World stock markets have been in meltdown from Shanghai and Shenzhen to London and New York. A sea of red blighted the computer screens of the stock exchanges everywhere in a panic global sell-off. Shock and disbelief among investors was ubiquitous. Even as the Dow Jones claws its way back from its worst losses, extreme volatility pervades the entire system. Could this crash be a one-off event, which will quickly return to normal, or the beginning of a series of shocks in an unstoppable chain of events?
It is worth recalling that the Depression of the 1930s began with the Wall Street Crash of 1929, which in turn produced a whole series of recoveries and market collapses over the following three years. For periods of months, rallies would set in, but only to give way to bigger falls. Of course, history never repeats itself exactly; but it would be foolish to ignore such parallels.
Today, economic stability, or what little there was, has vanished. Monday's stock market crash was accompanied by a sharp jump in volatility everywhere. The CBOE's Vix volatility index, Wall Street's so-called "fear gauge", jumped 42 per cent on Monday to 39.77 — readings above 20 are considered a signal of investor unease. The rise marked the index's sixth consecutive daily climb, including its fourth straight double-digit increase.
The collapse of global stock markets on Monday continued a rout that has wiped hundreds of billions of dollars off shares across the world. First to be hit was China, then followed by markets in Asia, then Europe and lastly in America, where stock markets have been in free fall. Larry Summers, a former US Treasurer, tweeted the understatement of the century: “This could be serious”. George Osborne was reportedly concerned about China, but nothing more. They appear as confused and disoriented as first class passengers on the Titanic enquiring about the sudden vibrations.
Big trouble in not-so-little China
The Shanghai stock market had fallen by 11.5% a week earlier, which caused the authorities to intervene. Their intervention, however, had little effect. They poured in money but the volatility continued. On “Black Monday”, the Shanghai stock market experienced its worst day of trading since February 2007. After opening, the market crashed in its first second of trading – a 9% fall that wiped out the entire year’s gains! By the end of the day, “Black Monday” saw the market fall by a massive 8.5%, intensifying fears of a further economic slowdown. This fear reverberated across the globe, affecting world stock markets like an uncontrollable virus. Today, the Shanghai index has fallen a further 7.6%.
“It is a key moment for China,” said Angus Nicholson, market analyst at IG. “The equity market in freefall, the banking system increasingly starved of liquidity, rising capital outflows and a rapidly slowing economy.” (Financial Times, 24/8/15) It was like a perfect storm.
The Chinese authorities reacted as with other shocks and swiftly poured in $200bn to prop up the market. In addition, they made several small interest rate cuts. Today’s cut was the fifth since November. While in the past such liquidity served to stem problems, this time they failed to turn things round. They seem to have lost control of the situation, which only leads to further turmoil and panic.
The initial cause of this stock market rout was fears of the dramatic slowing down of the Chinese economy, the second biggest world economy. All the latest numbers for industrial growth and exports were deteriorating. Most of the official figures can be taken with a pinch of salt. Some serious commentators believe the real growth rate of the Chinese economy is only around 3.5%. China’s manufacturing output has shrunk at the fastest pace since 2009, the lowest point of the world crisis. This summer, Chinese exports had fallen by 8%. Imports had also shrunk by a similar amount. This dramatic slowdown forced Beijing to devalue the renminbi on 11th August in an effort to reverse the situation, but causing mayhem through the emerging economies in the process.
The Chinese president, Xi Jinping, had attempted to put a brave face on the economic situation. “We should be confident that economic growth still enjoys promising prospects,” he told officials in north-east China last month.
Such reassurances are about as reassuring as those given by George W. Bush that the “fundamentals of the US economy are sound”, just before the collapse of Lehman Brothers.
Crashing back to reality
Whereas Chinese growth benefited enormously the global economy in the past by lowering commodity prices and providing markets and fields for profitable investment, now it has turned into its opposite by exporting its problems and weaknesses. At more than 15% of the global economy, China contributes about 25% of global growth, according to the IMF.
While China attempts to wean itself from massive capital investment towards a more balanced economy, its growth rate has taken a massive hit. The levels of capital accumulation have become unsustainable. With austerity in Europe and wage stagnation in America, the market for Chinese goods has reached its limits. Overproduction has affected many areas of the economy, creating a property bubble and a shadow banking crisis. This could not have come at a worse time for global capitalism, which is still struggling to escape from the crisis of 2008. The slowdown in China under present conditions is pushing the world economy towards another recession.
Stock markets have been booming for several years while the real economy has been bumping along. They have become more and more divorced from reality. Share prices no longer reflect the health of the economy or its future profitability. With near-zero interest rates creating “cheap” money and the existence of huge idle cash mountains, money poured into stock and shares in search of speculative gains. On the day that QE was launched in Britain on 9th March, the FTSE 100 stood at 3542 points. Its recent peak on 27th April this year was 7103 points, a gain of 100.5%. There is a similar pattern between the three rounds of QE in the US and the performance of the S&P 500, which was up more than 200% during the same period.
The situation is like that of the cartoon figure who walks over the edge of a cliff, but simply keeps on walking … until gravity eventually sets in.
In our artificial world of stocks, sooner or later there had to be a “correction”, where prices would come more into line with real values. But such a “correction”, as at present, under present unstable conditions can have wide-ranging consequences: a crash can precipitate a deep slump.
Asia’s fate is directly linked to China. The plunge in Chinese stock markets immediately spread to Asian markets. Today, there were new falls, with Japan’s Nikkei down 4%.
It soon became a pandemic on Monday as markets opened in Europe, with European markets slumping by 7.8%. By the end of the day, more than €500bn were wiped off share values. Throughout the month of August the pan-European FTSE Eurofirst 300 was down 12%, on course to beat the October 2008 fall of 12.68%.
“Remember the banking crisis of 2008? Well, European stocks are currently on track for their worst performance since those dark days”, stated the Financial Times. (24/8/15)
Meanwhile, the French CAC index was also down almost 5% and the German Drax lost 5%. In London, the FTSE 100 had lost 5.5%, the first time it has fallen below 6000 and on track to be its lowest since December 2012. That would end up wiping £74bn off the value of the index. These later recovered somewhat on Tuesday.
In the USA, on Monday, the Dow Jones Industrial Average dropped by 6.5% - losing 1,000 points in frenzied early trading. It was the biggest drop since 2008 and is now 14% below its record peak. The S&P 500 dropped 4%, and the Nasdaq lost 8.5% raising fears that a fresh tech bubble has burst. The drops followed already-heavy falls last week. Technology stocks were the hardest hit with Facebook losing 14% at one point and Apple off 11%. This is the most serious stock market collapse since the fall of Lehman Brothers.
On Tuesday, the US market had recovered, indicating massive shifts in stocks. Whether this lasts is doubtful given the underlying problems of the world economy.
The perfect storm
More generally, a “perfect storm” had taken hold, affecting key sectors of the global economy. In the so-called emerging markets, which were in the past saviours of the world economy, everything is falling: currencies, stocks and commodity prices. Money is plentiful and very cheap, but it makes no difference. The proposed interest rate rise in the United States – the first since 2006 – has sent shockwaves throughout these economies.
Falling commodity prices, which has hit them for six, and the expectation of a US rate rise has placed them in an impossible position. The shrinking export market, especially with falling demand and overproduction in China, is leading to a war of exports and currency devaluations. All are trying to make their exports cheaper in a race to the bottom.
The debts of the emerging markets are becoming unbearable as their economies slow down. The size of the debt has doubled in the last 5 years to $4.5 trillion. But with debts being denominated in dollars, every increase in the value of the dollar (pushed up by promised increases in US interest rates) leads to an increased burden and rising service costs. The noose is ever tightening.
Emerging markets have experienced a dramatic flight of capital, not least from China. The flight has doubled in the last 13 months to the tune of $1 trillion. The devaluation of the renminbi will accelerate outflows, which reached a record of $70bn in July. Emerging market equities, as well as currencies, are down by 10% this year. It is trade war without the tariff barriers.
The turmoil has meant the Malaysian ringgit has fallen by 1.4% against the dollar, not seen at this level since the 1998 Asian crisis. The Indonesian rupiah was also at its weakest since the 1990s. The Thai baht was at its lowest since 2009. The crisis has spread rapidly to South Africa and Brazil, demonstrating again that globalisation has meant global crisis. This is the real meaning of contagion.
The price of oil, which has been at $150 a barrel, given the collapse in demand, has fallen to $39.05 a barrel for West Texas Oil and $44.24 for Brent oil. Rather than being a source of strength, the price collapse has been a product of a worldwide deflation.
An organic crisis
The “recovery” has now exhausted itself. Investment is stagnant or falling. The US capitalists sit on a cash pile of $2 trillion, incapable of developing the productive forces as in the past. Meanwhile, the productive forces rebel against the limits of the market and private ownership. This epoch of “secular stagnation” is not one of equilibrium. Far from it. The boom and slump cycle has changed in this period, where the booms are feeble, while the slumps are deep and protracted.
The slump of 2008 was a turning point. It ushered in the biggest crisis since the 1930s, from which we are still suffering. The only reason we did not experience a deep Depression as in the thirties was due to the massive bailouts on a world scale, not least in China, which allowed capitalism to keep its head above water. But all the old contradictions have once again resurfaced. The crisis has been dragged out, as austerity cut the market and wages were kept down everywhere. It reflects an organic crisis of the capitalist system, where none of the previous indices of growth, employment, productivity, or profitability can be attained.
Periodic overproduction manifests itself in deep slumps, as in 2008. There can be all kinds of crises, where the line of capitalist production can be broken at any number of places, including stock market crises, which are not directly linked to the contradictions in the mode of production. The crises in the stock markets, in the final analysis, are symptomatic of the processes unfolding in the real economy. They can act as a trigger for real crisis in the economy. That was the case with the Great Crash of 1929 in America. The subprime scandal and the collapse of Lehman Brothers acted in the same way in 2007-8. Whether this current stock market slump leads to another slump cannot be predicted with any certainty. Clearly, the elements are present for another world slump, but what exactly will serve at its trigger is impossible to say. There are many elements that can play this role.
All we can say with certainty is that this economic “recovery” is exhausted. A downswing is being prepared.
A taste of things to come
As Marx explained in the third volume of Capital, “The final cause of a real crises always remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive forces in such a way that only the absolute power of consumption of society would be their limit.”
Today, given the austerity and cuts to real wages, “restricted consumption” is clearly apparent. Investment, the lifeblood of capitalism, is sagging or drying up. All the contradictions of capitalism, which allowed the system to continue over the past period, are once again coming to the surface. The scene is again being set for another slump even more severe than the last one.
The serious capitalists strategists are frightened because all the means to fight the last crisis have been used up. Governments are financially burdened with colossal debts and interest rates are at zero. They are reduced to tinkering, as in China. This will not save them. The present stock market turmoil is simply a foretaste of what is going to happen.