May 8, 2000
Between March 10 and April 14, the world s stock markets went through yet another spell of chaotic frenzy. This time, however, unlike in 1997 and 1998, it was neither South East Asia nor Russia which was in the eye of the storm, but the very stronghold of imperialism, the USA. Moreover, it was turmoil in the so-called "new economy" which generated this storm – that is in telecommunications, bio-technology, computer technology, internet and other "high-tech" industries.
Over this five week period, share prices on the NASDAQ market – the computerized market system through which most of the "new economy" shares are traded in the USA – tumbled down erratically week after week. During the first four weeks they lost 13% before plunging by another 23% in the last week alone. By April 14, NASDAQ shares had lost a third of their value on average compared with the peak reached on March 10.
Not that the "new economy" was the only casualty. During the last week of the storm, in particular, all major stock markets across the world experienced significant losses, even though they were less drastic than on the NASDAQ. In Europe, the City (London's financial center) was most affected, with a 9% fall over that week alone. As to the New York stock exchange, it lost 8% over the week and registered its fourth largest one-day fall ever on April 14, with a drop of 5.7%.
The storm seems to have subsided and share prices have recovered some of their losses. But they continue to bounce around a great deal. Economic commentators are now busy playing down this latest spell of financial havoc which they describe as a mere "readjustment" of share prices in the "new economy." Yet during the five weeks of the storm, these same commentators were much less level-headed. When they found something to say, it was more often than not to warn against a possible stock market crash on a scale similar to that of 1987, if not 1929. The confidence displayed by these so- called "experts" today cannot conceal the fact that they are just as incapable of knowing what may come after this latest "readjustment" as they were to predict it. As usual, the only thing they can do is to describe the damage caused by a system which is inherently unpredictable, but only after the event, once the damage is already done and nothing can be done to prevent it.
The fact that the so-called "new economy" was at the center of the storm gives a special significance to this latest paroxysm of the financial system. This "new economy" is more than just the latest fad among the proponents of the capitalist system – according to them, it is the "power house" which will pull the system out of its worldwide crisis, towards a new era of prosperity and economic development.
If anything, however, this latest financial storm highlights the fragility and artificial nature of this so-called "power house" of capitalism. Not only is this "power house" at the center of a speculative bubble within the general speculative movement which has plagued the world financial system for over a decade now. But in addition, once the "new economy" is stripped of its gloss, it appears as the product of a tightening of the "old" exploitation and inequalities – certainly not as the promise of a bright future for humanity.
That big business expects huge profits out of this "new economy" is beyond doubt. A graphic example of this was given by the auction of the new "Universal Mobile Telecommunication Systems" licenses in Britain – i.e. the next generation of mobile phone networks – which netted over 33 billion dollars to the British Treasury in late April. Obviously, the five successful bidders expect their profits to go way beyond the one and a half billion a year mark over the 20 years of their licenses.
The same expectations have been propelling "new economy" stock prices to astronomical levels since 1998. Between January 1999 and the peak reached on March 10 this year, NASDAQ share prices increased by 129%! This is why NASDAQ shareholders were hardly likely to commit suicide after the recent 33% fall – after all, they were still 52% richer than in January 1999, which is far more than most people's incomes!
These expectations are based on the fact that the markets aimed at by the "new economy" are still relatively untapped or, at least, they are still expanding – whether they be for computer software and hardware, mobile phones and derived activities, internet products and services, goods based on genetic engineering, etc. There is no economic "miracle" here: in capitalist terms, an expanding market generally means lower competition and therefore higher profits than in the rest of the economy, at least as long as it keeps expanding. Any owner of capital wants to move into the areas in which profits are expected to be highest.
Hence the disproportionate flow of capital in search of high returns towards "new economy" shares. Moreover those responsible for this flow are not just "cowboy" speculators or risk barons like George Soros, let alone individuals trading shares from home over the internet (as some commentators would have us believe). As the financial weekly The Economist pointed out in January this year: "Increasingly, it is big sophisticated institutional investors that are pouring their money into shares that Alan Greenspan [the chairman of the U.S. Federal Reserve] has described as lottery tickets.... Few of these institutions actually believe that the fundamentals of internet companies – however favorable – justify current share prices.... The internet sector has become too large to ignore. And its performance was so good that institutions that did not invest in it delivered poor performances relative to their more adventurous peers." In other words the prime movers in the "new economy" speculative bubble are the big financial institutions: insurance companies, pension funds and the equity investment arms of the big banks.
The result of this is a snowball effect. The more capital flows towards "new economy" shares, the higher their prices; the higher their prices, the more funds they attract.
This enormous flow of capital towards the "new economy" results in totally aberrant phenomena. Thus, for example, in January, the Financial Times estimated that out of every new dollar invested in U.S. shares, 50 cents went into internet shares and 16 cents to other "new economy" shares, leaving only 34 cents for the rest of the stocks on the market. Hence the overinflated value of the "new economy" stock market which today, even after its recent fall, represents one-third of the value of all U.S. shares – when the "new economy" itself represents well under 10% of the U.S. Gross Domestic Product.
Nor is this phenomenon limited to the U.S. The "new economy" has already reached 15% of Japan's stock market capitalization and almost 10% of France's. Only Britain seems to be lagging behind, with just under 5%, but this seems to be due, at least partly, to the fact that a number of British "new economy" companies have moved their headquarters to the U.S. over the past two years.
Another aberration due to the flood of capital towards the "new economy" is the mushrooming of start-ups, which are so often portrayed by commentators as illustrations of the "new economy's" entrepreneurship. Indeed, there is plenty of spare cash available for aspiring newcomers. And because most of them do not qualify for a quotation on the main stock exchanges – having no assets to be used as collateral – they go through the NASDAQ system which was set up, back in 1971, precisely for this kind of high-risk venture with no guarantees to offer. In return, NASDAQ provides market operators with a deregulated high-speed quotation system which allows them to buy and sell shares quickly and cheaply at the first hint of a price change.
Most of these start-ups have never made a dollar of profit and many just have one idea to sell. However, no one can tell which ones may become a Microsoft or an Intel in their own particular chosen field. So whenever a new venture is floated on the market, every market player worth his salt wants to grab some of its shares, hoping either that they will be winning tickets in the final lottery or that their prices will rise very fast, or both. Hence the countless stories which fill the papers about "new economy" entrepreneurs turned into "overnight millionaires" thanks to the company shares they hold. Hence too, the astronomical market values reached by some obscure "new economy" companies – like Palm Pilot, for example, the manufacturer of a small hand-held computer for executives, whose stock was valued at 53 billion dollars on the first day of its flotation in March, six billion more than General Motors!
Whether these "new economy" companies make profits or pay dividends is not an issue. In fact, most do not and even the most profitable among them, like Microsoft, have never paid a penny in dividends. The only thing that counts is whether their shares will go up. If so, the profits that can be made as a result are expected to be large enough in and of themselves.
Even the very conservative FTSE100 index, which measures the share prices of the City's 100 richest companies in terms of market value, has been affected by the "new economy" bubble. On March 10, nine companies were dropped out of the FTSE100, among which were Powergen, Thames Water and Imperial Tobacco. The nine new entrants which replaced them all belonged to the "new economy." Altogether they represented a market value of 57 billion dollars as opposed to 31.5 billion for the departing companies, in terms of profits, the picture was quite different: two of the nine new entrants had never made a penny of profit and their combined profits were just 450 million dollars, only 1/10 the value of those of the departing firms, whose profits were 4.5 billion dollars.
This speculative bubble around the "new economy" makes the benign description of the latest storm as a mere "readjustment" all the more hypocritical, given the potential risk it represented for the system as a whole. In fact, quite a few bourgeois commentators have already issued repeated warnings against the risks attached to the speculative drive on "new economy" shares in the context of highly reactive stock markets.
Indeed, stock markets have become much more volatile places over the past few years. Today, the average share listed in Wall Street is traded at least once a year, as opposed to once every three years in 1981 and once every six years in 1974. More trading means more volatility in prices. So, for example, during the two years 1995-96, there were only three days in which the [London] City share index changed by more than 2%. But in the 12 months up to March this year, this has happened 30 times.
The on-going speculative bubble of the past years, particularly the total divorce between share prices and actual profits in the "new economy," is one of the factors behind this volatility. Thus Alan Greenspan – the man who created a stir by warning against the stock market's "irrational exuberance" in 1996 – made a statement to the joint economic committee of the U.S. Congress in June last year arguing that, "a benign environment can induce investors to take on more risks and drive asset prices to unsustainable levels. This can occur when investors implicitly project rising prosperity further into the future than can reasonably be supported." Using the same coded language, Greenspan gave the same warning – beware of the risk of market havoc due to unrealistically high share prices.
However, a business journal such as The Economist does not need to use such coded language. In January, at a time when the NASDAQ was rising at an unprecedented speed, The Economist warned that "net-obsessed investors have lost touch with reality." In the same issue, an article entitled "When the Bubble Bursts" argued that "once normal valuations [for shares] fly out of the window, there are no reference points." At the highest point of the storm, in April, the same paper carried an editorial article entitled "Rosy Prospects, Forgotten Dangers," which spelled things out even more starkly: if the advocates of the "new economy" "have got it wrong," it argued, "the dawning of reality on Wall Street might then be brutal. The gap between expected and actual earnings might be so large as to cause a collapse in share prices, with severe turbulence following across all the world's financial markets; and America s external deficit, which grows apace despite surging productivity, may be hard to finance without a sharp fall in the dollar." The editorial concluded that if such was the case, then any past dream of a revival of the world market driven by growing U.S. imports would have to be forgotten.
In another article published a week earlier, The Economist outlined the mechanisms which could bring the market down. In particular it argued that speculators were increasingly basing their bets either "on how companies will do relative to expectations in the coming quarter" or "solely on the direction in which the market is heading." This was another way of saying that the capitalists operating on the stock market place their bets according to what they expect the future reactions of the market will be rather than on the actual performance of various companies. This means in particular that any downward trend of share prices is bound to be amplified almost instantaneously by speculators themselves. And The Economist concluded its analysis by saying, "add these together and you have the element in place for a panic" – an assessment which is worth taking seriously coming from a paper whose expertise on stock markets is probably just as good as one can get in the bourgeois press.
Besides, there are other factors which can amplify a fall on the stock market. In the latest storm, more than two trillion dollars disappeared into thin air – the equivalent of Germany's annual GDP or more than four times as much as Great Britain's current budget. Of course, much of this enormous sum was "virtual" anyway, since it resulted from paper gains made over the previous four months due to increasing share prices; it never existed outside the storage disks on which NASDAQ transactions are recorded. The problem is that speculators in many cases had already used their shares as collateral to borrow money for more gambling. In March, such loans amounted to a total of 278 billion dollars on Wall Street alone – not an insignificant amount even compared to the size of the stock market. However, unlike the gains made on shares, these are hard cash loans which have to be paid back in cash. Moreover, if the shares used as collateral lose value, borrowers are required to pay back their debt. This, too, can be another cause of panic selling, as speculators sell their shares in order to pay back their debt.
None of this is really new. The basic mechanisms for a crisis in the making are the same today as those which could be seen in the build-up to the 1929 crash – only now they are sophisticated and more powerful. In those days, there was also a speculative bubble driven by the "new technologies" of the time. The radio industry, which was beginning to develop, seems to have played a role somewhat similar to the internet today. RCA (Radio Company of America) was a typical example. By September 1929, the value of its shares had increased six-fold after only 21 months on the market. And yet this company had never paid a dividend. In the frantic speculation of 1928-29, which was boosted, as it is today, by large-scale mergers, speculators borrowed heavily in order to increase their stakes, just as they do today.
Those who warned then against the threat created by the speculative bubble were not welcome, as the American economic historian John Kenneth Galbraith recalls: "In 1929, any suggestion that anything was wrong was badly received. The principal offender was Paul M. Warburg, the banker and a founder of the Federal Reserve System. In March of 1929, he attacked the orgy of `unrestrained speculation' and said he feared it would `bring about a general depression involving the whole country.' He was accused of `sandbagging' American prosperity. Some implied he was short on the market." In other words when Alan Greenspan exposes "new economy" shares as "lottery tickets," he is following in the footsteps of his predecessors in 1929 – with the same impotence in containing the speculative drive or pre-empting its threatening consequences.
In 1929, the speculative bubble on stock markets was not the cause of the world crisis. In fact, this frantic speculation was merely the reflection of a storm which was already gathering pace in the production sphere. Faced with reduced profits, the capitalists were diverting more and more capital towards the financial sphere, thereby inflating the stock market bubble. The stock market crash was indeed a "readjustment," which deflated share prices down to their real value, in terms of the assets of the companies they represented. But at the same time the crash brought to the fore the production crisis which had remained relatively hidden up to that point, in particular by depriving many troubled companies of the credit lifeline which had kept them afloat.
Much the same can be said about today's situation. Of course the financial deregulation of the 1980s has played a role in facilitating stock market speculation by speeding up transactions and increasing the number of potential players. But above all, the development of the present speculative bubble is the direct result of the increasing flow of capital which has been diverted from the sphere of production towards the financial sphere since the return of the world capitalist crisis in the mid-1970s. In that sense it is a reflection of the on-going crisis which affects the entire world economy – a crisis which will perhaps break out tomorrow in the production sphere, as it did in 1929, as a result of one "readjustment" too many on the stock market.
Of course, the advocates of the "new economy" deny that their speculative bubble may present a threat to the economy, let alone that it may reflect a crisis. On the contrary, they argue that this bubble anticipates a huge development of the "new economy" which will bring prosperity to society. If there are occasional hiccups, they say, these are mere "readjustments" which are unavoidable in a transitional period. And they point to the on-going growth of the U.S. economy as an illustration of the wonders that the "new economy" has in store for the future.
It is true that, according to official statistics (in so far as they can be trusted), the U.S. economy has grown more rapidly over the past three years – by an average 4% – than during the previous period. What this growth means is another question. Many commentators have pointed out that most of this growth comes from just one sector – the computer industry – which is also the only area in which productivity has been increasing more rapidly over the same period.
On the other hand, there is one unquestionable fact: the poor layers of the U.S. population have become poorer. There has been a lot of talk about the reduction of unemployment in the USA. But most of it is due to the increasing marginalization of labor. And official figures are there to prove it. Over the past fifteen years, workers on the lower part of the wage-scale have had a 20% cut in their income in real terms.
Today, there are economists who are puzzled by the American situation: "How can we have such a low unemployment rate without an explosion of wages?" asks one American academic quoted by the Financial Times. The same paper, which is usually a staunch advocate of the "new economy," provided its own explanation in a series of articles devoted to it, in December last year: "a big increase in temporary workers ..., an increase in younger workers, who tend to have less bargaining power too, and a big jump in the prison population, which has simply eliminated a large number of people from the labor force who have a greater likelihood of being unemployed." Prison as a remedy to unemployment! It would be difficult to find a cruder illustration of what the "new economy" is really feeding on – a tightening of the screw on the working population.
In fact, behind the gloss of the new technologies, this is what the "new economy" is really about: increased exploitation of the working class across society, and particularly in the so- called "old" economy.
It is indeed ironical to see the contempt with which many advocates of the "new economy" treat what they call the "old" economy, including most production industries, as if it was some kind of antiquated remnant soon to disappear. But if such was the case, who would manufacture the Jaguars and the Rolls-Royces which seem to be indispensable attributes of the "new economy" millionaires? Who would produce the electricity and the batteries without which the sophisticated gimmicks of the "new economy" would be little more than heaps of junk?
Moreover what would provide the billions of dollars that feed the "new economy" speculative bubble and its hundreds of start-ups? In terms of profits, the "new economy" is still nothing compared to the industrial giants of the "old" – or to put it more accurately, it still produces a lot more debt than profits. But, above all, regardless of what may be claimed about the internet or mobile phone "revolutions," the "new economy" creates very little value. The internet may be a means of communication between individuals, it may offer previously unhoped for prospects of development for the advertising industry, it may help to increase the volume of goods traded while cutting jobs in the retail industry, but it only uses the value made by others. Productive human labor still remains the only known source of new value in society. And the service industries of the "new economy" can only exist as parasites of the value created by the working class in the production sector of the "old" economy.
The truth of the matter is that in the USA, as in most industrialized countries, the capitalists have managed to finance a very limited growth cheaply, by cutting the cost of labor. By playing on the threat of unemployment and on competition from other countries, they have been able to impose a reduction in the standard of living of the working classes, the generalization of casual labor and a worsening of working conditions to the point that they have turned the clock back several decades for whole sections of workers. In the process, the capitalists have also managed to increase their profits to the point where, in the USA for instance, company profits have doubled as a share of GDP since the 1980s. And these extra profits, which were not reinvested in production any more than they were in the previous period, have been added to the already enormous flow of capital which was circulating in the financial sphere. In reality, it is the sweat of the working class which is paying for the fat salaries of the "new economy" as well as its speculative bubble.
As far as the workings of capitalism are concerned and the interests of the working class, the distinction between "new" and "old" economy is meaningless. Capital goes back and forth from one sector to the other through the channels of the financial system either to extract real profits or to speculate on future ones. But it is the same capital and the same capitalism – a capitalism which has become so decrepit that its advocates have to resort to fairy tales such as the "new economy," the "internet revolution" and the like, in order to pretend that their system can offer a future to society, despite its on-going crisis and despite its increasingly glaring inability to meet the most basic needs of the world population. However, behind the fairy tales, the capitalist system has nothing to offer other than to turn the screw even more on working people. And while the capitalist class sees its ability to increase exploitation as a symptom of the good health of its system, for the working class it is proof that it is very sick indeed and needs to be overthrown.