This whole article is a HUGE long read but very very good. I will post some of the highlights then put the link at the bottom like usual dso you can read the whole thing if you want. Some really eye opening stuff. The whole article is a bit dry in the beginning then as the article moves along, it just keeps gathering steam getting better and better. Anyway, here it is............
The reality of the expansion of the 1990s bears little resemblance to the
official version. The claim that this was an 'extraordinary' boom is belied
by the Government's own figures. In terms of the standard measures - growth
of output, capital stock, labour productivity and wages, as well as the
level of unemployment - performance in the supposedly sensational five-year
period between 1995 and 2000 barely matched the levels achieved in the
25-year period between 1948 and 1973. The growth of labour productivity, the
most important indicator of economic dynamism, was a full 20 per cent lower.
Taking into account the whole business cycle of the decade from 1990 to 2000
and not just the five good years at the end, the average annual rate of
growth of GDP per person was a meagre 1.6 per cent, compared to 2.2 per cent
for the hundred-year period 1889-1989. Even by 2000, real hourly wages for
production and non-supervisory workers were still palpably below, and the
poverty rate above, their 1973 bests..........
..........The Japanese manufacturing economy, obliged to absorb
this enormous increase in the relative cost of its goods on the world
market, seemed on the verge of freezing up. Having just weathered the
international disruption caused by a major financial crisis in Mexico that
had reverberated throughout Latin America, the US Government could not allow
the Japanese economy to fail. Japan's economy was second only to that of the
US, and a crisis there would pose a threat to international stability. The
country was also the US's leading creditor, and a Japanese crisis would
probably have led to a fire sale of US bonds, forcing up interest rates and
cutting short the American recovery in the run-up to the 1996 elections.
With the so-called 'reverse Plaza Accord' of summer 1995, the US Government
therefore agreed with its Japanese and German counterparts to drive up the
dollar.
This agreement constituted a turning point in the evolution of the world
economy. It reversed the dominant economic trends of the previous decade
and, in a crucial sense, prepared the way for every major development of the
next five years: the decline of US profitability, the historic equity price
increase, the stock market-led economic boom - and the crash and recession
that have followed.............
........And yet, from 1996, US economic expansion took on a new dynamism,
and
carried the rest of the world along. What increasingly drove it was a stock
market that soared to unmatched heights, despite the weakening of corporate
profitability from 1997. Between the early 1980s and 1995, the rise of
equity prices had been no greater than the rise of profits. Henceforth, a
growing chasm would open up between the two. As the Wilshire 5000 Index
soared 65 per cent between 1997 and 2000, corporate profits (after tax and
net of interest) fell by 23 per cent..............
.........once the gap
between share values and profit rates had begun to open. By late 1996,
Greenspan was publicly expressing concern about the 'irrational exuberance'
of share prices. But he was clearly even more anxious, in private, about the
possible stumbling of the US economy, especially as economic growth at first
proved hesitant in the face of his interest-rate reductions and as turmoil
shook the East Asian markets in spring 1997. In this context, as he was well
aware, the 'wealth effect' of a rising stock market could play a stimulating
and steadying role, funding investment growth and consumer demand that could
compensate for declining government deficits and the negative impact of the
rising dollar on profit rates. If the prices of their equities rose,
corporations would be able to access otherwise unavailable funds for
investment, either by issuing over-valued shares or by borrowing from the
banks. By the same token, households with rising paper wealth would find
less need to save.
In undertaking the US's first essay in what might be termed stock-market
Keynesianism, Greenspan, far from seeking to control the bubble, actively
encouraged it. He not only welcomed the enormous increase in liquidity
resulting from the influx of foreign money and his own reduction of interest
rates, but also refused to raise the cost of borrowing from the beginning of
1995 until mid-1999 (aside from a lone quarter-point rise in early 1997) or
to raise the required margin on share purchases to discourage speculation.
He intervened vigorously by loosening credit whenever the equity markets
threatened to swoon - most spectacularly in autumn 1998, at the nadir of the
world financial crisis. As a result, from 1995 until 1999, the money supply
(M3) increased at six times the rate it had from 1990 until 1994, opening
the way for a gigantic wave of speculation.
US corporations, in particular, were quick to exploit the easy money
Greenspan was pouring their way. Between 1995 and 2000, they increased their
borrowing to record levels as a percentage of corporate GDP; not only to
fund new plant and equipment, but equally to cover the cost of buying back
their own stocks. In this way, they sidestepped the tedious process of
creating shareholder value by producing goods and services at a profit, and
directly drove up the price of their shares for the benefit of their
stockholders and for corporate executives, who were heavily remunerated with
stock options. Between 1995 and 2000 US corporations were the largest net
purchasers on the stock market............
............As equity
prices began to rise strongly from early 1996, fund managers were under
heavy pressure to buy, even if they doubted the long-term viability of their
purchases. If they failed to do so, they risked falling behind their
competitors and losing their jobs. On the other hand, if, in the long run,
the assets they had purchased went sour, they could not be held responsible,
since so many others had done the same thing...........
........According to a recent Federal Reserve study, the top 20 per cent of
wealth
holders could account, by themselves, for the spectacular reduction of the
US household savings rate from around 8 per cent in 1993 to zero in 2000.
.........
..........Between 1997
and 2000, as the boom peaked, the rate of profit in the non-financial
corporate sector as a whole fell by a fifth.
The 'virtuous cycle' touted by Greenspan was little more than hype. What
drove the economy during the second half of the decade was a vicious cycle
that proceeded from rising equity prices to rising investment, in the face
of falling profitability, which issued in increasing overcapacity that
lowered profitability still further.........
.........These 'one-stop' financial
supermarkets had emerged from an ever deepening process of financial
deregulation, closely overseen and patronised by the Clinton Administration
and a Democratic Party leadership determined to exploit the hugely increased
fund-raising opportunities they knew would materialise from their embrace of
the neoliberal programme and, in particular, the agenda of the great banks.
Under the watchful supervision of Robert Rubin, who, having been CEO at
Goldman Sachs, was made Clinton's Treasury Secretary in 1993, the already
disintegrating barriers between investment banks, commercial banks and
insurance companies - originally erected by the New Deal, in response to the
1990s-style excesses of the 1920s - were obliterated.
The climax came in April 1998 when Travelers Insurance, owners of the
investment bank Salomon Smith Barney, merged with the commercial bank
Citicorp to form Citigroup, in direct defiance of the still valid
Glass-Steagall Act, the pivotal piece of New Deal legislation regulating
finance. These giants were clearly confident that the Government would
sanction the merger - and with good reason: Citicorp donated $4 million in
campaign contributions during the 1996 and 1998 electoral cycles. The
finance, insurance and real-estate industries spent over $200 million on
lobbying during 1998 and donated another $150 million in the course of the
1998 electoral campaign. Above all, the newly merged mega-bank knew it could
count on Rubin, and the Treasury Secretary didn't let them down. He made
sure that Congress permitted their merger and was promptly rewarded when,
five months after resigning his post in the Clinton Administration, he was
appointed chairman of the executive committee of Citigroup, now the
country's largest financial institution................
.......They were
all too ready, as well, to invoke the latest innovations in 'structured
finance' to help their clients improve the appearance of their corporate
balance sheets, keeping their equity prices soaring, their money-raising
capacity unimpaired, and thus their demand for financial services expanding.
In the half-decade after 1995, the top ten banks organised 1670 mergers and
acquisitions valued at $1.3 trillion for telecommunications companies,
receiving from them $13 billion in fees............Meanwhile, the country's
longest-established
accounting firms, who had come increasingly to double as investment
consultants for the very companies whose books they were supposed to be
auditing, kept the game going by turning a blind eye to their clients'
financial shenanigans...........'What used to be a conflict of
interest is now a synergy,' he assured readers in a profile published in
Business Week in 2000. ...............
..........the market capitalisation of the telecoms companies (the value of
their outstanding
shares) had reached a staggering $2.7 trillion, or close to 15 per cent of
the total for all US non-financial corporations - this despite the fact that
they produced less than 3 per cent of the country's GDP...........
........To give an idea
of the scale of misrepresentation involved: a recent study by
SmartStockInvestor.com revealed that, for the first three quarters of 2001,
the Nasdaq 100 companies reported pro-forma profits of $19 billion to their
shareholders, but GAAP losses of $82 billion to the SEC. Microsoft, Intel,
Cisco Systems, Oracle and Dell, taken together, overstated their profits for
the same period by a factor of three..........
.......Telecoms debt now stands at around $525 billion - more than the value
of the outstanding junk bonds at the end of the 1980s and the cost of the
Savings and Loan bail-out combined..........
........published on 16 August 2001 in the
Wall Street Journal, of the 4200 companies listed on the Nasdaq Stock Index.
The losses these firms reported in the 12 months following 1 July 2000
amounted to $148.3 billion - in other words, slightly more than the $145.3
billion profits they had reported during the five-year boom of 1995 to 2000.
As one economist commented: 'What it means is that, with the benefit of
hindsight, the late 1990s never happened.'...........
.........Since the first
quarter of 2000, manufacturing employment (measured in hours) has been
reduced by a stunning 13.8 per cent. The overall effect has been a powerful
downward spiral in which pressure on prices resulting from overcapacity has
led to falling profitability, which has issued in falling investment, making
for rising unemployment and bankruptcies and, in turn, reductions in demand
that have fed back into falling prices and profitability, and so on.
As the US has entered its cyclical downturn, the rest of the world has been
dragged down too. Under the impact of plummeting US imports, the economies
of Japan, Europe and East Asia began to lose steam, which caused a further
sharp drop in US exports, further depressing growth. This mutually
reinforcing, international recessionary process is all the more worrying
because of the extent to which the economies of the rest of the world have,
over the past two decades, in the face of stagnating domestic demand, come
to depend on exports and thus on a US economy that can, as a result, look to
no one but itself to bail it out.
Beginning in January 2001, the Federal Reserve lowered interest rates on 12
occasions, the cuts amounting to a staggering 5.25 per cent, down to today's
record postwar low of 1.25 per cent. But, with respect to corporations, it
has been pushing on Keynes's proverbial string, eliciting no reaction.
Investment in plants and equipment, the key to economic health, has fallen
every single quarter since autumn 2000, driving the recession...........
lrb.co.uk |
