Socialist Action /October 2000
Wall St. Dreams of Permanent Economic
Expansion
By NAT WEINSTEIN
Federal Reserve Chairman Alan Greenspan has been
raising interest rates to cool off the overheating U.S. economy. Knowing
that if it continues its heated expansion it must sooner or later contract,
he hopes to gently nudge stocks down to a "soft landing."
However, the economy's stubborn resistance to a
gradual descent has led a significant number of prominent Wall Street "bulls,"
as the perennially optimistic stock market consultants and investors are
known, to predict virtually unending expansion of the economy and a general
rise in average corporate profits and stock prices. Those who venture a
number say for as much as 10 more years.
The case for such an unprecedented, prolonged continuation
of the economic expansion appeared in the Business section of The New York
Times (Sept. 9, 2000). Alex Berenson, the author, presents a concise summary
of the argument:
Higher productivity enables companies to increase
sales without adding workers. Even if the demand for labor rises [and therefore
wages would normally tend to rise], corporate profits can continue to climb
as long as worker productivity is growing faster than overall wages. And,
over time, higher earnings spell higher stock prices, since a stock is in
essence nothing more than a claim on a share of a company's future profits....
Now a growing number of economists are accepting
the once-heretical view that the United States may have permanently increased
the rate at which its economy can grow without inflation, thanks to advances
in computing and information technology.
If such notions were being articulated only by
"a growing number" of Wall Street bulls, however, it wouldn't
mean too much. But, the chairman of the Federal Reserve Bank has also been
promoting this "once-heretical view" of uninterrupted economic
expansion.
Greenspan, moreover, was among the first to have
come up with the half-truth that the "new economy"-that is, the
high-technology sector based on the electronic processing of information-has
given a huge impetus to the rate of worker productivity, especially in the
U.S. sector of the global economy.
To cut through the confusion inherent in this oversimplification
of a very complex process, some basic facts need to be established:
In the first place, there is no question but that
worker productivity has been experiencing an exceptionally rapid rise. But
that is in no way anything new. After all, average worker productivity has
tended to rise throughout the history of capitalism-including phases of
very rapid increases in the rate of labor productivity due to technological
breakthroughs based on steam, electric power, the internal combustion engine,
autos, etc.
But those great leaps in productivity did not eliminate
the boom-bust cycles of capitalist production then; nor is there the slightest
bit of evidence that a bust will not follow the latest boom.
But why do such influential figures as the chairman
of the U.S. Federal Reserve Bank find it necessary to engage in such gross
oversimplification of the laws of capitalist economy? After all, if capitalism's
prospects were indeed as rosy as is now being portrayed why go to such lengths
to explain it? Why don't they just sit back and enjoy the happy new reality
of permanent capitalist prosperity?
They don't, because behind all the ballyhoo lurks
a very real concern that the global expansion is running out of steam and
that the boom can turn to bust with surprising speed. Therefore, to put
it very simply, Greenspan's pronouncements are designed to reassure fellow
capitalists that good times will not end and that their investments are
safe.
The factor of psychology, to be sure, plays a role
in the matter of how long and how far an economic expansion can go, but
it is only one of many variables involved in the process.
Nonetheless, as G. K. Chesterton-the English writer
who called life "a trap for logicians" because it is almost, but
not quite, reasonable-wrote: "It looks just a little more mathematical
and regular than it is. Its exactitude is obvious, but its inexactitude
is hidden; its wildness lies in wait."*
Consequently, those in the other major industrial
countries who, like Federal Reserve Chairman Greenspan, are assigned by
their peers to regulate the economy and foresee problems soon enough to
counter them never know when what appears to be a temporary and relatively
minor glitch in the economy can become a major threat.
Thus, it has now become quite apparent that the
euro's fall in value from US$1.17, when it was introduced as the common
currency of the European Union in January 1999, to 84.7 cents as of Sept.
20, 2000, has now become a matter of great concern.
And to make matters worse, on the same day, the
price of a barrel of crude oil hit a 10-year high of $37.20.
Sagging euro and rising oil prices
In the first place, the real movers and shakers
of world capitalism are gravely concerned, as well they should be, over
the adverse effect the falling euro and the rising price of oil may have
on the booming U.S. and the more worrisome global economy.
We should keep in mind, too, that the experts have
credited the rapidly expanding U.S. economy as being the single engine of
growth keeping the entire global capitalist system afloat. Thus, the fate
of the world economy is more than ever before tied to that of the American
economy.
That brings to mind a historic parallel: The American
economy in the 1920s was (like today) expanding at a furious pace. According
to the media hype at the time (like today), "everyone" was getting
rich from stock market investments. In what became known as the "roaring
twenties" the U.S. economy was also sprouting legions of new millionaires.
In that regard, the main difference between then and now is that the U.S.
economy now is sprouting billionaires as well as a legion of new millionaires.
But while the rich were getting richer all over
America in the "roaring twenties," much of Europe and Asia was
stagnating economically and being wracked by a series of pre-revolutionary
and revolutionary crises in one country after another. How the "roaring
twenties" ended and the Great Depression began, however, is also an
old and very worrisome story.
Now the American economy has enjoyed a roaring
nineties, with the expectation of more to come. But the United States did
not exist in a vacuum 70 years ago-nor does it now. There was a global economy
then, too, and when the U.S. economy collapsed, the entire world was sucked
down with it into the severest economic, social, and political crisis in
the history of capitalism.
Now that the United States is locked into the globalized
capitalist economy far more tightly today than it was then, the falling
value of the world's second most important currency, the euro, is only symptomatic
of the deteriorating economic foundations of world capitalism.
Starting around Sept. 20, which appears to have
registered a new phase, with the hidden erosion of the world economy beginning,
once more, to break out into the open, the news media seemed to sit up and
take notice of the serious threat to global economic stability posed by
the sagging European common currency and the soaring price of oil.
The New York Times, in a story datelined Sept.
20, reported that "The slumping euro and fuel price inflation quickly
took over as the dominant theme today in advance of a meeting of some of
the world's top finance officials...." The story by Joseph Kahn went
on to report their reaction:
French leaders, alarmed at the soaring cost of
oil and gasoline that has aroused protests across Europe, demanded a unified
stand for lower fuel prices when they meet here this weekend among the Group
of 7 leading industrial nations. The top official of the International Monetary
Fund also warned of the risks of high oil prices and, in unusually blunt
remarks, urged the Group of 7 countries to intervene in the currency markets
to strengthen the euro....
The combination of a weak euro and expensive oil
is considered especially perilous in Europe just as new signs are emerging
that the region's vibrant economy may be slowing. Today, for instance, Italy
reported an unexpected slowdown in its quarterly growth rate, and a widely
watched indicator of business confidence in Germany fell for the third consecutive
month.
Moreover, on Sept. 28, Denmark, which rejected
the treaty establishing the single currency several years ago, voted in
a referendum against joining the euro.
This puts extraordinary pressure on the Group of
7 countries, the richest and most powerful in the world. Like it or not,
they will be compelled to try to reverse the slide of the euro, which had,
according to polls reported in The Times on Sept. 21, shifted Danish voters
from a slight majority for adopting the euro to a small majority against.
In regard to the speculations over whether the
Group of 7 nations will or will not try to prop up the euro, the same issue
of the Times reported their thinking at that time:
Several senior European officials have signaled
that they favor intervention, but Secretary of the Treasury Lawrence H.
Summers has so far shown no interest in joining them. Without American participation,
any intervention will carry a high risk of failure.
Any intervention could fail, embarrassing the Clinton
administration. Or it could work too well, pushing the euro up sharply at
the expense of the dollar and making the American trade deficit-now projected
at $354 billion this year-unsustainable, weakening the economy and hurting
Vice President Al Gore's campaign.
Then on Sept. 22, the London-based Financial Times
reported that the prevailing opinion among those in charge of the world
economy was that rescuing the euro would be something like bailing out the
Titanic with buckets. The reporters wrote:
The real reason for the euro's decline, analysts
say, has been the inexorable outflow of long-term capital from the euro-zone.
Driven by the promise of superior returns, European companies and equity
investors have been drawn to the U.S....
While speculative attacks can sometimes be fought
off through central bank intervention, capital flows are a more difficult
tide to turn.
However, all major news media and, of course, the
currency speculators, were taken by complete surprise when the Financial
Times of Sept. 23/24 reported that "yesterday's coordinated central
bank intervention to support the euro is recognition that the currency's
weakness has become a global problem."
The general assessment by the media was that had
the intervention to support the euro not taken the speculators by surprise,
what is variously estimated as between 2 and 10 billion dollars worth of
euros purchased by the central banks of the European Union, England, Japan,
and the United States-a relatively piddling sum for such an operation-would
have had no effect.
Even so, no one knows whether, or for how long,
this and other bailouts to come will stem the fall in the euro.
Worse than an oversimplification
Now that we have placed it in the context of the
general world situation, we can return to the matter we discussed at the
beginning of this article-Chairman Greenspan's efforts to bring the overheated
U.S. economy down to a soft landing by raising interest rates.
Should the United States, along with the other
Group of 7 industrial nations, continue the attempt to halt the collapsing
European currency by buying euros with dollars, that would have an effect
exactly opposite to Greenspan's raising interest rates to keep the flood
of capital flowing into the U.S. economy.
In fact, the role of the dollar as the world's
preferred storehouse of value could very easily be undercut if the United
States were to spend too many billions of dollars to rescue the euro.
As was noted above, any intervention could fail,
or it could work too well. If it fails, the U.S. loss of billions could
serve to erode confidence in the dollar. Or if the euro rises sharply, that,
too, is likely to be at the expense of the equilibrium of the dollar.
Listen to what the Sept. 22 Financial Times had
to say about the meaning of a collapse of confidence in the dollar in a
report on the world economy.
In discussing their admitted uncertainty concerning
the matter of the real extent of gains in productivity, the writers note
that "the story is eerily reminiscent of the explanations why Japanese
economic supremacy would be everlasting that were popular in the 1980s but
are little heard today. If the U.S. does come to grief, meaning a stock
market crash, a plummeting dollar, and a recession triggered by a collapse
of consumer confidence, then it will be difficult for the rest of the world
to avoid following suit. As President Clinton has warned, oil could be the
trigger."
And, we should keep in mind, that contrary to the
assurances by the likes of Alan Greenspan that "the new economy"
and the remarkably happy growth of productivity faster than overall wages
has tamed inflation, inflation has really been proceeding apace. It has
merely been hidden in great part by the "overvalued" dollar-a
less disturbing euphemism for a dollar that has been steadily losing absolute
value.
That is something that could not happen for long
when the world monetary system was based on gold.* But now that the values
of the world's currencies are only measured against each other, they can
all float down more or less together, concealing their lost values caused
by hidden inflation.
However, just as the collapse of the weaker currencies
of countries in Southeast Asia threatened to sweep around the globe, roiling
the world monetary system, when the currency speculators sense a weakness
in the dollar or any other of the world's major currencies, the entire house
of cards can come crashing down and there will be no collection of currencies
capable of a rescue.
As we can see, the argument by Wall Street's bulls-given
credence by Federal Reserve chief Alan Greenspan-that "corporate profits
can continue to climb as long as worker productivity is growing faster than
overall wages" is-to say the very least-far more than a gross oversimplification.
It's just wrong.
*The reference to the regulatory function
of gold is not meant to be an advocacy of a return to the gold standard.
It is merely intended to be an explanation of how the Keynesian system has
permitted a qualitative expansion of credit to an extent impossible when
gold exercised its dictatorship over the world capitalist economy.
Socialist Action /October 2000 |