Issue 240 of SOCIALIST REVIEW Published April 2000 Copyright © Socialist Review
The economy may be working at full speed, says Chris Harman, but that is why it is now time to fasten the seatbelt
It's like a car chase in a movie. You know the front car is going to go over the cliff eventually. But the director is intent on spinning it out as long as possible. So one miraculous escape follows another, until you wonder if someone told you the wrong ending. Then...well, what does happen then?
This is the stage we've reached with the US and British economies. A small pressure on the accelerator seemed to allow them to skid past the Asian crisis wall of death and the debris of Long Term Capital Management 18 months ago, and a nice bit of braking stopped them speeding out of control through last year. Now should be the time for big sighs of relief as they enter upon the straight flat road of the New Paradigm.
Except that a couple of the dashboard indicators are behaving crazily. Stock exchange prices are soaring way up in the red zone, and in southern England, at least, house prices are joining them. 'Don't worry,' the driver tells us. 'Technologies mean that an overheated engine improves rather than damages the long term performance of the vehicle.' Then the oil light goes on.
At that point there is hardly anyone who dares deny the driving is crazy. It's just that no one seems able to stop the car, and the only thing they can do is secure themselves ever more firmly on board.
The most visible sign of craziness is what is happening to the 'hi-tech' shares, such as those in the Nasdaq index. These companies have been soaring ever higher in value, despite most of them never having made a penny in profit. This applies not only to new and small dot.com companies, but even to supposed giants like Amazon which still make no profits. In Britain such companies are now supposed to be worth more than old established giants like Hanson and Whitbread. This is all too reminiscent of Japan in the late 1980s, when property values in the Tokyo area were judged be worth more than the whole US economy.
Something else is happening which brings back even worse memories. Great publicity campaigns are urging the man and woman in the street to join the big boys in putting their money into shares. That is what is involved in the scandal over the Mirror plugging shares its editor was gambling in, and the 'You Capitalist Pig' ads of Richard Branson's latest money-making ploy.
It is unpleasantly like what happened in the summer of 1929, and again with the 'people's capitalism' rhetoric in the run-up to October 1987. The scenario is at least 150 years old. The small private investor gets pulled into the stock market frenzy just as the more astute big investors begin to look for ways to get out.
The S&P 500 index for all US firms rose by about 25 percent between March last year and March this year. The index, excluding the 'hi-tech' firms, has fallen 20 percent. But for the dot.com craziness, the US stock exchanges would already be in decline.
What is more, the problem is not just with the 'hi-tech' shares. Non-hi-tech shares may have fallen over the last year, but they are still valued about twice as high as they would be if they were based on the real level of profits. And those profits are continually at risk.
One risk comes from the pressure of US workers. After a quarter of a century of falling real wages, many are seeing the boom as a chance to recover their position. Even though there is not yet any great advance of the unions, many firms are being forced to raise wages a little because of labour shortages.
Another risk comes from raw material prices. Oil is by far the most important raw material for modern capitalism. The governments that control most of its production in the Middle East, Venezuela and elsewhere are fully integrated into world capitalism today.
But they have interests of their own which are not identical to those of American industrial firms. When the whole world economy was stagnating in the early and mid-1990s, they had to put up with a fall in the price of oil from around $20 a barrel in 1991 (and over $25 in 1985) to under $10. This created shortages of cash and the threat of discontent in country after country.
Now they are doing their best to take advantage of the American boom to gain increased revenues. Their Opec agreement to limit supplies has trebled the price in a mere 12 months. Effectively, these governments are taking some of the profits of western firms and putting them in their own pockets.
The impact this can have was shown last month. Soap giant Procter & Gamble's share price fell by 25 percent. The Wall Street Journal commented, 'Economists are worried that some of the problems plaguing Procter & Gamble could crop up elsewhere. Their chief worry is that raw material prices are driving up costs for lots of companies.'
Stock exchanges are not by any means the whole of capitalism. They are simply one part of it, the part devoted to the buying and selling of shares in companies that already exist. They are like a parasitic growth on the productive section of capitalism, and often make short term movements in the opposite direction to the economy as a whole. So slumps in share prices do not automatically lead to slumps in the economy proper.
But one in the near future probably would do so. The boom in the real economy in the US depends upon people and companies being able to spend beyond their incomes. And they are only able to do so because the soaring stock exchange has pulled in money from all over the world. If the stock exchange falls, so can the economy as a whole.
No wonder commentators who were exuding confidence only a few weeks ago are now panicking about the craziness of the hi-tech shares. No wonder the US government is trying to bully oil-producing countries like Mexico and Norway--and above all Saudi Arabia--to increase their output and cut prices. As so often in the last decade, economic instablility is leading to political squabbling.
I wrote two months ago that no one could foresee when the US bubble would burst, or what would eventually cause it to. Hardly anyone was talking about oil being a factor then. Now some commentators are obsessed with it. But even if the oil states succumb to pressure from the US state and reduce their prices, this cannot keep the boom going indefinitely.
In the best thrillers, it is when a car seems safely at rest that it suddenly goes into reverse and plunges into the abyss.
The most visible sign of craziness is what is happening to hi-tech shares