Al-Ahram Weekly | International

		8 - 14 August 2002 Issue No. 598 International	Current issue Previous issue Site map
Published in Cairo by AL-AHRAM established in 1875		Recommend this page

Market melt-down
The world's largest economy is deeply mired in recession. Faiza Rady warns of depression ahead

The bad news is that Wall Street and global markets are down in the dumps again. The good news is deeply buried under the debris. While a faint glimmer of hope filtered through last week in the wake of an unexpected five per cent rise of the Dow Jones, the Street's leading stock index, the market plunged again towards the week's end. On Monday, the Dow closed at a disastrous 8,044. The free fall remains unabated as market turmoil brings more of the same.
For the establishment bigwigs, this adversity is compounded by the continued unraveling of corporate scandals. Bravely trying to weather the storm, they continued lauding the proverbial strength of the United States' economy. "I believe that our economy is strong, that we have many fundamentally sound companies, that we are undertaking significant and far-reaching reform, and that the stock prices in the market will eventually reflect all the good things that are happening," said Harvey Pitt, head of the US Securities and Exchange Commission (SEC).
Pitt's resounding vote of market confidence echoed US President George W Bush's earlier statements on the subject. In an effort to control the damage, Bush has worked hard to project the required dose of market optimism. Addressing students at the University of Alabama on 15 July, Bush used the virile "good ole boy" approach to woo his youthful audience and appease the market along the way. The economy is currently "experiencing a hangover", explained the US president. But not to worry, "our economy is fundamentally strong," he said.
Despite its careful orchestration, the president's speech did not quite cut the mustard. Bush was only reiterating what he had said a week earlier, which had caused the Dow Jones's to slide more than 700 points. Reported sales figures for July signal that individual investors' confidence has effectively reached rock bottom. As a result of plummeting equity values, individual investors withdrew $47 billion from mutual funds. This figure tops by 50 per cent the post-11 September withdrawals, when investors withdrew $30 billion.
Notwithstanding the politicians' professed optimism, the stocks' downward trend has become a relatively consistent feature on the Street. It is unfortunate for the politicians and the CEOs that figures are self-referential. They leave no credible space for ideologically-based ifs and buts, even when graced with macho muscle flexing about the economy.
While the Dow's free fall is an accurate indicator of the slump, the US Dow Jones Total Market Index (TMI) provides a more comprehensive indicator.
Unlike the Dow, which only measures the stock performance of leading US corporations, the TMI assesses the overall picture. According to the Dow Jones Web site, the TMI index includes 95 per cent of the investable market, tracking a total of 1,650 stocks.
Over the last 12 months the TMI has slumped by 24 per cent; as for the Dow, it is down 17 per cent. The TMI therefore shows a much bleaker picture than its more sedate counterpart.
Does the grimmer TMI index signal the way to the Dow's future? It is hard to tell: the capitalist paper market is subject to seemingly erratic fluctuations. Nevertheless, if financial history is any indicator of what lies ahead, it tells us that a prolonged market slump will lead first to recession and eventually to depression. The US and global markets have been mired in recession for the past two years, with no visible sign of recovery.
Last year, the world's leading economy showed dismal growth figures of 0.3 per cent, while estimated figures for the last quarter hover around 1.1 per cent. Profits, meanwhile, are forecast to rise only three per cent -- down from 40 per cent during the 1997 bubble. With no significant upturn in sight, it looks like the recession is here to stay, and that worse is to come, the crystal ball tells us.
Although the TMI slump was in itself sufficiently dramatic, it trailed far behind the spectacular losses of the hi- tech NASDAQ index. Since its peak in March 2000, the NASDAQ has plummeted by 73 per cent, as an estimated 90 per cent of the once scintillating "dot-com" enterprises collapsed.
Built on sand during boom euphoria, neophyte dot-coms and telecoms firms managed to milk the banks for all their worth -- exhibiting IT creativity as collateral. In never- never land, money flowed freely and IT stocks soared. But when the paper wealth vanished, the debt remained, triggering a vicious cycle of bankruptcies, production slow- downs and mounting unemployment levels.
The IT debacle was compounded by the corporate fraud serials, a more recent manifestation of the slump. Economic growth decline and loss of corporate profits necessarily required a little padding of the books, all for the sake of looking good on Wall Street. Thus corporations indulged in a little subterfuge: they posted business expenses as capital expenditures, items included in the profit balance.
Among corporate culprits, critics point to former superstars Enron and WorldCom as the worst offenders of all. The Enron and WorldCom sagas have indeed broken all records with regard to the sheer magnitude of their bankruptcy declarations. While Enron's $60 billion bankruptcy balance initially went down as unprecedented, it was soon to pale in comparison with WordCom's gargantuan $90 billion.
And other heads may be rolling soon. Xerox and media cum telecoms superstar, AOL Warner, are being investigated by the US Department of Justice. Qwest, another US telecoms heavyweight, has conceded it had been cooking its books in order to maintain its stock market allure.
Massive lay-offs naturally preceded the profit losses and bankruptcies. WorldCom's global operations have seen 17,000 workers fired already, and the numbers are rising. But lay-offs are old stuff. Since the hi-tech crash triggered the market's downward spin in the spring of 2000, transnationals have been firing workers right, left and centre.
Workers at telecoms companies have evidently been hard hit. A cursory look at some of last year's casualty figures drives the point home. In April the Swedish mobile phone giant Ericsson sacked 25,000 people, representing a quarter of its work force. In December, British Telecom fired 13,000 workers. November saw the French telecoms firm, Alcatel, cut 10,000 jobs in Europe. In October, 12,000 telecom and banking jobs were axed in Germany. And the list goes on.
It is the manufacturing sector, however, that has felt the brunt of the crisis: in Britain alone, 400,000 manufacturing jobs were lost over the past three years -- representing 10 per cent of the work force. In January, the Ford Motor Company announced that it had a "bloated" work force. Admitting to "complacency" in its hiring practices, Ford then promptly got down to business: it closed five plants and fired 35,000 workers.
Since then, things have become progressively worse. In the US, unemployment is projected to reach 6.5 per cent by the fall, up from hovering around the three per cent mark during Bill Clinton's golden years. As for the economies of the South, their work forces will crash even harder. Peripheral and dependent economies are by definition more vulnerable to recessions. The good news is definitely buried under the market rubble.

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