History of the world economy
Date: Wed, 7 Jan 1998 15:43:37 +0000
Sender: Forum on Labor in the Global Economy <LABOR-L@YORKU.CA>
From: Jordi Martorell <socappeal@EASYNET.CO.UK>
Subject: Updated Analysis of Economic situation
What's New at Socialist Appeal's "In Defence of Marxism" web site
January 6th,1998
http://easyweb.easynet.co.uk/~socappeal/IDOM.html
A new stage in the capitalist crisis
(http://easyweb.easynet.co.uk/~socappeal/capitalistcrisis.html)
A new stage in the capitalist crisis
By Alan Woods
6 January 1998
This long article by Alan Woods reviews the events since the stock
exchange crash of October 1997, and how the crisis has spread to the
once powerfull economies of South Korea and Japan despite the
reassuring comments of most bourgeois economist in the aftermath of
the crash. An update to the ideas developed in Ted Grant's article
The First Tremors (http://easyweb.easynet.co.uk/~socappeal/tremors.html)
Here follows an extract of the beginning of the article (the full
article can be found at the web site or can be sent via email on
request):
Fears of recession grow
"Typhoon in east Asia; North America and Europe feel barely a
breeze. That, in a nutshell, is the official view of the financial
crisis that has laid waste what was once the most dynamic part of the
world economy. It is a comforting view. It is not implausible. But it
is not the only possibility." (Financial Times, 2/1/98.)
Shortly after the October 97 stock exchange crash, Alan Greenspan,
head of the US Federal Reserve, delivered a speech at a charity
dinner in which he assured the illustrious guests that everything was
fine and the US economic performance "impressive". The optimistic
declaration of Greenspan, Clinton and others after the crash were
entirely predictable. These people imagine that the cause of the
crisis is subjective, the mood of investors ("confidence"). What
Greenspan's fellow guests did not know is that, even while he was
speaking, an aide was surreptitiously passing him updates on the
state of the market, so he could judge the effect of his every word!
This little detail in itself is sufficient to show the extreme
nervousness of the American bourgeoisie. True, the stock exchange
later rallied, mainly on the basis of a large number of small
investors who were foolishly persuaded to buy shares in a falling
market, after the big monopolies had already sold their shares the
day before. This rally, however, is of a temporary and unstable
character. Further big falls are inevitable.
The fall on Wall Street, despite all the attempts to play it down,
was a serious one. Historically, the Dow Jones changes on a daily
basis between 1-2 per cent. On Monday 27th October 1997, there was a
fall of 7 per cent, the 12th worst fall on record, though less than
the spectacular crash of 1987. The rise on Tuesday was 4.7 per cent,
quite a steep rise, which did not however recover the ground lost.
Despite this fact, US shares are extremely overvalued. This, in
itself, is enough to ensure a further and more severe fall in the
future, and probably not too far away.
Impressionistic as ever, the so-called "new paradigm" economists
promptly decided that the crash was an "over-reaction". There are
none so blind as they that will not see! They argued that since only
4 per cent of US exports go to Indonesia, Thailand, Malaysia and the
Philippines, the damage would be negligible. The only reason for the
crash was that the stock market was over-valued. "It doesn't take
much to derail a market that has gone to the moon" said Stephen
Roach, chief global economist of Morgan Stanley Dean Witter. (Time
magazine, 10/11/97.)
Wall Street decided that the crash was "a market event" that is,
something exclusively caused by the over-valuation of shares and
nothing to do with the "real economy". Now it is quite true that the
mania for buying and selling shares has a dynamic of its own,
separate and apart from the real economy. However it is not true that
the two things are entirely separate and that one cannot and does not
affect the other. Worries about the state of the real economy, under
certain conditions, can translate themselves into panic buying or
selling on the stock market. Thus, in a perverse logic, when
unemployment falls in the USA, shares also fall. This fact is, in
itself, a striking confirmation of the fact that the interests of the
workers and capitalists are completely antagonistic. News of more
jobs is manifestly good for the workers and unemployed, but is taken
as bad news by the owners of shares, concerned that less unemployment
will lead to upward pressure on wages and (allegedly) prices. The
converse is also true. While not every stock market crisis leads to a
slump, under certain circumstances, the one can lead (with the delay
of a few months) to the other. We will elaborate on this later.
After the initial shock, the capitalists recovered their nerves. On
all sides we read reassuring statements. President Clinton reminds us
that "the fundamentals of the US economy are sound." "There is no
reason to think the US stock market is going to be a bear market"
says economist Allen Sinai at Primark Decision Economics, "The US
economy is not going to be knocked down by a crisis in Asia." And
last but not least Alan Greenspan, the same man who warned twelve
months ago against the "irrational exuberance" of the stock market,
hastened to soothe the jangling nerves on Wall Street: "Our economy
has enjoyed a lengthy period of good economic growth, linked, not
co-incidentally, to damped inflation. The Federal Reserve is
dedicated to contributing as best it can to prolonging this
performance."
It is interesting to compare this comforting observations with the
speeches made by all the bourgeois politicians and economists before,
during and even after the Great Wall Street Crash of 1929:
"Representatives of thirty-five of the largest wire houses assembled
at the offices of Hornblower and Weeks and told the press on
departing that the market was 'fundamentally sound' and 'technically
in better condition than it has been in months'. It was the unanimous
view of those present that the worst had passed. The host firm
dispatched a market letter which stated that 'commencing with today's
trading the market should start laying the foundation for the
constructive advance which we believe will characterise 1930'.
Charles E. Mitchell announced that the trouble was 'purely technical'
and that 'fundamentals remained unimpaired'." (J.K. Galbraith, The
Great Crash 1929, p. 126.)
And again:
"Eugene M. Stevens, the President of the Continental Illinois Bank,
said, 'There is nothing in the business situation to justify any
nervousness.' Walter Teagle said there had been no 'fundamental
change' in the oil business to justify concern; Charles M. Schwab
said that the steel business had been making 'fundamental progress'
toward stability and added that this 'fundamental sound condition'
was responsible for the prosperity of the industry; Samuel Vauclain,
Chairman of the Baldwin Locomotive Works, declared that 'fundamentals
are sound'; President Hoover said that 'the fundamental business of
the country, that is production and distribution of commodities, is
on a sound and prosperous basis'." (Ibid., pp. 127-8.)
Galbraith's description of the mood on Wall Street after the initial
crash might have been written yesterday:
"Almost everyone believed that the heavenly knuckle-rapping was over
and that speculation could be now resumed in earnest. The papers were
full of the prospects for next week's market. Stocks, it was agreed,
were again cheap and accordingly there would be a heavy rush to buy.
Numerous stories from the brokerage houses, some of them possibly
inspired, told of a fabulous volume of buying orders which was piling
up in anticipation of the opening of the market. In a concerted
advertising campaign in Monday's papers, stock market firms urged the
wisdom of picking up these bargains promptly. 'We believe', said one
house, 'that the investor who purchases securities at this time with
the discrimination that is always a condition of prudent investing,
may do so with utmost confidence.' On Monday the real disaster
began." (Ibid., pp. 128-9.)
The times may have changed, but the system and the mentality of its
representatives remain exactly the same! And the effectiveness of
this kind of speech-therapy in preventing a slump is about the same
of the mumbo-jumbo of the medicine-man in curing cancer. Greenspan,
evidently forgetting his earlier warnings, now claimed that the fall
in share prices was "a salutary event". This overlooks the fact that
one year ago when he first issued his warning about "irrational
exuberance", the Dow Jones index had reached the record 5,000 mark.
Before the present crash it had passed 8,000. But even now it stands
at well over 7,000. This still defies the economic laws of gravity.
Further buying will push it still higher, preparing the way for
further, even more catastrophic falls. Greenspan is evidently aware
of this, but, under the given circumstances, clearly believes that
discretion is the better part of valour.
If you would like to be informed by email of new additions to the In
Defence of Marxism web site send us an email to
new@socappeal.easynet.co.uk with "subscribe What's new" as the
message body. If you want to be removed from this list send a message
to the same address with "unsuscribe" as the body of the message.
Yours in solidarity,
Jordi Martorell
Socialist Appeal's "In Defence of Marxism" web site
socappeal@easynet.co.uk
http://easyweb.easynet.co.uk/~socappeal/IDOM.html
PO Box 2626
London N1 7SQ
Britain
|