22 July 1996
The Stock Market Rollercoaster
Living Marxism's economics editor Phil Murphy looks at what's behind the
international stock market slide.
Recent sharp falls in US share prices - by about 7 per cent since the start
of July - have fuelled speculation about a rerun of the October 1987 financial
crash, or even of the Great Crash of October 1929. Others, slightly less
dramatically, have suggested that this 'correction' marks the end of the
five year 'bull' market during which the Dow Jones index of shares prices
of America's top companies has almost doubled. Many fear that the downturn
in Wall Street could drag down other stock markets around the world - especially
in the City of London - and set back the entire global economy.
Why is this happening, and what does it mean?
The proximate cause for the start of the Wall Street fall on 5 July was
the announcement of a higher than expected increase in US job creation last
month. These days, in the perverse world of international capitalism, stock
markets will fall because the financiers fear that the American economy
is creating TOO MANY jobs.
One school of thought believes that this evidence of stronger economic growth
means that there is an increased risk of rising inflation. The US Federal
Reserve (central bank), it is assumed, will thus have to push up short-term
interest rates significantly over the next year. Rising interest rates are
anticipated to push down share prices, both through the knock-on effect
of lower bond prices, and because higher interest rates will hold back economic
activity and hit corporate earnings. This expectation can become a self-fulfilling
prophecy. Those who believe in this scenario sell off shares quickly in
anticipation of lower prices, and as a result help bring about the very
price falls they feared.
Complicating this already bizarre train of events is the action of those
who hold a diametrically opposite viewpoint - the 'weak economy' school.
They believe that the Fed does not need to raise interest rates because
business expansion is already on its last legs. The consumer is thought
to be over-indebted, while
business investment is already also fading. This school emphasises the role
of recent profit warnings from leading companies like Hewlett-Packard, Motorola
and United Healthcare in triggering the stock price falls. Again, the anticipation
of price falls helps bring them about.
What all of this reveals is the nervous state of business confidence now,
and the underlying weakness of the US and British economies. The buoyancy
of the financial economy in recent years - typified by rising stock markets
- has been driven by its mirror opposite: the long term weakness of productive
the 'real' economy, evidenced by the decay of productive employment opportunities
over the past decade. The rise in share prices has been financed by a huge
pool of idle money, the store of past revenues, which cannot secure sufficient
profits through investing in stagnant industries, and instead has flown
in the financial markets at home and abroad. Underpinned by little more
than hype and hope, such speculative investments make an insecure basis
for a world economic system.
In today's general climate of uncertainty and sense of being out of control,
the common factor among all the schools of economic thought is the perception
that things are going to get worse. Whether the economy is believed to be
'overheating', or sluggish, bad times are expected. Ironically, the mindset
which prevails among the capitalist experts today tends to exaggerate the
gravity of the immediate situation. But things are so unstable that it is
quite possible for them to talk themselves into a crisis. Once the prophets
of doom start the financial pack of cards shaking, it could tumble straight
away; or much more likely, temporarily stabilise itself...pending the next
bout of jitters.
The underlying dynamic for this mood of uncertainty in global capitalism,
and the various ways in which it manifests itself today, will be explored
further during the 'Coping strategies for capitalism' course, which Phil
Murphy is convening at The Week conference from Friday 26 July to Thursday
For more information about The Week phone Jan Montague on (0171) 278 9908,
or mail firstname.lastname@example.org, or go to The
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