By Kumar David –
Do not imagine that the topic discussed here matters little to little Lanka. If the world economy goes into a tailspin we won’t find investors, markets for our products will dry up and Middle East employment will decline. This time with the world much more integrated it will be worse than the 1929-1944 depression and capitalist crisis induced WW2. So read on, duly warned
Is last week’s downturn a forerunner of a big crash to come later in 2016? Analysts are divided and at a guess pessimists outnumber fence sitters and optimists 2:1. Many expected an immediate bloodbath following the January market rout and the collapse of oil prices to below $30 a barrel. I doubted this since fundamentals need time to work themselves through the US and global systems and correctly opted for a delayed-crash theory. Yes, the price bubble in equities and property is spurred by ceaseless money printing and near-zero real interest rates in the US, Euro and Japan, yes spurts in US GDP and job growth may be dubious and jinks in the Chinese economy were unexpected. Yes oft quoted “top 1% owns more than lower 90%” jibes are symptoms of systemic disorder in global capitalism. However, systemic failure like fine wine needs time to mature.
British Marxist Michael Roberts shows that invest movement lags profit, up and down, by 12 to 18 months and adds: “Currently global corporate profits (weighted average of US, UK, Germany, Japan and China) have turned negative and US corporate profits are falling. That suggests business investment will start to drop too within a year or so. If that happens the US will likely head into recession”.
Since the Great Financial Crisis eight years ago I engaged in lively debates with Professor Harsha Sirisena (HRS), Professor Sivaguru Ganesan and Asela Dahana. HRS graduated from the Engineering Faculty (there was only the classic one then) a year after I did so I have known him for 50 years. Though friends, we are ideologically apart. I am a Marxist, he thinks socialists are balmy; he concedes Marx’s stature as a thinker but holds that on socialism he got it wrong. I had access to EFac records till I quit and HRS had the highest scores except for Alagiah Thuriarajah; so he is an exceptionally bright fellow.
Sivaguru was my classmate in the EFac and another bright fellow (I think he had the best all-island A-level maths score when we entered university). As students we were in the same LSSP ‘local’ but during Mrs Bandaranaike’s coalition he joined Peter Keuneman’s ministry in 1970 and was closer to the CP (at this time I was in the group laying the foundations of Vama Samasamajaya). Alaska my step-son is much younger and has the distinction of being the only non-engineer among us. He transforms Lanka’s best cinnamon into elegant products for US markets. The family joke is that he has still to conjure up his first million dollars which when in short-pants he promised to produce by the age of 25.
Our debates on the state of the global and American economy have been brought to a head by this sudden turn of events. Since the fall of 2007 I have been rubbing it in: “Marx held that capitalism is naturally prone to periodic catastrophe, it happened in 1929-1944 and is now recurring”. HRS would respond “Bollocks, there’s nothing wrong with capitalism per se; clowns and jokers have got their fangs into the Central Banks and Finance Ministries and screwing up a rectifiable system”. His examples of perfidy are Quantitative Easing (QE), reluctance to impose austerity and slash deficits, allowing gigantic debts to mount etc – economic indiscipline. But these are the valid corrective measures capitalist policy makers should take, Sivaguru and I wound retort. And so it went, back and forth.
Sivaguru, interestingly from his own Marxist perspectives, reaches novel conclusions. To put it as simply as possible, he does not think the US economy is in heap-big trouble or heading for a major crisis. He says: “Look at the strength of American technology, productive machine and financial sophistication; look at America’s creativity and innovation. If old Marx was around, from his most materialistic and dialectical of premises, he would hold that this economy is not on the verge of crumbling”. Alaska’s arguments belong to another genre and generation: “This country is overregulated; you can’t pass wind without certification from bureaucratised state and city authorities, worst is California”. The US is a “bloody socialist country” he swears. He has a point in that apart from Scandinavia, California has the most aggressive employee protection laws and you need a permit for just about anything though not quite to pass wind. Inefficiency is not grounds for firing; wages and benefits are better than in Europe, and in litigious California you can sue just about anyone for just about anything. He is bitching about obstacles to business, not ideology.
This piece relies on these exchanges and on international analyses we brought to each others notice. Except for tangentially relevant pieces by Sumanasisi Liyanege and Hema Senanayake I am not aware of anything by Sri Lankan economists on this eight year crisis in the world economy.
Will the market crash?
Will the market crash, search me; I am not the patron saint of American capitalism! A cogent prediction method comes from Gregory Harmon of Dragonfly Capital Management. His case is built of the 200-day moving average of the S&P 500. The chart shows the daily S&P closing price as a green mass while the black and red jagged line is something unusual. It is the percentage of stocks that are above their own 200-day average. If this jagged graph is high it means that many stocks are currently above their average price of the last 200 days while if the graph is low it means that only a few stocks are now doing as well as they have been doing in the last 220 days.
If many stocks are doing badly now, compared to how they were performing in the last 200 days, Harmon says it spells trouble ahead. In February-April 2007, then in September 2008-April 2009 (the big one), in July to October 2010 and in fall 2015 the black-and-red jagged line went below 25%, and each time this was related to a market downturn (though the first and fourth were not big). The black-and-red line fell to exactly 25% 20 days ago and must fallen lower since then since markets declined last week. If the black-and-red graph persists below the 25% axis Harmon says from empirical experience we should expect a big stock-market downturn.
Frequently observed connections cannot be scorned because the correlation is empirical not theoretical; they raise legitimate red-flags. J.L. Yastine collects a march-past of red-flags in ‘sovereigninvestor.com’ website, 7 January. Here are three examples he quotes. Billionaire Carl Icahn declared in a broadcast: “The public is walking into a trap again as they did in 2007”. Prophetic economist Andrew Smithers warns “U.S. stocks are now about 80% overvalued; the only time in history stocks were this risky was 1929 and 1999”. Congressmen Ron Paul chokes “The day of reckoning it’s not just going to be a correction; it will be stock market chaos.”
The doomsayers are contradicted by US Treasury Secretary Jack Lew who is confident US economic fundamentals are strong; Goldman Sacks which alleges that markets were overreacting to bad news from China and the flooring of oil prices; and the Wall Street Journal which says market panic is incongruent with economic reality. The ECB and BoJ hurriedly reversed course at the end of last week and started pumping money into markets to prevent a rout in asset prices and it is unlikely the Fed will implement any more interest rate increases for a while. These measures will deflect any immediate stock or property market collapse while storing up even bigger problems for later.
Drowning in debt
That the world is drowning in debt is not contested by anybody. It is the same everywhere – the US, EU, Japan, South America and most developing countries – only a small number of exceptions such as he oil-rich Middle East, China, and HRS claims New Zealand, are not drowning. Not only government debt but household and corporate debt is alarming. For example US federal, state and municipal debts total $22 trillion, but household debt including mortgages, and corporate debts are each also of the same order. Total indebtedness of all sectors in the US is in excess of a staggering $60 trillion compared to a 2015 GDP of $18 trillion – all at current prices.
You might ask who the creditors on the plus side are. Part is circular – A owes B, B owes C and C owes A, so it cancels. A category of big lenders are pension, savings and social security funds in rich countries and another group are the mega rich investors one hears a lot about these days. [The top 5% in the US hold 62% of all wealth and the top 20% hold 93%].
Source: Federal Reserve -[Federal Reserve chart taken via New York Times for the Fed “Balance Sheet”, that is money it has created for the Treasury and banks. Shaded regions are QE1, QE2 and QE3. Markers below horizontal axis run from 2006 to 2014; spacers on vertical axis run from $1 trillion to $ 4 trillion. The last dot near end-2014 is $4.48 trillion].
The second graph shows the ‘balance sheet’ of the US Federal Reserve or how much money it has created (polite term for electronically printed). The $4.48 trillion in late 2014 must have risen to over $5 trillion by now. The picture is similar for the ECB, BoJ and the Bank of England, all of whose balance sheets now stand at 300 to 400% of what they were in 2007. Most of this debt should be written off as a gigantic wealth tax on the mega-rich; there is no other way to correct obscene global inequality. After that policies that prevent such enormous inequality must be made standing provisions on global statute books.
Why does crisis keep recurring from 2007?
A question to which I have heard only naïve or trite responses from economists in the media including the Business Programmes of all the big TV broadcasters is “Why is the crisis persisting; why does it keep recurring in frightening proportions in some big sector or major country?” The pundits simply struggle to answer. Productivity is stagnant, business confidence is waning and living standards in America are unlikely to rise in the coming decades. Frankly I do not see and cannot imagine an answer apart from an analysis that explains how it is built into the systems natural dynamics, the capitalist economic metabolism. I cannot elaborate since I promised not to push Marxism in this piece and will make only one summary remark. Capitalism as a system works in a certain way, accumulating, reinvesting and seeking profit; its mode of functioning is analogous to a natural DNA. A consequence of this intrinsic nature is boom and periodic crisis, and on a longer time scale, catastrophic breakdown.
I simply have not heard or read any other even remotely convincing explanation – HRS’s “the central bankers and finance ministers are pluperfect idiots” thesis included – to the ‘Why does the crisis keep on breaking out in some major sector or the other; why has it persisted since 2008?’ lament.