate it forcefully.
To the chagrin of the Democrats, the popular perception of the booming US economy has calmed corporate fears of Trump’s recklessness and emboldened Trump’s advisors and supporters.
But behind the appearance of economic exuberance is an economic engine running out of fuel. Key fundamental markers for consumption and investment are slackening, profits are threatened and major political stumbling blocks lie ahead.
Despite record-breaking profits, compensation costs for capitalist enterprises are eating into those profits. The low unemployment rate has spurred an intense competition for workers. With fewer unemployed available, firms are offering higher wages, salaries and benefits to wrest employees from other firms.
Further, the rising interest-rate environment is tacking on additional borrowing costs to overall costs, cutting into corporate margins.
And the relatively slow corporate-revenue growth, especially in technology and communications, is squeezing profits as well.
The explosive growth of federal debt further challenges the Trump economy, though only for those wedded to conventional economic dogma. Because of the tax cuts, the deficit expanded by 17 per cent in the fiscal year ending in September to the highest level in six years.
With rising interest rates, deficit growth will only accelerate. The debt scolds in both parties will be screaming in chorus for budget cuts and spending limits, as they did so often during the Obama administration. Of course they will argue for the cuts to come from programmes and institutions that serve the people. The scourge of austerity will descend again over the economy, producing the readily predictable result of dampened growth.
The Trump administration is battling the Federal Reserve over the issue of interest rates. The Fed is attempting to raise interest rates to take the oxygen out of the economy and evade speculative bubbles. Trump, on the other hand, wants low rates to pump oxygen into the economy to secure the continued growth that he has promised. Neither approach will save the economy from the turmoil ahead.
Next year will bring stagnation, if not economic decline, for the global as well as the US economy. Inevitably, capitalism will attempt to place the burden of the system’s failure onto the backs of working people. It will sell austerity as the palliative for that failure, another sign of the bankruptcy of the system.
Some will fight to fix the capitalist system to reform it. Others will struggle to replace it. The goals should not be confused. They are different projects. Only one can promise a humane, peaceful, and sustainable world.
Zoltan Zigedy’s commentaries on current events, political economy, and the Communist movement can be found at http://zzs-blg.blogspot.com.
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