Does the Chinese stock market tumbling matter?
The Shanghai Stock Exchange briefly plunged by more than 20 percent last week sending shockwaves through global financial markets. In the US stocks fell by ten percent – what top bosses euphemistically call a “correction”.
World markets are nose-diving because investors are selling up, worried that China’s problems are about to drag the global economy into a slump.
The RBS bank argued that “China has set off a major correction and it is going to snowball”.
They’re only partly right. The stock market tumbling by itself won’t cause a global slump–prices of shares carry little resemblance to bosses’ profits.
Shares are essentially bits of paper that give shareholders a claim on profits produced in the “real economy”. Bosses use stock markets to raise funds for investment. In return shareholders get dividends.
If stocks lose value money is transferred from the shareholder to the firm–but real capital isn’t actually destroyed.
This massive injection of money by governments to banks to keep them afloat have been used to fuel a stock market boom. Now this is unravelling.
This turmoil is a symptom of a much deeper crisis of profitability.
As the Financial Times newspaper columnist Martin Wolf argues the “investment-driven model is disappearing”.
During the 2008 crisis panicking bosses argued that China would keep the global economy afloat. China pumped £2.1 trillion into its economy, firing a debt-driven boom.
This also fuelled a serious problem of “over accumulation” of capital–47 percent of Chinese GDP is being invested but only returning four percent growth.
That’s pulling other “emerging market” economies, such as Brazil, India and South Africa, into recession.
Why has the oil price collapsed?
In the summer of 2014 the price of a barrel of oil was over $100. Last week it was barely above $30. New sources, such as US shale oil from fracking, have increased global production of oil.
Other producers, particularly Saudi Arabia, have not cut back to keep prices more stable. Instead it hopes to drive the new US producers out of business by pushing the price of oil below their production cost.
But as Financial Times blogger Stephen King writes, “falling oil prices are less about shale production or the Machiavellian machinations of oil ministers and more about persistently weaker-than-expected global growth”.
Oil prices are falling because capitalists are not investing or producing and don’t need raw materials such as oil.
Last week a study by energy consultant Wood Mackenzie showed that big oil firms have shelved nearly £279 billion of spending on 68 new oil and gas projects.
Instead of investing companies are slashing jobs and pay and holding back exploration to protect profits. Yet it’s a short-term solution for the bosses.
Less investment in new oil fields is good—in fact, essential—for the environment. But in the longer-term it undermines the energy giants’ profits, and some will go bust.
Is it just oil?
A collapse in other commodity prices is further evidence that the oil price fall reflects stagnant or shrinking economies, not something peculiar about oil.
The price of metals such as nickel, zinc and copper have all slumped dramatically recently.
As the prices collapse, big firms make workers pay. British steel workers are sent to the scrapheap. Mining giant Anglo-American plans to sell or shut 60 percent of its mines.
We are seeing the end of what became known as the “commodities super-cycle”. This was when the price of raw materials rose consistently for nearly 15 years from the turn of the century reflecting booming demand from China and other countries.
Sections of the population of some poorer countries benefited from this but now this “boom” is over. Overblown rhetoric about a surge in Africa has now stopped.
Rick Rowden was a senior policy analyst for ActionAid. He writes, “Nigeria and South Africa, which together account for 55 percent of the 48 sub-Saharan African nations’ GDP, have both been particularly hard hit by falling mineral and oil prices.”
He said the fall in prices has hit other oil producers, such as Angola and Ghana, while Zambia has suffered as copper prices are at a six-year low.
Capitalism fails, and we all pay the price—but particularly those in the global south.
Big business doesn’t even pass on the price falls. Wholesale gas and electricity prices have fallen up to 40 percent in a year. But only one of the big six providers cut bills ahead of this winter—and that was by just five percent.
The energy fat cats are grabbing more profits.
Are we heading for a new crisis?
Nearly a decade since the “credit crunch” in 2007 the global economy is still mired in depression. The same problem that caused that crisis lies behind the weak recovery–a long term “crisis of profitability”.
Capitalists are locked into competition with one another, which forces them to continually invest into more efficient ways of producing things. This means firms plough more money into new technologies than into workers.
But the source of profit is labour, not technology.
Individual firms can boost profits through investment but competition drags down the overall “rate of profit”. This can lead to a “crisis of over accumulation” of capital like in China today.
To get around this capitalists try and squeeze more out of us–that’s what austerity is really about.
But for capitalism to begin booming again the unprofitable bits of capital and debt will have to be cleaned out through large scale bankruptcies. Yet this hasn’t happened. Instead governments bailed out the banks fearing their bankruptcy could drag the world economy under.
Bankers’ newspaper City AM argues that an army of “zombie” firms “addicted to near-zero interest rates” is choking the British economy. Investment is based on profits, but because profitability remains below 1990s levels firms aren’t investing.
On top of that the US Federal Reserve is looking to raise interest rates to put the brakes on a new credit bubble. But this could choke off growth in the West and potentially fuel recession elsewhere.
Even if a new global slump is avoided this year systemic problems mean it is not far off.