Here's a prediction. The US economy is heading for slump. By the end of this year, that reality will start to emerge behind the smoke and mirrors of stock market exuberance and big business bluster. Since 1945, all world slumps have started in the US. This time will be no exception. Europe is just beginning to pick up steam. Its budding boom will be cut off by the frost of the American recession. Japan and Asia are already freezing. Before the millennium is reached, the world will be ice.
At the moment, there appears to be no cold weather on the horizon for the US economy. On the contrary it looks like a hot summer ahead.
Last month the US government reported that the economy was growing at 4% a year even after taking into account inflation. Indeed, prices in the shops were rising at only 2% a year, and at the factory gate they were actually falling! At the same time, the official unemployment rate was just 4.3%. And the number of people out of work for longer than half a year had fallen to just 900,000, 50% less than three years ago. With mortgage rates steady, house building has reached record levels, at least for the 1990s. Adding wages, hours worked and jobs together, then the overall income going to the American working class is rising at near 4% a year even after inflation. President Bill Clinton has echoed the words of Harold Macmillan, the Tory prime minister of the good old days of the 1950s, who said once to the British working-class: "you've never had it so good!"
And the good news has been expressed in a wave of buying in the shops. And of course, the great idol of American capitalism, the stock market, has boomed. US stock prices are up over 50% in just two years. Nothing has been seen like it since.... the 1920s.
And here is the rub. US capitalism is in the same wave of euphoria last seen 70 years ago. And as my Scottish grandmother used to say: "You mark my words. It'll all end in tears".
In the UK, at the dinner parties of the chattering middle-classes, contrary to their claims, the main topic of conversation has never been culture (the theatre, the opera or good books) but money, in particular, but the value of their houses. Were their investments in real estate still going up?
But in the US that same money talk is no longer about house prices but about stock prices - "how are my shares doing?" Now any self-respecting American money earner with something to spare is betting on the stock market, mainly by investing savings in a personal retirement account (similar the so-called PEPs in the UK), which in turn is given to a money manager to invest through what are called mutual funds. So big has been the flow of money into mutual funds been, that for the first time in American capitalist history, these mutual funds have more savings in total than all the American banks.
The American middle classes are speculating with their life savings in a big way. Now something like 40% of the average American household financial assets (that's savings outside the house they own) is invested in Wall Street. So far, it's been a bonanza! The Dow-Jones index, the main stock market index was under 7,000 just 18 months ago. Early in 1998 it reached 9,400. Some small investors in Arizona were so enthused that they have formed a club - the 10,000 club - which aimed to celebrate when the Dow Jones reached that figure - by Xmas 1998, they hoped.
But that avaricious dream is beginning to turn into a nightmare. The Dow has stopped rising. Indeed in recent months it has fallen back to 8,700. Not disastrous, but it's treading water. More money is being poured into the market but each wave of cash seems to have less and less effect on stock market prices. What's happening?
The reality is that beneath the sunny exterior of US capitalism, the old mole of the capitalist cycle is working away at undermining the surface strength of the economy. The boom of the 1990s has been based on three key factors: a huge rise in profitability; very low interest rates and fast rising global trade.
Profits have been rising by 15-20% a year for the last four years. The rate of profit has now reached a level not seen since late 1960s. This profits boom has been based on three factors. First, the US dollar has never been stronger for years. Since April 1995, it has appreciated against the Japanese yen and the Deutschemark. As a result, the cost of importing semiconductor chips, computers, electronics, oil and a host of other essentials for industry and households alike has fallen. That has kept industry's production costs down.
And it has forced American labour to accept lower wage increases. While real wages for the average worker have hardly risen until recently, productivity has rocketed. The high unemployment in the early 1990s enabled US employers to whip their workers into shape. 'Downsizing' the labour force came along with the replacement of workers with machines, particularly the new information technology. Investment in information technology hardware has risen at a rate $220bn a year.
As a result, overall investment in what Marx called constant capital shot up at 8.5% a year, a pace not matched since the 1960s. But because the price of each unit of new technology kept falling, the overall cost of this constant capital did not rise as fast as the cost of living labour (variable capital). So the organic composition of capital (the cost of machines over labour) fell and profitability rose.
Workers wage rises were restrained by the fear of losing their jobs. And the workforce was made to work longer and harder. In 1973, the average US worker put in 41 hours a week. Now he or she works nearly 51 hours a week on average! The American worker is slave to his or her computer. No wonder labour costs per unit of production shrank back and profits accelerated.
Inflation died away in during the huge recession of 1990-92. It did not come back in the mid-1990s because of the strong dollar and low labour costs. That meant that the bankers could afford to keep interest rates on borrowing low and still make a fat profit. Low interest rates always benefits the productive capitalist employing workers to make real things that people can use. If borrowing money is cheap, then capitalists will invest.
With finance capital taking a smaller share of the overall surplus value created by American workers, American corporations built up huge piles of cash to invest or to buy other companies with. There has been an unprecedented burst of take-overs, as capital centralises even more.
World trade continued to boom during the 1990s. Growth in trade averaged 6-8% a year. But most important, American capitalists re-established their hegemony in world markets as their superior technology kept costs down and because Europe (until very recently) and Japan remained in stagnation. As American industry reaped super-profits from exploitation abroad, the Mexican crisis of 1995 and the collapse of the Asian miracle in 1997 only seemed to confirm American capitalism's omnipotence.
But the stock market has stopped its meteoric rise because the first signs of the end of American boom have appeared. The traditional capitalist cycle goes like this. First after the slump, labour is plentiful and cheap. Many capitalist competitors have been liquidated, so those capitalists left can earn quick profits. That reignites growth. Interest rates are low so capitalists start to borrow to invest. Growth accelerates and eventually increased jobs and rising wages boosts consumption. Now the boom really gets under way.
But later, the capitalists start to over-invest, while productivity slows because there are diminishing returns on each new investment and wages are rising faster as the spare capacity in the labour force (what Marx called the reserve army of labour) gets used up. Then profitability starts to drop. Inflation picks up and with it interest rates. Capitalists are over-extended. They start to cut back on investment. Production slows and then drops sharply. Workers get laid off, stop buying goods and the crisis of production begins.
The first signs of this late stage of the cycle are now to be seen. The stock of goods unsold is beginning to build up in the factories. The level of unsold goods reached $77bn in the first quarter of this year compared with $65bn in the last quarter of 1997. May's figures suggest it has reached $100bn. Manufacturing output has slowed as a result, to just a 2% growth rate compared with 4% in March. It will stop altogether this summer.
Above all, the profits squeeze is on. In the first quarter of 1998, earnings from the top 500 US companies were 2.4% lower than the same time last year. And the fall is accelerating. And world trade is no longer coming to American industry's rescue. The Asian crisis has made it much tougher. Export volume growth was rising at over 10% in 1997. Now it is in outright decline. The US payments deficit with the rest of the world is widening. The shortage of labour would normally force up prices and interest rates. But the weakness of world prices, particularly imported oil and other goods, because of Asia's collapse is holding factory prices steady. Otherwise it is clear that the boom is nearly over.
As night follows day, falling profits and slowing growth can only mean a collapse in stock market prices. The US market has continued to hold on in wave after wave of euphoria. Just as in the 1920s, rational calculation has given way to the blind belief that the market can only keep going up. A recent survey of American investors found that they expected to earn an annual 20% on their investments in the stock market. The average for the last 100 years has been just 5%! The forecast increase in profits this year is just 3%.
Up to now those poor figures have not appeared in the results of most American corporations. Profits have been artificially kept up by raiding workers pension funds, cutting back on pension contributions and paying wages in stock options rather than cash so it does not appear in profit and loss account. And the government has obliged by cutting taxes. But these tricks cannot last much longer. Eventually, companies will start to admit slowing or even falling profits. When that happens, then investors will pull out. The market will crash quickly.
The big freeze is coming.