By NAT WEINSTEIN
Unusually candid commentaries on the falling value of the yen, and what it tells about the depth of the economic crisis in Japan and Southeast Asia, appeared almost daily in the mass media last month. It reflects a growing uncertainty among the world’s capitalists about the future of their economic system. It was prompted by an accelerated fall in the price of the yen, along with another big dip in Japan’s stock market.
One of the first in a series of increasingly pessimistic reports throughout the media appeared in the June 11 New York Times. Financial commentator Gretchen Morgenson reported the result of interviews with what she describes as “veteran Japan-watchers.”
She noted at the outset that “Japan is in such a straitjacket that even if the government takes decisive action, the yen will still plunge.” She explained that the yen has declined 25 percent in value relative to the dollar over the last 12 months and that “the Japanese central bank increasingly appears incapable of stopping the plunge.”
One of her interviewees, described as a high-placed Wall Street “financial strategist,” told her: “I don’t think an intervention by the Bank of Japan, even a massive one, can reverse the slide. The worst is yet to come.”
Another Wall Street professional told her how Japan’s central bank stopped a run on the yen over the Easter weekend by spending $25 billion of its reserve currencies (mainly dollars and marks) buying yen. And though the threat of another such governmental intervention has kept the currency speculators from waging a major attack on the yen, it has only slowed it’s fall.
Another assault on Japan’s currency, her informant said, is sure to come when currency traders around the world sense an opportunity to profit by driving the yen’s price down as far as they can.
Unsold commodities piling up
Morgenson noted that inventories in Japanese warehouses have risen to double the amount piled up in 1992, the country’s previous peak reached in unsold goods. Although she simply cited this statistic, it reflects her understanding that this is the real source of the economic storm threatening to sweep across the globe from Asia.
The fact is that world capitalism is increasingly producing far more goods than consumers with money to buy them. And, paradoxically, as the resulting competition for market share sharpens, the race to produce more goods with fewer workers and, thus, with ever lower purchasing power, intensifies. Another former Wall Street economist, now a professor of finance, told Morgenson what he thinks Japan must do to rescue its economy from sinking down into a 1930s-type depression. He stated that Japan is already in a “depression” (Japan announced it was officially in recession on the day this article appeared).
He argued that “Japan must stimulate its economy by cutting taxes and spending more on public works projects, [and] the central bank must finance these projects with money fresh off the printing presses. If the bank did not create new money and instead sold debt [that is, borrowing by selling government bonds] to pay for the projects, it would merely sop up funds that might otherwise go to investment or consumption.” (Emphasis added.)
The Times columnist explained that the Japanese are “reluctant” to speed up the printing presses. But she went on to point out that Japan — and other countries — routinely inflate the money supply this way when up against the wall. She made the point by noting that Japan’s “money supply growth [in this case, printing and paying out more currency than is received in taxes and other revenue] was at a “20 percent rate in the early 1970s and at a 9 percent rate in 1990.”
The direct printing of paper money without an equivalent increase in tax revenues or cuts in expenditures reduces the value of every unit of a nation’s currency.
Although borrowing to make up for shortfalls in tax revenue is also inflationary, reving up the printing presses is a far more dangerous way to make up for budget deficits. (When a glut begins clogging the marketplace and threatens to bring production to a halt, printing valueless currency to absorb some of the surplus goods takes effect quicker and is done only when speed is essential. But it can easily turn into its opposite when big-time speculators sense that a currency’s value has been quietly eroding and seize the chance to make a quick killing.)
Morgenson explained the dilemma faced by Japanese capitalism: “If the government were to let the budget deficit run bigger than this year’s estimated 3.8 percent of the gross domestic product,” she writes, “the yen’s value would fall. If the government did nothing, it would fall as well.” Either way, she says, it would strike another blow against the enfeebled economies of Asia, causing “an even more precipitous downward spiral of currencies in the region.”
Morgenson ended her piece with this warning to capitalists prowling through Japan and the Pacific Rim hunting for choice companies to gobble up at fire- sale prices: “Finally, a sharply declining yen would devastate Japanese stocks, already down more than 7 percent this year. Conclusion: investors buying into the Japanese market in the belief that it is the bargain basement may soon learn that they are nowhere near the cellar at all.”
Temporary benefit to U.S. economy
The same day that dismal reports like Ms. Morgenson’s were buried in the financial section of The Times , there was a different sort of story featured on the paper’s front page. Federal Reserve chairman Alan Greenspan was reported saying that the U.S. economy was in extraordinarily good shape.
This conflicts with Greenspan’s pronouncement some 18 months earlier. At that time he spooked Wall Street investors with his comment about their “irrational exuberance” driving stock prices far above real values.
Stocks fell, of course, since his every word is examined by stockholders with a microscope for clues indicating whether they should buy more shares or sell. But the speculative mania was undiminished and stocks soon rose even higher.
Thus, since stock prices are now even more overvalued, his optimistic words can only have another purpose. While his “jawboning” was designed before to gently bring stock prices down, this time it’s to prevent them >from falling too fast and too far.
At the same time, there is just a grain of substance to Greenspan’s claim that the U.S. economy is in good health.
Capitalism is a complex system with a plethora of conflicting, interacting forces governing the movements of the economy.
Thus, the rest of the world cannot be insulated against the brewing storm building momenttum over Asia. Its immediate impact is having very contradictary effects. One of these is a strong temporary positive effect on the stronger European and American economies.
This is how it works; Capitalists, like rats deserting a sinking ship, are pulling their capital out of the most troubled countries and pouring it into the “safe haven‰ of government bonds and other investments in Western Europe and America — mainly, for the moment, into the latter. Japanese capitalists are leading the desertion of their own economy. The June 16
Times reports that “Japanese investors sent a record amount of capital flowing out of the country. About 3.74 trillion yen, or 25 billion dollars, went into equity and bond investments overseas…”
This flood of capital flowing out of Asia has had a positive, immediate impact on the economies of its recipient countries. The flow of capital into U.S. treasury bonds, for instance, reduces the interest to be paid on the U.S. national debt.
Similarly, a greater supply of capital, in line with the law of supply and demand, serves to reduce the cost (the interest) of borrowed productive capital. Thus cheaper capital in itself promises a higher rate of profit on new investments and spurs production — adding fuel to the developing crisis of overproduction.
So long as the “good times” last, the higher stock prices soar into the stratosphere. But it doesn’t take a rocket scientist to see that the higher it goes, the further and harder it will fall — and fall it must.
The declining price of Asian exports, another consequence of the developing global crisis of overproduction, also has had contradictory effects. On the one hand the inflow of increasing quantities of cheap Asian exports depresses all prices, thus contributing to a fall in the rate of inflation. But that means that as the price of products are driven lower by incoming cheaper goods, the average profit earned by capitalists also tends to fall.
An economic black hole
All these factors tend to combine, ultimately intensifying the pressure on the world’s least efficient capitalists. More importantly, as bankruptcies proliferate in such crises, whole countries can and do become bankrupt — as we’re seeing in Asia. And since world capitalism has been tied together closer than ever, one after another in time will be dragged down into an economic black-hole.
In 1929, Wall Street’s “Black Friday” — which was merely a reflection of the collapse of the booming “bubble economy” of the 1920s, sucked a far less closely linked global capitalism down the tubes. That’s why growing alarm is being voiced in the mass media by responsible representatives of the capitalist class as they helplessly watch Japan sinking ever faster toward total collapse.
For instance, the lead headline featured on the front page of the June 16 San Francisco Examiner’s business section reflected capitalism’s deepening fears of imminent catastrophe. The report ,which was taken from that day’s edition of the Wall Street Journal, was titled, “Asian slump could infect world.”
In the text of that article, World Bank senior regional official Jean-Michel Severino was reported to have warned that Asia was plunging into depression and called on Japan to help pull the region out of its economic nose dive. He was reported to have said: “We are probably at the end of the first cycle of the crisis and we are entering into a deep recession, or you could even use the term depression. This depression could be very long-lasting if it is not handled very, very carefully.”
Then on June 17, the United States and Japan jointly began buying yen to stop its fall after currency speculators began another assault on the value of Japan’s currency.
The next day (June 18), reports inThe New York Times on the latest turn of events were no less pessimistic. The following selection from the paper’s main report on the joint U.S.-Japan intervention sums up its view of the highly volatile state of the global economy. The article was laced with references to the confusing maze of conflicting forces roiling Asia and threatening the world. Most feared was China’s threat that if the United States and Japan did not stop the yen’s slide, it would have no choice but to devalue its own currency, the yuan:
American officials have long feared that such a move would set off devaluations around the world, as China’s competitors throughout Asia — and in Latin America and Eastern Europe — followed suit so that their own products would not be more expensive than China’s on world markets.
“What this proves is that the depths of the Asian crisis are much, much worse than anticipated,” C. Fred Bergsten, president of the Institute for International Economics here, said today. “What spurred this is that many in Asia are talking about their version of our Great Depression.”
Officials of the World Bank have also begun to use the word “depression,” and they said today that they now expected the Asian economic crisis to last for years.
Clearly, those in charge of maintaining the equilibrium of world capitalism don’t know what to do. Many say so, and those who pretend they know are all over the map with contradictory advice. It’s also clear why they are baffled: The measures that seemed to have served them well enough since the end of World War II have lately been producing entirely unexpected results!
All the above notwithstanding, since the world capitalist social and economic order is infinitely complex and unpredictable, no one can predict how long the powers-that-be can postpone a decisive collapse of their system. Such a postponement, however, depends in the end on whether or not they can crush resistance by capitalism’s victims to their drive to lower living standards and thus raise profits — and thereby win another small extension of the life of their system.
The world’s capitalists can only gain time, but only at the cost of the gradual and irrepressible breakdown of the existing civil order. That breakdown, as we see in Yugoslavia, the former Soviet Union ,and in long suffering Africa, is accelerating.
That’s the meaning of the warning issued by the founders of scientific socialism that the alternatives for humanity are either socialism or capitalist barbarism.
Either the working class will lead all humanity forward into a bright socialist future based on production for the satisfaction of human needs. Or capitalist production for profit will drag the human race down into a modern-day barbarism resembling Hollywood’s grimmest apocalyptic previsions of a future following nuclear conflagration.
