15 - 21 February 2001
Issue No.521
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Al-Ahram Weekly On-line 15 - 21 February 2001 Issue No.521 |
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Capital collapse
What goes up must come down, Newton's law of gravity and the cyclical structure of the market economy tell us. During the Clinton era in the United States, the upswing of the "new economy" reached colossal heights, with only a few interspersed, insignificant tumbles here and there, or so they said.
Neo-liberal economists were quick to hail the merits of the "new economic paradigm", based on revolutionary developments in the much-touted information technology (IT) sector, that would put an end to the inevitable boom and bust cycles of capitalist growth. The world will no longer suffer from recession-slump-depression blues, predicted Martin Wolf, distinguished columnist at The Financial Times, because the economy is on the brink of an innovation-driven "long boom that will transform markets forever."
Nevertheless, there were clouds on the horizon. In the US the otherwise idyllic boom was marred by the spectacular 1987 Wall Street crash, and the less dramatic but still resounding 1997 and 1998 crashes. Glossing over 1987 as an erratic "market fluke," Wall Street analysts resorted to evoking the magic of the "new market" mechanism that would self-correct any and all imbalances, if only it were left to operate according to its own impeccable volition.
In 1987, however, the market genie did not come out of the bottle as predicted. Instead, the US Federal Reserve Bank saved the day by pumping billions of dollars into brokerage firms so that they could buy up the suddenly devalued stocks and forcibly turn the market around. A far cry from the neo-liberal credo that professes economic laissez-faire at any cost and come what may, the Federal Reserve occasionally adopts the most rigorous interventionist strategies -- worthy of the much-maligned Soviet-era socialist economies.
That said, the US boom managed to outlive even the most starry-eyed neo-liberal expectations, stretching over a decade of charmed IT-driven growth, with only the occasional disruption to shake people out of their stupor. Since the mid-1990s US growth figures hovered around the 2.5 per cent mark, unemployment levels sank to a historic low of 4 per cent and inflation was kept in check. Meanwhile, productivity growth rose to vertiginous heights: in mid-2000 North American workers, outside agriculture, increased their production by 6 per cent over their 1999 output. Hence all was for the best in the best of all worlds.
But in our heart of hearts we all know that the IT bubble had to burst, and sooner rather than later. Why? The problem with the new economic paradigm -- like the old, for that matter (remember 1929?) -- is its vicious cyclical momentum: everyone is chasing everyone else. "People are buying because shares are going up -- and shares are going up because people are buying them. That is the classical definition of a bubble," explains economist Mick Brooks. Likewise, the bubble bursts when shares are going down and people are selling, and people sell because the shares are going down. When dealing in fictitious paper capital, the herd instinct prevails and works in mysterious ways -- or so it seems.
Phenomenally speculative and outrageously overvalued, the dot.com stock prices skyrocketed from 1995 onwards -- until the mirage finally evaporated into thin air, for all but the IT titans, in the wake of last year's resonant NASDAQ crash on Wall Street. As a result, three quarters of dot.com businesses in the US are currently trading below their issue price.
What heights did the speculative bubble reach? The fictitious value of IT stock capital grew at a mind-boggling rate. Take Bill Gates's Microsoft, which sells the standard Windows software application to millions of personal computer users. Prior to the crash, in the midst of IT euphoria, Microsoft was said to be worth more than Canada, a country of 10 million sq kms with a population of 31 million people and a gross domestic product of $760.9 billion. On a more modest scale, take on-line book seller Amazon.com, whose stock was valued higher than that of Texaco, the US-based transnational oil giant with billions of dollars in annual profits.
But in the real world, over and beyond the magic of virtual market valuation, stock prices have to reflect tangible earnings sooner or later. Thus, Amazon.com and a host of other lesser dot.coms in the IT constellation eventually fell from grace when the price/earnings ratios on paper did not quite add up. Amazon.com in particular has yet to tally its negligible profit sheets against the oil heavyweight.
The problem is that the effects of any stock market crash spill into the real economy, no matter how big and developed the latter may be. Despite claims to the contrary, the world's sole superpower falls prey to it like any other country. "This is not self-contained stupidity," comments Brooks to this effect. A bubble in one sector of the economy swells assets and encourages spending sprees. People and companies borrow against their paper assets, live on borrowed time and money, and keep the banks in business. During boom euphoria, US household borrowing went up 27 per cent, while personal savings went down the drain. But when the paper wealth vanished, the debt remained, triggering a cycle of bankruptcies, production slow-downs and soaring unemployment levels.
This is already happening in the US. The manufacturing sector is severely contracting, paving the way to a recession. Steel production is especially affected: 11 plants have filed for bankruptcy. "Manufacturing activity plunged again in January to levels that usually are seen only when the entire economy is in recession," warned The Wall Street Journal. Accordingly, jobs are made redundant right, left and centre. Between October and December over half a million American workers were fired. And the rate of attrition is on the rise. "Reduced headcounts," management's newspeak for sacking workers, are threatening 26,000 jobs at Daimler-Chrysler; Lucent Technologies, the telecommunications manufacturer, announced that they would slash 10,000 jobs; and Worldcom, the telecoms group, reported that it plans to "trim" its workforce of 77,000 by at least 10 per cent. And more heads will roll in the near future, by the thousands, all casualties of the allegedly invincible new economic paradigm that was to transform the market economy forever.
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