Boom to Slump

The financial press and the investment houses of global finance capital are in euphoria. The world's stock markets are booming. But a closer look reveals that all this euphoria is misleading and the real situation is far less healthy than would appear on the surface.

The world's stock markets are booming. The US stock market index (called the Dow Jones industrial index), which measures the stock prices of the top 30 companies in the US, has just hit an all-time high. Other wider-based indexes, both in the US and Europe are also at five-year or more highs. Even the Japanese stock market, which plunged to incredibly low levels after the financial market bust of the late 1980s, has started to recover.

Even so, these new highs are somewhat misleading. The Dow Jones index may be at an all-time high of 12,000-plus. But it has taken six and half years to get back there after the dot.com collapse in stock market prices back in March 2000. So if you had been stupid enough to invest in stock markets (as many middle-class people did and most of us were indirectly forced to do because our pension funds did) back in 2000, you would have made no money at all until now! You would have been better leaving your hard-earned savings (assuming you had any) in the bank.

Moreover, if the stock market indexes were adjusted for inflation since 2000, then the Dow Jones index has not reached an all-time high. To do that, it would have to rise another 15% before investors who bought stocks back in 2000 could claim to have made any money after deducting for inflation.

Nevertheless, the financial press and the investment houses of global finance capital are in euphoria. They are making huge profits - every day, the big investment houses announce yet more billions of profit made. This Christmas, their executives are expecting massive bonuses to their already bulging pay packets. Their earnings will be matching those of professional footballers. No wonder property prices in the 'best' parts of central London are rocketing!

These bonuses and the profits of finance capital also go a long way to explain why the stock markets are booming. Stock prices are rising fast because the level of profits for big business in Europe, Japan and the US seems to be at record highs. According to the official data, the share of profits in annual national income is at a record high in the US, with the share going in wages (both for ordinary workers and their managers) at all-time lows. It's the same thing for Europe and Japan. The economic growth of the last few years since the mild global recession of 2001 has been mainly diverted into profits and workers have gained little or nothing.

It's the same thing with the profit margins. That's the measure of the rate of profit in a capitalist economy that the capitalist economists like to use. It measures the amount of profit made per unit of output. That is at an all-time high.

US corporate profits as share of annual US output (%)

Boom to Slump

As readers who have followed this column will know, I have been trying to measure the rate of profit from a Marxist value point of view. That is very different from the bourgeois measure of profitability because it measures profit relative to the total cost to capitalists of investing in plant and the labour force. Marx showed that capital accumulation would have a tendency to lower the rate of profit. That tendency for the rate of profit to fall could be counteracted for a while by higher exploitation of workers (as expressed in the higher share of profits in output ‑ which is what the capitalist measures currently show), or by lowering the costs of equipment and plant through new technology. But eventually, profitability would fall.

As far as I can calculate, the rate of profit in the US under the Marxist definition is still below where it was at its peak in 1997. It has recovered from a low in 2001, but it has still not surpassed 1997. If that is right, then the argument that capitalism is still in the early stages of profit downwave holds. According to my argument, capitalism is set for a tough time over the next decade similar to the 1970s and even more like the 1930s.

If that is right, then the profitability of capitalism has probably peaked right now and is set to fall from here. Investors in the stock markets are currently enraptured by the news that big business profits have been rising in the US at over a 10% rate for 17 consecutive quarters. And in the current quarter (Q3'06), they will be up another 15%.

Again these profit figures are misleading because much of the gains are concentrated in the finance sector. The most productive sectors of the economy, manufacturing and industry, have not recorded such mega results. The banks and finance houses have ripped off most of the profit.

That's not good news for the future of capitalism in the US, Europe or Japan because it means that surplus-value extracted from the output of workers will not be re-invested in new technology and equipment to create more value but instead will go into what Marx called 'fictitious capital', namely speculation in the stock market or property, or will be invested abroad in exploiting workers in China, India etc.

As Good As It Gets

Moreover many capitalist economists are now predicting that profits growth will slow to a trickle next year, as economic growth slows in the US and employment and investment costs mount. This is as good as it is going to get for capitalism.

Already, we know that the great driver of US capitalist prosperity ‑ house prices - has collapsed. The US housing market peaked way back in mid-2005 and now, for the first time in 15 years, average house prices are falling. That is really bad news for the mass of Americans who have increasingly come to depend on maintaining their living standards by borrowing more on their houses as their value rose. They will not be able to do that any longer.

And they cannot expect to increase their incomes by working longer or taking extra jobs. Already Americans work more hours in one year than any other advanced capitalist country (with the exception of Japan). They work 20% more hours than French workers do in one year. It is a key reason why American capitalists have been making so much profit ‑ American workers create more value (and because wages have hardly risen, more surplus value) than in any other capitalist economy.

But if Americans are going to have less money to spend because they cannot increase their borrowing any more and cannot work any harder, then demand for all the goods that they buy in the shops and demand for all services they pay for in restaurants, home maintenance, travelling etc., is going to slow down sharply. That means profits will no longer go on rising at such huge rates and may even start to fall by the end of next year.

It may well be that economic growth in the US will stagger on at a 2% rate for a few more years. This is less than the growth rate of 3% that would be necessary to sustain the relatively low unemployment that the US has at the moment. Thus, as we already see in the UK, where unemployment is already at a six-year high (even if it is still low by the standards of the 1970s), unemployment in the US will rise over the next few years.

The cycles of boom and slump in capitalism have not disappeared. They seem to operate on a 9-10 year cycle. There was a worldwide economic recession or slump in 1980-2. Then the world capitalist economy recovered and an economic boom ensued (with a slight 'pause' in 1986-7). Finally, capitalism fell back into recession in 1990-2, about 9-10 years since the previous slump. Again capitalism recovered and a new boom ensued (again with a bit of pause in 1994). It culminated in another recession (this time relatively mild) in 2001.

Serious Slump in Prospect

Once more, capitalism took another breath of life and began a new "boom" (although this is one of the weakest in capitalist history). This has lasted five years so far. If the cycle of boom and slump holds, then it could continue until 2010, perhaps after a 'pause' next year.

As I have argued previously in this column, the US housing slump will probably not reach its bottom until 2010, if previous real estate cycles in the US are anything to rely on. Also, I expect profitability will be heading to a new low by then. Everything is shaping up for a very serious slump in world capitalism by the end of this decade at the latest.

The way to test whether this is right is to monitor the growth of profits in the US, the movement of house prices, and the level of employment. Expect all to fall over the next few years. That will wipe the smile off the stock market speculators. But the biggest misery will be reserved for those who must pay for the next world economic slump in jobs and living standards - us.


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