Why the stock market's on a roller-coaster
Comment by Allen Myers
You can tell that capitalism is going through an unusually rough patch when the Financial Review's editorials take on a philosophical tone. The one in the paper's October 30 edition was a "defence of the [stock] market".
The defence was unusually subdued, boiling down to the claim that there exists no "better way to match savings and investment". And this less than ringing celebration of the capitalist order came on the day after the Australian stock market had regained 143.8 of the 177.8 points it had lost on the previous day.
A similar sign was the nervous claims of John Howard and Peter Costello that, whatever stock market prices did, the "fundamentals" of the economy were sound.
When the stock market is stable or rising, they tell us that it shows how clever they are and that we have to continue sacrificing to keep it that way. When it crashes anyway, they tell us the stock market doesn't matter.
1987 revisited
You could almost hear the sighs of relief echoing around the world on October 29, as Wall Street reversed the previous day's plunge, when frightened investors and media commentators couldn't help recalling the stock market crash of 1987. This was different, they kept saying, but the surprised euphoria the next day made it clear they hadn't believed it.
In fact, there are important differences between 1987 and 1997. But the 1987 crash is still being felt today.
A decade ago, fearing that a continued share decline would lead to an international depression, capitalist governments pumped money into their economies. To contain the inflationary effects of this, they stepped up the neo-liberal offensive against wages and social welfare.
From the capitalists' standpoint, these measures were largely successful. There was no coordinated international recession, share markets soon resumed their rise, profits boomed and real wages stagnated or declined.
However, these results only added to the vast sums of capital unable to be invested productively at a high enough rate of profit. The existence of an ocean of speculative capital was already a fundamental cause of the overexpansion of share markets in the period before October 1987.
Despite the Financial Review editors' belief that the stock market is a means of channelling savings into investment, in reality, most stock market "investment" buys already existing shares from their current owner; the purchase money is therefore not available to the corporation to use productively.
Paper tigers
Large amounts of the post-1987 excess capital were drawn to the "tiger" economies of south-east Asia, as both share investment and loans. Japan provided the bulk of this capital; Japanese banks today have loans of US$150 billion in Asia.
This influx of money for the most part did not go into producing goods for the international market: the money was available to south-east Asia only because saturated world markets prevented it being invested in the imperialist countries.
Considerable Japanese investment in south-east Asia therefore went into shares in construction companies building huge office blocks in Bangkok and other capitals.
Other funds went into driving up land prices, share speculation, corruption and nominally productive but economically absurd projects like the Indonesian "national car" scheme, which is intended to enrich presidential son Tommy Suharto right up to the moment of its inevitable collapse.
Japanese institutional investors, looking at the over-supply of office space in the "tiger" economies, began pulling out in 1995. Peter Hartcher, reporting in the October 25-26 Financial Review on a study by Jardine Fleming Securities, noted that Japanese investment trusts provided a net flow of more than US$8.3 billion to south-east Asia in 1993-94.
In 1995-96, however, the net flow was US$7.5 billion in the other direction, and nearly US$1 billion has been withdrawn this year. For the five-year period, Japanese trusts have withdrawn US$147 million more than they invested.
Other institutional investors began to follow Japan's lead this year. US mutual funds have withdrawn US$1.8 billion, British unit trusts US$392 million and other foreign funds US$1.8 billion.
Currency crisis
When international speculators realised that the Japanese were pulling out, they knew that a currency devaluation was inevitable and that they could make a killing by betting on it.
For "tiger" governments trying to defend the interests of local capitalists, this created a choice between two ways of losing.
Allowing a devaluation would directly disadvantage the many local capitalists with debts denominated in US dollars, who would have to pay that many more baht or rupiah to their creditor banks. But trying to prevent devaluation by raising interest rates would also harm local capitalists by driving down the price of corporate shares and making it more expensive for local businesses to borrow.
The ASEAN "tiger" governments have in practice followed both courses.
Recessionary effect
Share markets in the First World are similarly speculative, but their dividend expectations are higher and more reliable than in the Third World, for all the reasons that make First World corporations more reliably profitable than Third World companies.
Nevertheless, the large amount of liquid capital sloshing around the world drives share prices higher than would be justified by real dividend expectations. This makes markets subject to abrupt shifts, but doesn't automatically dictate a big fall in the short term, if only because the money has nowhere else to go.
However, real interest rates are extremely high at present, and the wild swings of share markets can only discourage real investment. Both factors will have a recessionary effect on a world economy in which growth rates during the 1990s upturn have been the lowest for any upturn in a quarter century.
In the particular case of the Australian stock market, there is an additional source of money keeping prices artificially high. This is the compulsory superannuation levy brought in by the previous Labor government.
Superannuation fund managers are estimated to have holdings totalling around $26 billion. As Trevor Sykes pointed out in the October 30 Financial Review, these funds "can be considered a potential mattress under the share market. If Australian shares suffer a severe bear raid, there is no shortage of cash waiting to pounce on anything that is perceived as value."
In other words, workers' retirement funds are being gambled in order to keep stock speculators' profits high. But robbing workers to protect profits is one of those "fundamentals" that the government always tries to get right.