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NEWS & LETTERS,
August-September 2002
World capitalism’s unstable economic base
by Andrew Kliman During the past couple of years, and especially during
the last few months, stock prices throughout the world have taken their deepest
plunge since the economic crisis of the mid-1970s. Only a few months since the
latest recession (apparently) ended, the collapse of stock prices is a signal
that yet another downturn may be on the horizon. Other economic news suggests that a renewed downturn or
“double-dip” recession is not unlikely. The latest government statistics
indicate that there has been essentially no job creation in the country since
February. (In the 11 months prior to February, the number of jobs fell by nearly
160,000 per month.) Advance figures for the second quarter of the year
indicate that the growth of Gross Domestic Product (GDP) slowed to a meager
1.1%, that business investment declined for the seventh straight quarter, and
that the growth of consumer spending fell markedly. Several newly released
indicators of future economic activity, such as factory orders and surveys of
consumer confidence, are also signaling that the economy may weaken in the
months ahead. Another recession? The collapse of stock prices might prove to be a cause,
and not only a signal, of a double-dip recession. Investors in U.S. stocks have
lost about $7 trillion--an amount equal to 70% of annual GDP the last 28 months.
Many of them are working people who, as they redouble their efforts to provide
for their retirement, will now have to save more and spend less. In response to
a big drop in spending, economic growth would slow down markedly or even turn
negative. Even though stock prices rebounded from their recent
lows in late July, they remain very depressed. As of August 2, the Dow Jones
Industrial Index stood 29% below the peak it reached in early 2000. More
representative stock price indexes have fallen even more sharply. During the
past 28 months, the Standard and Poor’s 500 index has fallen by 43%, and the
NASDAQ index has fallen by a whopping 75%. Dramatic revelations that Enron, WorldCom, and other giant U.S. companies falsified profit reports, and the consequent bankruptcy, are among the factors contributing to the accelerating plunge in stock prices. But this is far from the whole story. Not only did the stockmarket collapse begin well before
such revelations, but it is an international, not national, phenomenon. Stock
prices have plummeted in every major European nation, as well as throughout
Latin America. In most cases, moreover, the decline is roughly equal in
magnitude to the decline in the U.S. On average, stock prices throughout the
world have fallen by 45% from their peak in 2000, and by 22% from their highs
earlier this year. Crisis in profitability We are witnessing the gradual return of worldwide stock
prices to where they stood just before a speculative mania, fueled by a
fantastic overestimation of the profits to be gotten from computer technology,
sent them skyrocketing. The NASDAQ index, which shot up fourfold, has in the
past couple of weeks descended to where it stood at the end of 1996, when
Federal Reserve Chairman Greenspan warned about “irrational exuberance”
overtaking the stockmarkets. The S&P 500 index, and especially the Dow Jones,
still remain significantly above their pre-mania levels. This doesn’t mean
that stocks will descend to those levels and then stabilize. It is quite
possible that stock prices will rise sharply in the near future. It’s also
possible they will continue to plummet. The recent financial scandals have helped to depress
stock prices because they have made investors worry that companies in which they
are investing might be less profitable in the future than they had expected. But
investors have many other reasons besides cooked books to worry about the future
trajectory of profits. Company after company has been reporting that its
profits are lower than had been expected. Some analysts forecasted that this
would be a “profitless recovery”--as well as a “jobless” one--and they
are being proven correct thus far. The latest figures show that corporate
profits have not rebounded from the depths to which they sunk during the
recession. They remain 20% below the peak levels they reached in late 1999 and
early 2000. The U.S. has displayed its military dominance in recent months. But economic and financial events continue to suggest that its military might rests on an unstable economic base. |
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