Panic! The world’s
stock markets had their sharpest fall since 9/11 on Monday 21 January. It is supposed to be the most miserable day
in the year in the Northern hemisphere, where the daylight is short, the
weather is bad, people have colds and flu and they have run up debts from
Christmas. But this year, it really was
a Black Monday for capitalism.
World stock markets are now down over 20% from their highs
set just last November. That
technically is called a ‘bear market’.
Stock markets have had their worst start in a year for 30 years and in
the case of the US and the UK, the worst start ever since records began!
Why the panic? Up to
Christmas, stock markets were generally static, not falling much. Capitalist investors were ‘in denial’ as the
psychiatrists say. They knew that there
was a problem in credit and debt markets, because of the collapse in the US
housing market and the losses then suffered by the big banks and other
financial institutions that had bought so much of the so-called sub-prime
(risky) mortgages. But stock market
investors thought that this would not affect their investments because it would
not touch the nicely growing capitalist ‘real’ economy of making goods and
delivering services.
Of course, this was wishful thinking. After Christmas, one big bank after another
announced yet more losses as they ‘wrote down’ the value of their debt
securities they had bought on the expectation that house prices would keep on
rising. To date, the banks and
financial institutions have written off about $120bn. They may well have to admit to losses four times greater than
that before they are finished, or 1% of world GDP.
Then the evidence about the state of US economy began to
filter through to the minds of capitalist investors. Profits results from the big companies were down hugely, not just
in the financial sector (20% of the US stock market), but also in other
companies like Microsoft, the auto companies and other important services-based
firms. US corporate profits looked to
have fallen by about 5-10% in the last quarter of 2007. It will get worse in 2008.
Also, the US economy was now slowing down fast towards what
is called economic recession, when national output actually drops back. The housing sector was in free fall, with
prices dropping 5-10%, sales down 50% and mortgage defaults in the risky
‘sub-prime’ sector rising to 20%. But
it was not just there. The Christmas
sales for the big US retailers were appalling, with no growth at all over
2006. And other services were falling
back in sales.
And the credit and debt markets (mortgages, credit cards,
auto finance) saw large rises in the cost of borrowing, even though the US
Federal Reserve Bank had started a series of interest-rate cuts and the Fed,
the Bank of England and the European Central Bank had launched a coordinated
injection of $500bn of credit into the world’s financial system. It was not working to turn the housing
market around or stop the recession. So
stock markets have panicked.
And they are right to do so. As the US economy heads into recession, it will drag the rest of
the world down with it. Already, the UK
housing market is heading the same way as in the US. House prices have fallen for three consecutive months in Britain
and will fall further, even though the Bank of England plans to cut interest
rates. The UK consumer spent little
over the Christmas period because most British households are already highly
indebted with big mortgages and credit card debts.
UK manufacturing is in the doldrums because the pound has
been way too strong, keeping export prices too high. That’s happened because the UK trade deficit (even bigger than
that of the US as a share of GDP), has been financed by attracting ‘hot money’
from Russians, Arabs and other oil-rich ruling classes (who buy homes, football
clubs and British stocks). Thus the UK
economy had staggered on, living off rising property prices and foreign
borrowing. That is all coming to an
end.
Now stock markets have noticed that Europe and Japan will
slow down too. Just three months ago,
most capitalist economists said that Europe and Japan would grow at around
2.5-3.0% in 2008, with the UK and the US a little slower. China and India would rocket along at around
10% a year. Now they have changed their
tune. Most expect a recession in the US
and slower growth in Europe and Japan. They
still hope for good growth in China and India.
But it’s going to get worse than that. With the UK and the US in recession, expect
Europe and Japan to grow no more than 1% this year. And China and India will slow too – to about half their current
growth rates. That’s bad news across
the board.
It means higher unemployment (probably double current rates
in the US and the UK) and smaller pay rises (possible none at all), although
the bonuses to the fat cats in the City of London and Wall Street won’t drop
much. It will be particularly bad for
those economies that are increasingly dependent on finance capital rather than
productive sectors of manufacturing and transport.
As we have argued in this column, ad nauseum, the UK is the most dependent of all the big seven
economies on finance, property and so-called professional services (legal,
insurance, consultants). So this world
downturn will hit it hardest of all. God
help us all with New Labour under Gordon Brown and Alistair Darling in charge! Their policy is to save the investors of
Northern Rock not working people.
