Socialist Action /March 1999
Warnings of Global Crisis Grow Louder
By NAT WEINSTEIN
A series of four articles appearing in the Feb. 15 -18 New York Times
titled, "Global Contagion: A Narrative," makes the most convincing
case yet to appear in the mass media of the rapidly worsening global economic
crisis. This latest and most informative report is based on an extensive
array of concrete evidence justifying the authors' implicit warning that
the global economy is rushing headlong towards a cliff, and that no one
in charge knows how to stop it!
It's not the first warning. Federal Reserve chairman Alan Greenspan,
on Dec. 5, 1996, indicated the concern of his class that "irrational
exuberance" is driving the stock market up into unsustainable heights.
But that and the many warnings since have not been heeded.
On the contrary, since Greenspan's 1996 pronouncement, the U.S. stock
market rose 64 percent higher. Thus, despite mounting evidence that economic
reality is coming down the tracks like a mile-long, runaway railroad train,
all the cautionary appeals have not dampened the speculative mania.
This four-part series of articles in The Times is not likely to
have been the result of a whim by a few economic writers; rather it suggests
having been initiated by the editors of the New York daily. It appears to
be a major effort to "talk down" stock prices before it's too
late.
But such a candid picture of the depths reached by the world crisis as
is portrayed in The Times's "Narrative," whether intentional or
not, points knowledgeable readers to the conclusion that it may already
be too late.
It appears that the editors of this newspaper voice of American big business
assigned the authors of this series to deliver something of a shock to the
mass of investors who are heading lemming-like toward an economic cliff.
Their intent can be likened to the old saying about whacking a "stubborn
mule" with a two-by-four just to get its attention.
It's likely, however, that their shocking tale of failed measures to
prevent the spread of the contagion that began in Thailand in July 1997
will not have the desired effect. In which case, they will come down a little
harder with their cautionary message next time.
But just in the way of an introduction: The day before this series began
to be run in The Times, a column by Louis Uchitelle titled, "Sky-High
Stocks Breed Debt, Sowing the Seeds of a Slump" appeared in the financial
pages of the paper's Feb. 14 edition. It also seems to have been designed
by its editors to gain the attention of the stampeding herd intent on bidding
stocks up without regard to the tiny dividends paid out.
Clearly, speculation is rampant because investors are convinced that
there always will be someone who will pay a higher price and thus provide
a healthy profit when the stock is sold. But Uchitelle also stresses that
the market can reverse course with heart-stopping suddenness:
More than 24 percent of the nation's household wealth is now invested
in stocks, up from 10 percent at the time of the 1987 crash. Rarely if
ever has the Federal Reserve recorded a higher percentage. And many Americans
believe that the economy must weaken for standard reasons-rising unemployment,
less consumption, a spike in oil prices-before the market will react and
fall. They do not see that the causal chain can run in reverse: A scare
or panic collapses stock prices, and then the crash shrinks the economy.
[Emphasis added]
The 'Narrative' authors make their case
The following quotation from the third installment in The Times
series exemplifies the thrust of the articles. The authors begin by posing
the "$64 Question" roiling the capitalist world:
Why did the crisis ripple from country to country and end up leaving
Russia facing hunger and economic chaos, with 30 per cent of Russians living
below the poverty line, up from 18 percent at the end of 1996?
And why has it now hit Brazil and shaken financial markets in Argentina,
Colombia and Mexico?...
Nobody else was initially very worried that Thailand's problems would
radiate around the world. While some of Thailand's underlying problems
were well known, on the day of the devaluation [of its currency] the Thai
stock market rose 7.9 percent, its biggest gain in more than five years.
In hindsight, absolutely everyone seems to have made a
catastrophic misdiagnosis of the problem, one that resulted in Thailand's
getting insufficient treatment and in exposing other countries to the contagion.
The misdiagnosis was twofold: first, that Thailand probably faced a
typical temporary downturn, rather than a staggering depression that would
last for years; second, that the problem was largely confined to Thailand
rather than the beginnings of a serious global crisis. [Emphasis added]
The authors document what they claim is now generally recognized by all
concerned to be mistake after mistake by those in charge and by their critics
as well. They show how such a misdiagnosis as is mentioned above was repeated
over and over again.
They don't point to a single expert with a hand in determining policy,
from the beginning of the crisis to the present, who had been consistently
right. Neither can they cite any other of capitalism's recognized experts
as having had a clue to a solution when Thailand first hit the skids, or
earlier, when Japan's phenomenal boom petered out at the end of the 1980s
and the world's second largest economy began its long descent into a major
and seemingly endless depression.
The authors of this graphic description of global capitalism rapidly
spinning out of control point to repeated zig-zagging from one failed solution
to another with only the most arrogant (Clinton administration officials
in charge are among those cited) claiming that though their medicine didn't
work, it was still the best that could be administered at the time.
For instance, they cite how President Clinton's administration first
reacted to the collapse of Southeast Asia. The authors report that he and
his cabinet initially saw the crisis in Thailand as just "a replay
of what happened in Mexico in 1995, and prescribed the same [medicine],
a mix of austerity and aid." But the Japanese had a different idea
of how to stabilize the entire region. The authors describe what happened:
Thailand appealed to Japan for financial help that summer of 1997, and
officials in Tokyo say they thought seriously about arranging a big package
of loans. But in the end they did not, partly because Washington insisted
that a rescue be made only through the fund [the International Monetary
Fund (IMF)] and only after imposing tough conditions on Thailand.
The authors subsequently describe what amounts to U.S. capitalism's self-serving
motive for favoring the IMF-style austerity solution in their account of
the Clinton administration's "rescue" of South Korea:
President Clinton telephoned President Kim Young Sam of South Korea
[on Thanksgiving day, 1997] and told him he had no choice but to accept
an international bailout. Mr. Kim bowed to the inevitable and accepted
a bailout that swelled to $57 billion, the biggest ever. But with that
money now flowing into South Korea, Western banks saw a chance to take
it and run. The banks called in their loans, hoping to flee while they
could....
South Koreans lost their businesses and in some cases were even driven
to suicide. But foreign banks-among them Citibank, J.P. Morgan, Chase Manhattan,
BankAmerica, and Bankers Trust-were rewarded with sharply higher interest
rates ... and a government guarantee that passed the risk of default
from their shareholders to Korean taxpayers. [Emphasis added]
Impact on ordinary people
The authors skillfully work into their story the terrible consequences
of the developing crisis on the great majority of those who gained nothing
while the getting was good but are now left holding the bag as the system
unravels and their lives ruined. The authors interweave their narrative
of capitalist crisis with the stories of two ordinary people, half a world
apart, now caught up in a world they never made.
The first mentioned is Mary Jo Paoni, a 59-year-old secretary, who lives
with her husband, a retired meat cutter, in Cantrall, Ill., a farm town
about 130 miles southwest of Chicago. She is described as having "in
fact invested in Asia and all over the world, although she does not know
it."
When she retires early this year her income, the authors say, will derive
from a pension fund that has large investments abroad, giving her indirect
ownership of stocks in Indonesia, Russia, and Brazil.
Neither does she know that she is also linked in another way to the fate
of the global economy because her savings are deposited in a money market
account, which, the article notes, "helped build elegant hotels and
office towers from Argentina to Vietnam."
On the other side of the planet, is Mr. Salamet, an Indonesian rickshaw
driver in a town east of Jakarta, who is already suffering from the effects
of the global crisis.
One of the reporters describes how she witnessed Salamet's mother writhing
in pain on the bare floor of her family's small house. Salamet's mother
was dying a painful death from terminal breast cancer. But the painkillers
she needed cost Salamet two days pay per month.
He was faced with the awful choice of either continuing to spend the
two dollars he earned for two days work out of each month on painkillers
for his mother, or have his rickshaw, his only means of making a living,
seized for lack of payments.
And then, unable to pay school fees, his son would be dropped after just
two years in the primary school he attended and thus be denied a basic education.
(Salamet, quite typically in Indonesia, cannot read or write.)
The reporter tells how Salamet's mother-in-law has been pawning her sarongs
to buy food for her two hungry grandchildren, and is starving herself because,
as she says, "I can put up with it if I don't eat, but the children
aren't used to it. They cry and cry."
While the authors of this series show their concern for the tragic consequences
of the crisis on ordinary people, their main objective, of course, is to
portray the enormity of the degenerating world economic order. They describe
the fantastically interlinked world system that affects every single inhabitant
of the planet.
In the end, whether they intend to or not, what comes through is a preview
of the apocalyptic future that faces the entire human race.
Build it and they will come?
For instance, the authors give one of the most graphic examples imaginable
of a classic capitalist crisis of overproduction, such as is at the heart
of the currently unfolding global crisis. Under the heading of "High
Rise Ghost Town," the authors describe how an entire city was planned
and built to house a population of 700,000, bigger than Boston's. But far
too few buyers came.
The ghost city is called Muang Thong Thani and was built on barren fields
on the edge of Bangkok, Thailand. The owners of the land, the project's
promoters, the banks that financed it and the stockholders, expected to
attract more than enough buyers from land-short, crowded Bangkok. The authors
give a vivid description of the city-sized failed enterprise:
It is a dazzling complex of two dozen huge gray-white buildings soaring
nearly 30 stories high, and surrounded by streets lined with shops, town
houses, and detached homes. Walk closer and it feels eerie, for it is a
ghost city. Along one street of 100 houses the windows are mere holes in
the walls and yards have weeds that grow as high as a person. Muong Thong
Thani was built during Thailand's boom as a product of free capital flows
and financial liberalization....
The project was greeted enthusiastically as all proposals were in the
early 1990s, and [its promoters and backers] issued shares on the Thai
stock exchange in 1992 to raise money. Its shares were hot, picked up by
J. Mark Mobius, the emerging-markets guru and by funds like the Thai International
Fund and the Thai Euro Fund....
In Illinois, the state pension fund bought shares ... and that made
Mary Jo Paoni, a secretary in Cantrall, Ill., a roundabout owner of a tiny
part of Bangok Land and Muang Tong Thani....
How does such a thing happen? The New York Times, along with the
rest of the mass news media, had earlier told us it was due to the irresponsible
Asian variety of "crony capitalism." It suited their purposes
then, since the culpability of imperialist bankers was kept out of the news.
But The Times, now having other fish to fry, comes a little closer
to the truth. After all, such facts cannot be kept secret for long. It has
now become widely known that much if not most of the capital that went into
Thailand's ghost city and many other speculative projects in Asia, Russia
and Brazil came from Mrs. Paoni's pension fund and other American banking
and financial institutions.
Let's take a closer look at how the profit system works and how crises
of overproduction are built into the system of organized anarchy-otherwise
known as capitalism:
In periods of rapid capitalist expansion such as led to the construction
of a ghost city in Thailand, capitalists everywhere are in intense competition
to grab as much a share of the profits to be made as they can. Commodities,
whether office towers or automobiles, must be produced and carried to where
the buyers are waiting with cash in hand while the market is hot. If your
competitors, and there are always competitors, get there with the goods
ahead of you, you miss out.
Large scale housing or commercial construction requires years of preparation
before their product is ready for purchase: locating and buying the land,
arranging financing and beginning actual construction. Thus all capitalists
must make an educated guess as to whether or not the market will absorb
the goods they intend to produce. But in boom periods, when demand is high
and capitalists seem to be selling anything and everything they can produce
and lucrative profits are there for the taking, under such conditions the
production of more than the market can possibly absorb is inevitable.
The builders of Muang Thong Thani, along with their bankers and stockholders,
guessed wrong as capitalists throughout the history of capitalism have done
and will continue to do.
The U.S. economy is no exception
What about the arguments we hear in the same newspapers, often on the
same day, from the perennial optimists who believe that the American economy,
the world's largest and most powerful, is strong enough to resist the spreading
global infection. Some maintain, moreover, that the United States is capable
of staying afloat and may even be powerful enough to help keep much of the
world economy from sinking.
In fact, it seems to be a case of a split capitalist psyche since most
economists speak out of both sides of their mouths. For instance, Federal
Reserve chairman Greenspan alternates between carefully-worded pronouncements
designed to maintain confidence in the health of the economy and at other
times issues just as carefully-worded statements pointing in the opposite
direction.
It's not a case of a split personality, of course. The simple explanation
for this dualism is at least in part motivated by their perceived need to
keep confidence in the economy just right, neither too optimistic nor too
pessimistic-like Goldilocks and the three bears, neither too hot nor too
cold, but just right.
Just the next day, to illustrate the seriousness with which world capitalism
is treating the state of the global economy, an article in the Feb. 19 London-based
daily, the Financial Times, appeared titled, "The U.S. economy:
An impossible balancing act."
The piece briefly but convincingly also warns of the ominous trend of
events, in this case the U.S. economy itself. The article focuses in on
the fact that personal savings in this country are "declining unsustainably."
It notes too that this means that there is now a "financial imbalance
at the heart of the U.S. economy ... [which] is a highly unusual situation,
and one fraught with danger."
The author of this short piece goes on to point out that the unusually
prolonged growth of the U.S. economy has depended for an unclearly defined
period of time (at least since the early 1990s) on a steady rise in private
debt and the acceleration of the money supply-a sophisticated way to put
money in circulation that's not there.
In a word, it amounts to a devaluation of every dollar in circulation;
that is, it will accelerate the rate of inflation. And only so long as there
is no run on the U.S. Treasury, will the devaluation of the currency fail
to result in rising prices. (Of course, the rapidly falling price of basic
commodities helps hide the devaluation of the dollar.)
Add to this the accelerating balance of payments deficit and the mythological
federal "budget surplus" Clinton bragged about, which even if
true will disappear the moment the economy goes into decline, as it must.
The Financial Times article sums it up this way: "Neither
the growth in net lending nor the acceleration in the money supply can continue
for ever ... this can happen only for as long as debt continues to mount
exponentially."
Of course, as one "highly respected" capitalist expert once
said (with deadpan sarcasm), "If something cannot go on forever, it
will stop." And in that case, long before U.S. debt reaches impossible
heights, those in the business of buying and selling currencies for a profit
will sense the weakness of the dollar.
In that case, the U.S. Treasury will come under attack by an army of
speculators armed with huge amounts of leveraged capital in the form of
derivatives and hedge funds. Even the most powerful nation on earth cannot
resist such an attack.
If this happens, it would be much more significant than a run on the
dollar; the equilibrium of the entire global monetary system would be shaken
down to its foundations.
In any event, the seeming omnipotence and permanence of the world capitalist
order is showing all the signs that the economic infrastructure upon which
it stands is in a state of accelerating decay. The beginning of its decomposition
and its collapse cannot be far down the road.
And with that the objective prerequisites for world socialist revolution
will once again become dominant and the march toward the construction of
a mass revolutionary workers' leadership will then proceed apace.
Socialist Action /March 1999 |