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News :: Human Rights
"A puzzling disconnect between the markets’ buoyancy and underlying economic developments.”
28 Jul 2014
This game cannot go on forever. Ultimately, the valuations of financial assets must come crashing down. The consequences of the coming crash will be even more dramatic than those of the 2008 financial meltdown.
Chart Economy.png
From World Socialist Web Site: 28 July 2014

All three major US stock indexes fell Friday, capping the largest weekly decline in US stock markets in nearly two months. The catalyst for Friday’s sell-off was a very weak series of sales figures and projections from three corporations tied to consumer spending: Amazon, the largest online retailer; Wal-Mart, the largest brick-and-mortar retailer; and Visa, the credit and debit card transaction company.

More broadly, the stock market tremors reflect growing concern within the ruling class that share values, which have doubled, and in some cases tripled, since their 2009 lows, are on the verge of another historic collapse.




The open secret of the US economy is that the extraordinary rise in the stock markets is entirely disconnected from the process of production. While the economic growth was only 1.8 percent last year, below the average of the previous three years, the S&P 500 stock shot up more than 20 percent. In the first quarter of this year, as the economy contracted at a rate of nearly three percent, all three US stock indexes continued to rise.

The stock market rally is based on two interconnected elements: the systematic transfer of wealth from the working class to the financial elite, and the provision of an essentially unlimited flow of cash into the financial system by the Federal Reserve.

The stock market bubble has facilitated mergers and acquisitions designed to inflate corporate stock prices by mass layoffs and cost cutting, further choking off economic growth. Such mergers and acquisitions are up by some 50 percent over the past year. A case in point was Microsoft’s announcement this month of 18,000 worldwide layoffs in the aftermath of its $7 billion acquisition of Nokia’s mobile division.

Corporate profits as a share of US GDP were higher last year than any year on records going back to the late 1940s. A measure of the speculative fever that has once again gripped corporate America: companies are using these profits not for investment, but rather to swell executive pay, raise dividends, and buy back their own stocks. Stock buybacks reached their second-highest level on record in the first quarter of this year, behind only the second quarter of 2007, just before the financial meltdown.

The fact that the stock market rally is clearly unstable has generated murmurs of concern from some quarters. Earlier this month, Fitch Ratings Agency warned of an “increasing anxiety among investors that valuations reflect too much money chasing too few income-producing assets.” The rating agency added, “Investors feel they have little choice but to invest in whatever comes to market, despite the continuing fall in yields and coupons.”

One commentator warned this month in the New York Times of an “Everything Bubble” in which “there are very few unambiguously cheap assets.” These warnings echoed concerns raised by the Bank of International Settlements, which concluded late last month that “it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments.”

The most categorical warning comes from John P. Hussman, a former University of Michigan professor and current investment fund manager who published a memo this week entitled, “Yes, This Is An Equity Bubble.” He concluded, “Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme.” He concludes, “The Federal Reserve can certainly postpone the collapse of this bubble, but only by making the eventual outcome that much worse.”

Soaring corporate profits and stock values have accompanied an enormous decline in social conditions for the vast majority of the US population. According to one recent study, the inflation-adjusted net worth of a typical US household has declined by 36 percent between 2003 and 2014. Median household income in the US plummeted by 8.3 percent between 2007 and 2012, and the number of people using food stamps has increased by 70 percent since 2008.

The enormous social retrogression of American society is summed up in one statistic: one in four children in the United States live below the official poverty line, while one in five are at risk of going hungry.

The 2008 collapse nearly brought down the entire world financial system and sparked a global recession, with no recovery. The Fed has lowered interest rates to essentially zero, where they have stayed for nearly six years, allowing banks access to cash for free. Through a variety of asset purchasing programs, the Fed has tripled the size of its balance sheet since 2008. This policy has been mimicked internationally, coupled with ever more brutal austerity measures directed at the working class.

This game cannot go on forever. Ultimately, the valuations of financial assets must come crashing down. The consequences of the coming crash will be even more dramatic than those of the 2008 financial meltdown.

The US ruling elite has reached a historical dead end. It staggers from crisis to crisis, trying to put out fires with gasoline. This pragmatic, shortsighted and parasitic approach to the crisis of the US economy is expressive of the basic physiognomy of the financial elite. This is a social layer that has amassed its wealth not through productive activity, but through the looting of society: raiding pension funds, slashing wages, shutting down industrial facilities and laying off workers.

This internal socioeconomic crisis of American capitalism is a significant factor in US foreign policy, the extraordinary recklessness with which the ruling class and its representatives in the political and media establishment stoke conflict all over the world.

Facing an economic and political disaster at home, the US ruling elite seeks through war a desperate means to shore up its position in the global economy and deflect social anger at home into wars and interventions abroad. Each stage of the economic crisis has been accompanied by an every greater paroxysm of imperialist violence.

The policy of the American ruling class is, in a profound sense, insane. However, it is a socially conditioned insanity, an insanity that expresses a bankrupt economic system and a social order on the eve of revolution.
See also:
http://www.wsws.org/en/articles/2014/07/28/pers-j28.html

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A puzzling disconnect
28 Jul 2014
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Reply to Thom Hartmann’s Interview of Richard Wolff - On the Causes of Investment Decline in the US Economy by JACK RASMUS

Is the chronically stagnant US economic recovery since 2009 (predicted in my 2010 book, ‘Epic Recession: Prelude to Global Depression’), the result of insufficient income growth for most households—that is then necessary to stimulate consumption demand that, in turn would result in real investment that would create jobs? Or has the escalation of financial asset prices since 2009—itself the consequence of $10-$15 trillion of Fed and central bank liquidity injections— resulted in lower real investment in the US and thus the failure of job and income growth?

To restate more simply: does the lack of wage and income growth determine real asset investment; or are the expanding opportunities for more profitable financial asset speculative profits globally driving the decline of US real asset investment (and thus jobs, wages, and income growth)?

Which is the more primary causal relationship? If one believes lack of income is the primary cause of declining real investment today in the USA, then the solution is simply to raise wages and income of households that typically spend by whatever means—tax cuts, subsidies, etc. The problem is simply an insufficient level of income.

But what if, alternatively, it is not income that determines real investment, but rather the addiction of investors to financial asset speculation and investing that is the main determinant of slowing real asset investment? If the latter is primary, then simply raising wages and incomes alone will not necessarily ensure real investment returning to historical levels in the US economy. That is, the determinants of real asset investment lay just not with inadequate income growth in the US, but with the expanding and more profitable financial investment opportunities in a 21st century finance capital world in which investors are increasingly addicted to financial speculation.

This is a critical distinction that mainstream economists fail to understand (and some ‘left’ economists only partly understand). It is important because merely boosting wages and incomes of median and below households will not, by itself, generate sustained real investment and recovery in the US economy. That’s a Krugman-Reich-Stiglitz notion. It is also a classical ‘underconsumptionist’ argument that those who follow Marx should know Marx himself rejected unequivocally.

Sustained recovery requires direct investment, not just a rise in consumption income that hopefully might convince capitalists to again reinvest in the US (or not convince). So the problem is not merely a lack of income growth to stimulate investment. US capitalists are investing–just not in real asset investment and not in the US. They are investing in emerging markets, and even more so in financial asset markets globally (which are now more numerous, liquid, and available than ever before due to the creation of an unregulated global shadow banking system). That’s where the Fed’s $15 trillion money injection is going (some of which is also just being hoarded on balance sheets, of course).

The more fundamental problem is that finance capital has changed. Raising incomes of workers and middle class Americans will help somewhat, but not all that much. It will not result in sustained economic recovery any longer. It is therefore not the main solution to the long term economic stagnation that the US has been experiencing since 2009. Capitalist profit opportunities are simply greater offshore in EMs, and in financial asset markets, than they are from making goods and services in the US, even if US workers were able to buy those real goods and services if they had more income.

Neither mainstream liberal economists, nor even many US Marxist economists, understand the differences, or the important mutual causal relationships, between financial asset investment and real asset investment.

To argue simply for wage and income growth as the solution to a chronic stagnant US economic recovery—as Krugman and colleagues do for example—is to assume that capitalist enterprise will redirect itself from more lucrative profit opportunities from financial speculation and in offshore markets, back to less profitable real production of goods and services in the US. They won’t to any significant extent, since rates of return in the latter are significantly less than in the former.

The only real solution to a sustained US recovery is for massive public government investment, that then subsequently creates income. Investment precedes income creation, it does not necessarily follow it any longer in a world of 21sts century global finance capital. Just calling for income growth (via minimum wage hikes, more contingent job creation, tax cuts, or whatever) will not necessarily result in US-based investment if Capitalists continue to shift to more profitable financial speculation offshore; public investment must therefore occur prior to income growth in order to generate a sustained recovery.

Krugman and his neo-Keynesian colleagues don’t understand this essential error in their analysis. They simply believe all forms of demand stimulation are the same. Only the aggregate amount matters. (Which, by the way, Keynes himself did not maintain, so they aren’t even really Keynesians at all). Neo-Marxists should beware of this idea that ‘simply raising wages and incomes is the solution to economic recovery’. They should understand that the financial bubbles being created again around the world are not a consequence of declining real asset investment but are a cause of it. They should beware of slipping into an argument of promoting dead-end underconsumptionism in its many variant forms.

In today’s world of 21st Century Global Finance Capital, don’t expect capitalists to invest in real production and thus jobs and income in the US economy as they did decades ago. They are too busy making greater profits offshore and in financial asset speculation, leveraging the trillions of dollars of free money and credit created for them by the Federal Reserve. If real investment in the US economy is ever to return, it will have to come via major public investment initiatives. And if not, expect chronic economic stagnation to continue, as has been the case since 2010.

Jack Rasmus is the author of the book, ‘Obama’s Economy: Recovery for the Few’, Pluto Press, 2012, and ‘Epic Recession: Prelude to Global Depression, Pluto, 2010. He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network. His blog is jackrasmus.com, his website www.kyklosproductions.com, and twitter handle @drjackrasmus


http://www.counterpunch.org/2014/07/28/on-the-causes-of-investment-decli/