Sunny summer optimism

The world’s stock markets are hitting their highs for the year. Optimism rules in this sunniest and hottest of summers. The bulls (investors who reckon stock prices are going to rise) are in the ascendancy and the bears (those who forecast falling share prices) are in their caves. But is this optimism justified? Profits are up in the oil and the banking sectors. In industry as a whole profits are not up, as companies are finding it difficult to up prices in the world market.

As I write, the world’s stock markets are hitting their highs for the year. Optimism rules in this sunniest and hottest of summers. The bulls (investors who reckon stock prices are going to rise) are in the ascendancy and the bears (those who forecast falling share prices) are in their caves.

The world’s stock markets peaked back in March 2000 at the height of the euphoria over the hi-tech revolution and the dot.com mania. The stock markets then fell dramatically, nearly matching the fall in 1929-32 and mirroring the collapse of the Japanese stock market after 1989. Their value plummeted over 60% in the next three years and for three years in a row share prices were lower at the end of the year than they started – 2000, 2001 and 2002. They have not fallen four years in a row since 1929-32 and no economist or Wall Street soothsayer was prepared to predict such a calamity for 2003.

The optimists were shaking in their boots when Bush launched his attack on Iraq. The stock market reached new lows. However, after ‘victory’ was declared, investors were hugely relieved and went on a buying spree. Market prices jumped 25% and in Germany they leaped an astronomical 60%.

Investors were encouraged to buy by the actions of the two great financial players in the economy: the central bank of the US, the Federal Reserve Bank, and the US government. The septuagenarian guru of finance capital, Mr Greenspan, Chairman of the Fed, announced a series of interest rate cuts and pumped billions of dollars into the banking system. The Bank of Japan followed suit and even the conservative European Central Bank came in with rate cuts. Businesses and houseowners were told: buy, buy, buy because you can borrow all you want and at historically low rates of interest. Indeed, the big three auto manufacturers in the US announced unbelievable discounts on their cars, along with no deposit and no need to pay for three years and then at low interest rates. In effect, they were giving the vehicles away!

At the same time, that Texas ranger Bush announced tax cuts that would be paid out immediately in cheques to every household and massive increases in arms spending and ‘homeland security’ to boost the production and profits of the arms manufacturers, security companies and anybody who could get a government contract.

No wonder the optimists bought the stock market. The stock market was predicting that, thanks to Messrs Greenspan and Bush, the US economy was set to boom. And virtually every economist in the US is predicting at least 3-4% economic growth in the second half of this year compared to the weak rise of 1.5-2.0% in the first half.

Is this optimism justified? Are the US and the world set to turn the corner? The global economy will boom, Iraq will be pacified, the Middle East will follow the road map to peace and, above all, corporations will make big profits and stock market investors will make a killing. That’s the theory.

But hold on a minute. Are things so rosy? Take the US economy. In the second quarter of this year, it grew at a rate of just 2.4%. That was faster than the 1.2% in the first quarter, so the optimists were happy. But when you look at the figures, the reason for the faster growth becomes clear: ‘defence’ spending by the government. That was up 44% over the previous quarter. If you take out Bush’s spending on arms and the war in Iraq from the equation, the economy grew no faster than in the first quarter.

It’s the same with profits. This is the Achilles heel of capitalism. Without profit, capitalists won’t invest in replacing equipment and they won’t employ people. At the height of the tech boom in the late 1990s, the margin of profit made on each unit sold by US companies was, on average, 13.5%. By the time of the depth of the recession and 9/11, that margin had fallen to an historic low of 7.5%. Corporations could not sell their goods or services and they could not raise their prices either. They were desperate and they saw only one way out: cut costs.

From the moment Bush gained the presidency (through his electoral ‘coup’) at the beginning of 2001 to this summer of 2003, US companies have sacked over 3m Americans. They also stopped investing. The result was that they got costs down sharply and the profit margin rose – from 7.5% to 8.5%. That’s all.

It’s not enough. Why did so many have to pay the price of their job for so little profit gain? The answer is that US, European and Japanese corporations have still not been able to raise production much and have been totally unable to raise prices. Indeed, in business circles, prices are falling, not rising. Deflation is already there. In Japan, overall prices have been falling for years. In the US and Europe, prices of goods sold in the shops have also been static or falling. Only prices of services like healthcare, insurance, banking, etc., have been rising.

The manufacturing sector of the advanced capitalist world remains decimated. It cannot raise prices in the shops because consumers expect bargains, and consumers expect bargains because out in Asia there is a huge manufacturing colossus that is destroying the markets of the old capitalists in the West in sector after sector. China is swamping the world with textiles, toys and now electrical goods and increasingly even computers and hi-tech products. As a result, China is forcing down prices across the globe.

It shows up in the profit results of US corporations. The stock market optimists have been ecstatic over the recent profit results of the second quarter. On average, the top 500 companies boosted profits by nearly 10% compared with last year. But the average hides a nasty reality. Virtually all that profit was made by just two sectors: banks and oil companies.

Despite all promises, oil prices have stayed high after the Iraq war as Iraq has failed to come back on stream into global production. So oil companies have continued to reap in windfall profits. But it is in the finance sector that the real killing has been made.

Low interest rates made it possible for banks to lend huge amounts to Americans who in turn borrowed to buy houses or remortgage the cost of their existing house. It has been massive business. Everybody wants to lend money and everybody wants to borrow money.

Well, that’s not entirely true. Sure, the US government wanted to borrow money to pay for its wars and houseowners borrowed on their houses. But big business did not borrow to invest or employ people because vast swathes of industry and services were making no profit at all. It’s a vicious circle. Profits are made by the moneylenders, but the productive sectors make none.

It’s a shocking thing to know that General Motors, employing over 180,000 Americans made little or no profit on selling its cars but it made millions on lending car buyers the money to buy its cars. In the second quarter it made $901m in total profit, but its finance division made $834m of that! Even more shocking is that General Motors makes more profit from its own mortgage business than from selling cars. That’s the ultimate in the unproductive nature of finance capital.

What profits that were made in industry were achieved not by increased sales but by cutting back the workforce and stopping investing. American manufacturers on average have made idle one in every four of their machines and laid off the workers who used that machine.

But don’t worry, says Mr Greenspan. It is a matter of debate whether manufacturing is important to an economy like the US where over 60% of jobs and output comes from what are called services. Mr Greenspan told the US Congress recently that what matters is that “economies create value”. So it doesn’t matter where the profit comes from as long as you make it. If General Motors makes more from lending money than from making cars, so be it. This spake the guru of finance capital.

But this economic theory is one of bankruptcy. Without the productive sectors of an economy that makes things, services will not survive. Insurance depends on manufacturers, car owners, and transport companies. Private healthcare depends on companies like GM shelling out on benefits for its employees. Wars by government depend on manufacturers making weapons. Services depend on industry.

It’s no good saying, well we’ll leave the making of things to countries like China who make them cheaper (because they pay their workers a pittance) while we ‘design’ things and just lend money. That only works in a truly global world under socialist planning. In a capitalist world, there are national and private interests that must be satisfied above global cooperation. Does the US government want its weapons made by Chinese companies? Of course not. Does Mr Greenspan really want China to make all the cars and let General Motors shrink and shrivel and with its hundreds of other companies that depend on it? No.

That is why optimists: the stock market, Mr Greenspan and Mr Bush are blowing in the wind. Look at industry across the advanced capitalist world. It is in deep trouble. Germany and France have just announced a second quarter in a row of falling national output, mainly because of weak industry. UK manufacturing has been on its knees for several quarters. Japanese industry after over a decade of slump is still showing limp signs of life.

If Greenspan and Bush were so confident about US economic recovery, why are they desperate for the Chinese to revalue their currency? They’ve been bleating on about this for months. China cleverly ties its currency to the US dollar. So if the dollar weakens, so does the Chinese renminbi. The result is that China’s exports stay cheaply priced in the US, unlike those of Europe in the last year when the Euro jumped in value by over 20% against the dollar. The US wants China to end this practice of pegging its currency to the dollar so they can sell more goods in China and, most important, US manufacturers can start to compete on price against Chinese imports in the US. Fat chance! The Chinese have ignored the Americans. They have no intention of losing their grip on world manufacturing.

And yet the US must have economic growth. It is make or break for Bush, Greenspan and for swathes of US industry. Bush and the Republicans have launched an imperialist adventure across the world. Just as the US struggles economically, the political strategists of American imperialism have gone for broke. They are trying not just to police the world but to rebuild it in the American image of the free market. The running sore of the Middle East is to be solved by imposing a peace on the Palestinians. The petty irritations of tin pot dictators like Saddam who do not toe the American line are to be crushed. If Kim in North Korea or the mullahs in Iran carry on the way they are, they will receive the same treatment. Thus we have a new Roman Empire.

But, as the Roman emperors found, ruling the world with a fist of steel and moulding it into thousands of Roman cities is very expensive. It needs permanent armies and permanent constructions (Hadrian’s Wall etc). So the Republicans have now embarked on an arms spending spree unprecedented in America, even more than in the days of Vietnam. They are not just equipping armies; they plan to spend billions ($600bn is the low estimate) on rebuilding Iraq. There will be more to find if they have to reunite the two Koreas.

As a result, the US government is set to spend about $500bn more than it raises in taxes each year for the rest of this decade. That compares to a surplus of $150bn it was running just two years ago. How will it find this money? Well, there is an easy way. It borrows it by issuing bonds that the banks and big business buy. They do so because they are secure in the knowledge that the American government will never refuse to pay its debts. Even so, the more the government borrows, the more interest it will have to pay.

And here’s the rub. The interest demanded by lenders to the government is rising fast. It has jumped a full 1% from 3.5% to 4.5% in just one month. That means the government must find more money each year to pay its interest bills, either by raising taxes or by borrowing more. Even more serious, rising interest rates on government bonds drives up mortgage rates. That’s because the mortgage agencies who have big holdings of government bonds will want more from houseowners as the value of the bonds falls. And indeed, mortgage rates are rising sharply in the US.

That spells disaster. What growth the US economy has had in the last two years has come from spending by Americans on cheap goods in the shops. And Americans have been ready to spend because the value of their houses has been rocketing. House prices are up about 6-8% a year (much less than the 25% in the UK, but high by US standards). Americans have been cashing in. They’ve been remortgaging their properties at ever lower interest rates and then spending the extra money from cheaper mortgage payments. But if mortgage rates start rising, then the spending money is going to disappear, along with the jobs that have already gone. And if Americans stop investing in houses, the housing boom could soon turn into a bust.

And Americans have never been so much in debt. Household debt is now 125% of annual income on average. If the cost of financing that debt starts rising, then the shopping spree will be over and defaults will mount. That spells disaster for all those banks, government agencies and even General Motors that have lent the money. Only this week, a small mortgage lender in California closed its doors – the first leaf falls before a cold winter.

And while over the summer Bush has sent cheques in the post to Americans (using borrowed money), the 50 state governments are getting ready to raise taxes across the board. That’s because most US states are getting deeper into deficit like the Federal government. Asked to finance medical care schemes, education schemes and now energy construction schemes (after the blackout across the north-east), they have also been asked to keep taxes down. The result is growing deficits.

The worst hit is the state that hosted the hi-tech, dot.com revolution in the 1990s. Then it was spend, spend for programmes and cut, cut for taxes. Now California has a deficit of $38bn, or one-third of its tax revenues.

The state is still resisting the inevitable – raising, not cutting taxes. Instead it is hoping that the Terminator (another poor film actor like Reagan in the 1960s) will save the day. But other states are already hiking charges. So the irony is that St Peter Bush’s tax cheques are being taken away by St Paul’s increased council taxes. And Mr Greenspan’s interest rate cuts at the Fed are being reversed by President Bush’s empire-building free spending at the White House.

The result will eventually be low growth, higher interest rates, more job losses and the continued spectre of deflation, driven by Chinese imports and weak consumer spending at home. The current super-sunny summer optimism will give way to dark, cold winter misery.