World stock markets in turmoil

China hints at a tax on capital gains and the Shanghai stock exchange falls by 10%, but then the fall affects all the other major stock exchanges. What does all this indicate? Michael Roberts gives his view on the question.

Over the last few days, world stock markets have taken significant plunges. It all appeared to start in China. The Beijing government hinted that speculation on the Shanghai stock exchange was getting out of hand and the government may have to introduce a special tax on capital gains being made. That produced a 10% fall in prices, the biggest daily drop in ten years.

It was ironic that the Chinese government should make this call. Only six months before they had declared open day for stock market speculators, easing restrictions and announcing big sales of shares in state companies. The stock market jumped 100% in just half a year! Now the pain is following the gain. It also shows how the turn towards capitalism driven by the so-called "Communist" leaders has exposed China's economy to the gyrations of capitalist volatility.

But the stock market plunge did not just affect China. It soon spread to the stock markets of Japan, Europe and the US. They fell by 3-4% in a day, not a huge fall but significant after the huge steady rise that these markets have seen since last summer.

That a hiccup in China should ripple throughout the world's stock markets shows how globalised capitalism, particularly its finance sector, has become. Truly, chaos theory applies in the anarchy of world capitalism: when the Beijing butterfly flaps its wings, the snow falls on New York.

The problem was compounded by two other events. US economic data were released that suggested that the US economy may be slowing down much faster than markets expected. It appeared that real GDP growth in the US in the last quarter of 2006 was only just above 2% rather than 3.5% previously estimated.

Also, the former chairman of the US central bank, Alan Greenspan, made a video speech to investors in Hong Kong (for $150,000 by the way!) in which he said that there was a possibility of economic recession in the US in 2007.

All this was enough to spook investors into selling their stocks. Yesterday, the US stock market seemed to stabilise. But today the falls have continued in China, Japan, Europe and the US, as I write.

How far can this go? It depends on how you analyse the causes of the fall-back. The capitalist optimists argue that there is nothing wrong with the fundamentals of capitalist growth: employment is good, profits are good, interest rates are lowish, inflation is under control. So this stock market fall is just a healthy "correction" that will end soon, before the market starts going up again - just as it did last summer after a "correction".

This is the view of the majority and the current Federal Reserve Chairman who succeeded, Greenspan, Ben Bernanke. Speaking to Congress, yesterday, Bernanke was at pains to tell the senators that all was well. The US market stabilised (briefly) on his words.

However, there are others who argue that the US financial markets have become way overpriced because of 'excessive' credit in the economy. Huge money piles are being ploughed into buying up companies through so-called 'private equity' deals and into lending money for property and share deals. Money is not going into productive investment (indeed investment into new plant and machinery is hardly growing in the US), so it is being squandered.

Such is the excess that any sign that the great manufacturing powerhouses of Asia, particularly China, could be slowing down and thus driving up inflation and slowing world growth could easily set off a collapse in stock prices and drive the world into recession.

My view is a little different. The key to understanding the health of capitalism is profitability. US and global profits have rocketed up since the recession 2001. However, much of these profits are not real (they are really the profits of finance capital siphoned off the productive sectors of the economy). Moreover, although profitability has risen in the last five years, supporting higher stock prices, it is still below the levels achieved in 1997.

Most important, profitability is set to fall from here. US productivity growth is slowing and costs of production are rising compared to growth in sales. Sales are dropping off as the US housing market slumps. Also, the cost of borrowing has risen as the Federal Reserve has hiked up interest rates.

The profits squeeze will steadily grow over the next few years. That will weaken enthusiasm for the stock market. Eventually profitability will fall to levels that will provoke an economic slump and a sustained fall in the stock market.

This current stock market fall probably won't lead to any crash and an immediate economic recession. But it is an indicator of the future deterioration of the health of global capitalism that will unfold over the next few years.