The Global Bubble Grows

By NAT WEINSTEIN

 

Few serious economists agree with the claims in the mass media that Japan, Southeast Asia, and Brazil (and the world) have really recovered from the crisis that swept across the globe starting in Japan at the beginning of the 1990s. In fact, the bursting of Japan’s economic bubble was in reality the first major break in global economic equilibrium, and Japan’s decade-long recession now serves as a major drag on the world economy and a harbinger of the much bigger bust still to come.

Moreover, every measure that succeeds in delaying the inevitable is like piling sandbags on dikes to contain an overflowing river. But the higher the economic flood is allowed to rise, the more destructive will it be when the flood of unsold goods and unrepayable debts breaks through the artificial barriers erected by those charged with maintaining a relatively stable global capitalist economy.

A short news item, given no special significance by its author or his editors, appeared in the financial section of the Oct. 6, 1999, New York Times. But intentionally or not, it points straight at why postponing the inevitable collapse of the global economy makes it increasingly more destructive in the end. A single sentence from this report, which tells of a marked increase in sales of industrial robots, illustrates how the global economy works:

“In the first half of 1999, motor vehicle manufacturers’ orders [for industrial robots] surged 101 percent worldwide, and 214 percent in North America, compared with the same period in 1998.”

This seemingly routine news item points to the heart of the problem faced by global capitalism. The booming market for industrial robots reflects the general trend toward the replacement of human labor by machines. In other words, more robots mean fewer workers-both relatively and absolutely.

Thus, the longer this process continues, the greater is the productive capacity of the world economy, and the fewer workers there are to buy the mounting supplies of goods. Consequently, the bottom line is clear: the longer the expansion of the productive forces continues, the greater will be the number of surplus factories, surplus goods and, last but not least, surplus workers.

And despite the drumbeat of assurances by capitalism’s molders of public opinion that the boom-bust cycles of capitalist production have been abolished and replaced by more or less gentle upturns and downturns, the facts, as we shall see, point in a quite different direction.

“Share prices are absolutely crazy”

We will let well-known leading capitalist economists tell in their own words what is, for them, an alarming story of what the future holds for global capitalism.

Following are extracts from a piece titled “Like All Bubbles, This Will Burst” appearing in the October 1999 issue of Socialist Appeal, a small British periodical:

On Wall Street shares have gone through the roof. “Oh yes, share prices are absolutely crazy,” declares Prof. Tim Congdon, managing director of Lombard Street Research.

While it took the bench mark Dow Jones index 88 years from its launch in 1896 to crawl permanently past 1000, it has needed only another 15 years to sprint from 1000 to 10,000. In the Nineties alone, the longest bull run in history, the market has more than trebled!

With a price-earnings ratio of more than 35 times and an income yield of just 1 percent, Congdon says, Wall Street “is not just expensive: it has never been remotely like this before.”

The “price-earnings ratio” measures a stock’s dividends (profits per share) as a percentage of its price. The significance of the extraordinarily low rate of profit is explained by what economists have dubbed a “bubble economy.” It designates an economy in which stocks keep rising in price not because dividends (real profits) are higher, but only because investors believe stocks will keep rising in price indefinitely!

Thus, while dividends are in most cases today well below the average profit rate, the rise in stock prices has for an unusually long period resulted in a higher than normal rate of profit when the stock is sold. But, the rising price of stocks is more and more based on an incredible and unsustainable expansion of credit.

The extent of speculative investment is reflected in such previously unknown practices as lower-middle-class investors borrowing on their credit cards to finance speculation in stocks. Thus credit-card debt has also reached dangerously-unsustainable heights. It doesn’t take an overly-vivid imagination to see the catastrophic results when the bubble bursts.

The article goes on to cite other capitalist authorities speaking in the same vein. The following, reflecting the views of two well-known bourgeois economic experts, is typical:

It is a classical bubble, agrees Prof J. K. Galbraith, author of “A Short History of Financial Euphoria.” “When you hear it being said that we’ve entered a new era of permanent prosperity with prices of financial instruments reflecting that happy fact, you should take cover”, says Galbraith. “Let us not assume the age of slump, recession, depression, is past.”

Incredibly, this view is now shared by the extreme right-wing monetarist Milton Friedman, who believes that the world is on the verge of a new 1929 crash. In an interview with Germany’s Handelsblatt newspaper, he says that the U.S. stock market exhibits uncanny parallels to the market of the 1920s before the Great Crash of 1929, as well as similarities to the Japanese market in the 1980s before the collapse there….

If this turns out to be true, then the United States will experience a deep collapse of the stock market. That would be a true danger for the continuation of the unusual economic expansion of the past nine years.

But why can’t bourgeois economic experts stop the horde of capitalist lemmings from rushing blindly to the edge of the cliff?

There are two reasons for this. In the first place, the most sophisticated bourgeois economists know that what goes up must come down. That’s why they would like very much to stop a catastrophe by precipitating a mild recession-what they call a “soft landing”-rather than allow the stock market to rise to higher levels of what they euphemistically call “over-valuation,” with the increased likelihood of a “hard landing.”

That’s what Federal Reserve Chairman Alan Greenspan tried to do in December 1996 with his warning about an unjustified rise in stock prices due to “irrational exuberance.”

But it didn’t work. Average stock prices since then have nearly doubled. It now appears that Greenspan and others in charge of avoiding a stock market crash realize that it will take a far more urgently phrased warning to let some air out of the bubble. But they fear that such an action could trigger a panicky rush by stockholders to unload their stocks in the hope that they can get out while the getting is good.

In fact, when the October 1997 Asian crisis sent stock prices tumbling around the world-with the Dow Jones dropping 554 points in one scary day-capitalism’s decision makers stopped worrying about the bubble economy and did everything they could to reinflate stock prices. In other words, they had no choice since their worst fears threatened to materialize. But to the extent it was partially successful, their efforts will prove entirely counter-productive and be worse in the end.

Then again, in August 1998, those charged with defending the American and world economy from being dragged under by the collapsing Russian ruble, threw good money after bad in a desperate attempt to rescue the ruble from collapsing. (Of course, the billions of dollars lent to Russia did not in anyway help the Russian economy or hurt imperialism’s loan sharks since it all went to pay off the same sharks-with U.S. taxpayers footing the bill and/or adding to the national debt!)

Thus, when the Russian economy collapsed, sending shock waves around the world, some of those in charge might well have concluded that a “soft landing” may no longer be possible!

Decline in manufacturing jobs

Further evidence suggesting that the world economy has gone beyond the point of no return was registered in an Oct. 9, 1999, New York Times report by Louis Uchitelle, one of that newspaper’s popularizers of capitalist economic policies.

He wrote: “Over the last 18 months manufacturing employment has shrunk by 532,000 jobs, to 18.4 million. To keep production up with fewer workers, companies have resorted to labor-saving technology and equipment, as well as overtime for the remaining people.” (Emphasis added.)

The part about the decline in manufacturing jobs, however, is far more significant than Uchitelle lets on. What he leaves unsaid is that this latest decline in manufacturing jobs is not new and is, in fact, a long-term trend that has two very bad components. To appreciate its significance, one first needs to know that while the rate of unemployment has allegedly “declined” to what is touted to be “an unusually low 4.2 percent,” industrial jobs continue to disappear.

However, the real state of the eroding economy becomes apparent when the nature of the old jobs lost and the new jobs gained is made known.

In a recent study commissioned by the AFL-CIO, it was found that between 1984 and 1997 the 30 fastest-growing sectors of the economy-including hotels, child care, finance, retail trade, and airlines-added 26 million new jobs. But only one in 20 of those newly employed workers joined unions. The study also showed that in eight mass production industries with the greatest job loss, including steel and auto, four-fifths of the 2.1 million jobs lost belonged to union members in heavily organized industries having much higher average wages and benefits.

This shift of jobs out of manufacturing and into the financial, commercial, and service sector of the economy has far more drastic consequences than the bare statistics would indicate. It means that while much higher paid, full-time industrial jobs have been permanently disappearing, they are being replaced by much lower paid jobs-a major portion of which are even lower paid part-time jobs.

Thus both the quality and quantity of available full-time jobs are in decline, and the working class considered as a whole receives less total wages and is therefore only able to buy a smaller portion of the total gross national product

That’s bad enough, but the steady increase in the financial and commercial superstructure of the economy, caused in part by the decline of employment in its industrial base, contributes heavily to the tendency of the average rate of profit to fall.

While the financial/commercial sector appears to contribute to the production of surplus value, this sector of the economy only accelerates the realization of surplus value, which is not the same as adding to the total surplus value produced. The fact is that only human labor involved in the production of commodities creates surplus value.1

But because capital invested in all sectors of the economy have an equal claim on the total surplus value, profits are distributed equally to those enterprises that produce surplus value as well as to those that don’t. Thus the rate of profit tends to fall.

But this tendency is not manifested gradually. On the contrary, quantitative changes building up beneath the surface of the global marketplace tend to be expressed in sudden sharp qualitative changes. Consequently, as competition in the world marketplace intensifies, and the least efficient enterprises are driven into bankruptcy, the rate of profit may be maintained by such means as expanding credit and expanding the supply of paper dollars.

But the rate of profit must sooner or later fall. And the longer it is postponed, the more precipitous will be the fall in the average rate of profit.

1 Commodity production, of course, includes the labor involved in mining, agriculture, transportation, telecommunication, warehousing, etc., all of which contribute to the production of commodities and the creation of surplus value-the source of all profits.