The market madness that means trouble ahead

September 2, 2015

Behind the financial instability looms the threat of a new slump--a crisis that will feel to working people like an intensification of the rotten times they've been living through.

THE TURMOIL on international stock markets is focusing attention on the instability of a world economy plagued by weaknesses and contradictions that could lead to future financial shocks, or tip a feeble, uneven recovery since the Great Recession back into slump--or both.

The flash point of this phase of capitalist crisis is in China, where the spectacular, headlong economic growth of recent decades is slowing down, headed for what economists fearfully call a "hard landing." The effects are rippling through international financial markets because of, among other factors, the ongoing crash of China's stock market, which has lost 40 percent of its value since June.

But there are other, more far-reaching economic consequences, and every corner of the world, from the poorest countries to the richest, is feeling the pain already, or will soon enough. The stock market madness of the past few weeks is a signal of trouble to come that, if it plays out, will have an even more direct effect on working people.

A worried trader on the floor of the New York Stock Exchange

Though the U.S. media focus obsessively on Wall Street, to the exclusion of most everything else about the economy, what happens to the stock market is only one narrow indicator of economic conditions. It can be a deceptive one, too, since speculation, gambling and herd mentality have a lot to do with the day-to-day gyrations.

Case in point: The New York Stock Exchange suffered a historic loss on August 24, a decline of around 6 percent within just the opening minutes of the trading day. But the loss was reversed by the end of the week, and then some. Obviously, that doesn't mean everything is all better again.

Still, financial markets internationally have been headed south for several months. August was the worst month for the Dow Jones Industrial Average stock index since 2012--since its peak in May, it is down by almost 10 percent.

Thus, many ordinary people will likely look back at this summer as the time that their retirement savings took a hit--those lucky enough to have retirement savings anyway.

But what's more important is what the recent market madness can tell us about the future beyond that--not just what your 401(k) will be worth, but whether you'll have a job this time next year or the year after, whether your wages will continue to stagnate, whether you'll be struggling even more to make ends meet.

Since the official start of the recovery period after the Great Recession in the U.S., almost all the benefits of renewed economic growth--sputtering, but real--have gone to corporations and the rich. Now, the 99 Percent could be asked to endure a new, equally destructive recession when they haven't really recovered from the last one.

ECONOMIC COMMENTATORS of all stripes--not to mention xenophobic politicians--have been blaming the financial market turmoil on the Chinese government's irresponsibility and/or incompetence, but that's cynical scapegoating. As the most internationally integrated economy in the world, China's crisis is bound up with the crisis of the whole world system.

Specifically, its recent slowdown in economic growth--to a still enviable 7 percent by official figures, though analysts believe the real figure may be as low as half that--is the consequence, in significant ways, of the role China played in pulling the world system through the last slump, detonated, of course, by the 2008 financial meltdown in the U.S.

In 2009, the U.S. government enacted an economic stimulus package worth a record $787 billion to try to jump-start the economy. But China's stimulus was bigger and longer-lasting--the government's vast investments in infrastructure and industrial capacity were far more important than any U.S. action in fueling worldwide demand, particularly for basic commodities, ranging from oil, to minerals like iron ore, to agricultural products such as rice and soy.

The Chinese government's policy worked: Gross domestic product grew by 78 percent between 2007 and 2014--that is, the size of the Chinese economy came close to doubling in seven years, during a period of recession and stagnation worldwide--while the U.S. managed just 8 percent growth. A number of countries experienced a revival from the crisis years by supplying China with the raw materials for its new leap forward.

But the hangover from the boom has been harsh. China's economy suffers from legendary overcapacity--new cities that are half populated, railroad lines that aren't used, state-of-the-art industrial facilities that produce at a loss or never opened to begin with. Of course, there is no "overcapacity" in terms of producing for the vast unmet needs of China's working class. There is only too much capacity to operate at a profit.

The problem is what economists call a lack of "effective demand"--meaning demand from people and companies with enough money to pay--for the products, both industrial and consumer, that Chinese industry could deliver. And this is where the world system comes in.

AMONG THE biggest economic powers, the U.S. is the success story in the post-Great Recession period, but its growth rates have been stuck around 2 percent, well short of what is typical in a period of recovery from recession. Things are worse in Europe, where Germany, the dominant power of the eurozone, is in positive territory, but other member states--big ones like France and Italy, and debt-ridden smaller ones, especially Greece--are stagnating or slumping. According to its government, the Japanese economy shrank in the most recent quarter.

In other words, China's prime markets for exports--the source of its phenomenal state capitalist success over the past three decades--are stumbling along at best. Overall, in the first six months of the year, global trade suffered its worst contraction since 2008, as a consequence of the slowdown or stagnation in the wealthiest countries.

This--rather than some sinister plot, as China-bashing politicians insist--explains why the Beijing government devalued its currency last month. With data for July showing that exports had slumped by 8.9 percent from the same period a year before, the government engineered a modest 4 percent drop in the value of the yuan against the dollar. This was designed to make China's exports somewhat less expensive in a world where virtually all currencies--like the euro, for example--have already lost far more value in relation to the dollar.

Meanwhile, countries that had been expanding by producing commodities to feed the Chinese boom are suffering a secondhand hangover.

The most obvious example is oil, the fuel behind nearly all industry and production. After a brief rally earlier this year, oil prices are now back to multi-year lows--driven down not only by lower demand that can be traced back to China, but booming production led by Saudi Arabia and the new giant of energy extraction, the U.S. of A.

That might mean cheaper prices for gas in the U.S., but the downward trend is harming oil-producing countries like Venezuela, just as other nations dependent on basic commodity production are suffering. Brazil, once heralded as one of the powerhouse emerging economies alongside China, has tipped into recession, with investment in mining and offshore oil collapsing, and agricultural exports like soybeans falling.

Then there's the consumer imports to China. Ford reports that it expects car sales in China to drop this year for the first time in 17 years, and Volkswagen says its deliveries are down for the first time in a decade.

There was an old saying about the dominance of the American economy: When the U.S. sneezes, the rest of the world catches cold. These days, the economic contagion also float East to West.

WITHOUT THE train of China's economic growth pulling the world system forward, other structural weaknesses--many of them ominously familiar from the depths of the last crisis--are becoming more obvious.

To single out one of them among many, the days of the financial bubbles are back--and that means that the days of bubbles burst, with all the financial consequences that comes in their wake, aren't far behind.

The response of the U.S. government to the 2008 Wall Street meltdown wasn't primarily an economic stimulus to promote expanded growth, like China, but a bailout of the financial system.

This came in various forms. There was the direct rescue of banks and Wall Street firms when the federal government took responsibility for their toxic loans through the Troubled Asset Relief Program. The Federal Reserve cut interest rates for lending to banks to nearly zero. Plus, the government simply created more money, through a policy known as quantitative easing--with the aim of flooding the financial system with enough cash to lift it out of trouble.

Like China's government-stimulated infrastructure boom, quantitative easing did work on its own terms--according to one report, the U.S. monetary base, which adds the notes and coins in circulation to the reserves held by the central bank, has quintupled since 2008, from around $800 billion to more than $4 trillion today.

One of the consequences is that the overhang of debt that made the financial system more unstable and prone to a crash last time has gotten bigger, not smaller. A report released earlier this year revealed that global debt had grown by a mindboggling $57 trillion since 2007--a 40.1 percent increase in just seven years.

All of the major economies are offenders, according to the report. China is one, of course, with its massive stimulus plan, but so is the U.S., where the debts of non-financial corporations have grown steadily and now amount to almost a year's worth of total economic output.

If debts on this scale don't cause a future financial crisis by themselves, they will definitely exaggerate its impact. And they make it harder and harder for governments to respond with orthodox monetary policies employed when recession strikes.

The Wall Street rescue succeeded in its main objective: restoring the profitability of banks and the financial sector. Non-financial corporate profits followed suit, breaking new records even as unemployment stayed stubbornly high.

What the bailout failed dismally at was providing even basic assistance to anyone outside the small elite who managed or owned shares in U.S. financial and industrial corporations. There was little to no help for homeowners on the brink of foreclosure, for workers who lost a good-paying position and could find nothing better than a low-wage McJob, for anyone who needed the assistance of government poverty programs.

On the contrary, the vast sums of money injected into the U.S. economy, courtesy of U.S. taxpayers, have not gone, by and large, toward productive investments that might create new jobs or meet social priorities.

Instead, the money is sloshing around in the bank accounts of corporations and the rich, or the infamous Wall Street casino. When Corporate America isn't engaged in the latest round of merger mania, it is carrying out stock buybacks or rewarding shareholders with huge dividends. The banksters and hedge funds are even back to their old tricks of creating ultra-risky investment vehicles to foist on the financial markets, with who knows what kind of hell to pay if they go bad.

And there has been plenty of money to fuel a new bull stock market, which continued to hit new highs this year, despite the signs of weaknesses in the underlying real economy.

One calculation of the ratio of total stock prices to corporate earnings for the companies in the Standard & Poor's 500 stock index stands at 27.2 to 1, nearly two-thirds above the historic average of 16.6. If that sounds like statistical mumbo-jumbo, consider this: Since 1882, this particular statistic has only been as high as it is now three times: in 1929, on the eve of the Great Depression; in 2000, before the bursting of the dot-com bubble; and in--you guessed it--2007, right before Wall Street's meltdown.

The policies of the U.S. government--and, of course, the greed of Corporate America--have contributed directly to a more unstable world economy, prone to financial upheavals and threatened by the prospect of economic stagnation being dragged down into a new recession.

When that happens--and as long we live under capitalism, the next recession isn't an "if," but a "when"--the crisis will feel to many working people like an intensification of the rotten times they were already living through.

History teaches us that the ruling class can survive any crisis, no matter how severe, if they can get the mass of working people, by coercion and consent, to pay the price. But the wild gyrations of the stock market and the irrational hurtling toward a new crisis are a further indictment of the system of capitalism and its priority of profit before human need.

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