US Capitalism: Digging A Deeper Hole
By Michael Roberts
Theres a story about the Great Depression of the 1930s. A distressed American banker decided to end it all by jumping out a window on the 12th story of the old Maryland National Bank building in Baltimore. As he was going by the 5th floor, he was heard to remark: Well, Im all right so far.
That was the consensus coming from the economic pundits in the U.S. and U.K. until just a few weeks ago. But now the mood is changing. This last weekend the papers are full of worry and concern with headlines like Capitalism is sick or Its all gone bear-shaped. The capitalist pundits are worried that the U.S. and world capitalist economy is not recovering as they expected. And stock markets around the world are plummeting.
The experts are beginning to agree with what we said last October: Indeed, there are four bubbles. The first was hi-tech investment in dot.com and Internet companies. That has well and truly burst. The second was the collapse of the stock market that financed all those Internet start-up companies. Share prices around the world are now down 30-60 percent from their peaks in March 2000. But theres further to go. The third bubble is still expanding: namely, the property market. American and British households, in particular, having had their fingers badly burnt by investing in the stock market, continue to push cash and borrow more to buy bricks and mortarthe safe investment. That bubble has still to burst. And further down the road is the bubble of paper currencies, in particular, the dollar.
Now the dollar is falling and the papers are full of concern about how long the expanding balloon of property prices can go on without bursting. Stephen Roach is the leading economist at the U.S. investment house, Morgan Stanley. He comments that the world economy is on an inherently unstable path that can only end in tears.
Indeed this current capitalist economic cycle has no precedent in the whole post-war period. Investment spending is unusually weak and consumer spending unusually strong. Yet this pattern has at least one ominous parallel before the Second World War: the U.S. economy of 1926-29.
There are two features of the current economic cycle that suggest that the tears will come. First is the massive increase in debt. Last year U.S. national income grew by $179 billion. Debts, on the other hand, increased more than $2 trillion, ten times faster than income. Telecom debt alone now equals nearly as much as the combined total of the infamous U.S. Savings and Loan crisis of the 1980s and the junk bond crisis of the 1990s. And the value of these telecom companies on the stock market has been destroyed. The $2.5 trillion lost in the telecom meltdown was the largest single loss of wealth ever to occur in the stock market.
Americans have mortgaged up their houses as never before. 19 million Americans now pay more than 35 percent of their incomes to keep a roof over their heads, up from just 16 million in a similar circumstance ten years ago. Bankruptcies are becoming more and more common. And older Americansthose 65 and upare declaring bankruptcy at a rate 244 percent higher than they were ten years ago. Fewer people are finding jobsthe number of people collecting long-term unemployment benefits is at a 19-year high. Credit card payments are getting stretched, late payments are at a 5-year high.
The second factor that suggests the failure of recovery is the lack of profit. The optimists continue to argue that as long as Americans go on borrowing and spending, then the economy will pick up and all will be well and everything else, like profit and investment spending, will take care of itself.
After all, there appears to have been a dramatic surge in economic growth in the U.S. during the first quarter of 2002. Gross domestic product (GDP) grew at a 5.8 percent annual rate. On the face of it, Americas economy is roaring back, adds the Economist magazine, but dig beneath the headline figure for growth and Americas performance looks less miraculous. Most of the GDP growth came from a slower rate of inventory reduction and a big jump in government spending. Defense outlays are growing at a 20 percent annual rate.
And even more important is the failure of profits to grow with spending. Under capitalism, production is for profit and profits matter. But U.S. corporate profits peaked in the second quarter of 2000 at $518 billion. By the fourth quarter of 2001, they were down 44.4 percent. Manufacturing companies earned $175 billion during the second quarter of 2000. That dropped 71.2 percent by the fourth quarter of last year.
Profits are essentially the unpaid part of the value added by the workforce. And if profits are the basis for investible resources for the future, then a chronic lack of profits indicates that America is consuming its capital; eating its seed corn. Valuewealthis being consumed. U.S. corporate profits have slumped to their lowest level in the post-war period. In the 1960s, they were 9 percent of GDP. At the nadir of the recession in 1991 they had plummeted to 4 percent. But currently, profits are less than 3 percent of GDP!
For a few years, during the great hi-tech boom, the reality of the decline in profitability was hidden by cheap accounting tricks, but the scandal of Enron has exposed all that. And the greed and graft of some of Americas top corporate executives has increasingly angered middle-class investors who now stay out of the stock market as a result.
The story of Tyco Corporation CEO, Kozlowski, is the latest horror story. He persuaded his board to give him hundreds of millions of dollars of cash, stock and perks. And he took home tens of millions of dollars of pay that supposedly reflected his improvement of the companys performance, while Tyco lent him yet more millions of dollars, while the companys profits and stock price plummeted.
And the funeral pyre of bruised and tattered corporate reputations grows higher by the day. Even Vice President Dick Cheneys former company is being investigated for cooking the books.
The bubbles of the New Economy and the stock market burst in millennium year. In 2002, the bubble of dollar supremacy is also bursting. The dollar is diving against other currencies as foreign investors stop buying U.S. companies, shares and bonds. In 2001, net inflows of capital into U.S. markets equaled $44 billion each month. But in each of the first three months of this year, only $25 billion came in. And foreigners own 39.5 percent of the U.S. Treasury bond market and 23.8 percent of the U.S. corporate bond market. Both levels of ownership are at record highs. And foreigners also own 12.7 percent of the U.S. stock market.
One of the largest sources of dollars was from foreign companies buying U.S. companies or setting up production facilities in the U.S. In the period 1990-95 average annual European dollar flows from mergers and acquisitions (M&A) was only $10 billion. But in 2000, Europeans invested over $600 billion in the U.S. Taking away U.S. investments in Europe it was a net $214 billion to the advantage of the U.S. That alone financed half of the huge U.S. trade deficit. Now European purchases of U.S. companies has dropped to just $7 billion. So the dollars dominance over currency markets is slipping and the trade deficit is starting to spook the capitalist economists.
What would happen in a dollar crash? Morgan Stanleys Stephen Roach gives us this picture: In my view, a dollar crash would have a devastating impact on U.S. financial markets that could well be amplified in other capital markets around the world. The result would be lower prices for equities and bonds, alike. It would undoubtedly deal a devastating blow to consumer confidence, finally sealing the fate of the long-awaited consolidation of the American consumer. The negative asset effects would also result in a higher cost of capital that would most likely impede business capital spending.
In other words, a dollar slump means eventually a global economic slump. The end of the era of U.S. capitalist supremacy would mean the end of the global economic upswing of the last ten years.
The U.S. rules the economic and political world like an empire. As the American historian Paul Kennedy, puts it: No country has been as dominant culturally, economically, technologically and militarily in the history of the world since the Roman Empire. The Roman Empire stretched further afield, he notes, but there was another great empire in Persia and a larger one in China. Today China is no competition. It is just another country on Americas hit list.
The modest republic of 1776 has become the great empire of 2002. If the past is any guide, an empires successes are inevitably followed by humiliating defeats. Financial progress is always trailed by national bankruptcy and the destruction of the currency. And the good sense of a decent people is soon replaced by a malign megalomania which brings the whole bunch to complete ruin. A great empire is to the world of geopolitics what a great bubble is to the world of economics. It looks omnipotent at the outset, eventually it is a catastrophe.
In Defense of Marxism, June 10, 2002