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“Welcome to the first global recession of the 21st century.” – Economist, 25 August

This article is over 20 years, 4 months old
STOCK markets tumbled last week in the aftermath of the attack on the World Trade Centre and the Pentagon. Many commentators predicted global economic recession. But the world economy was already in deep trouble.
Issue 1767

STOCK markets tumbled last week in the aftermath of the attack on the World Trade Centre and the Pentagon. Many commentators predicted global economic recession. But the world economy was already in deep trouble.

The quotes on this page are taken from the bosses’ Economist magazine and the Financial Times newspaper. They show how the ruling class was already panicking about the prospects of a global recession. All the quotes are from before last week’s events.

‘THE sharp slowdown in America has already caused a recession, maybe not at home, but in Mexico, Singapore, Taiwan and elsewhere. In more and more countries around the world output is now stalling, if not falling. Total world output probably fell in the second quarter for the first time in two decades. News from around the rest of the world is getting gloomier. In the second quarter, Germany’s economy stagnated, and growth in the euro area as a whole was probablv not much above zero. Japan’s economy saw a steep decline, and many economies in East Asia and Latin America are slumping alarmingly. This downturn has not been caused by a collapse in demand after central banks have raised interest rates to fight inflation. Instead, it is an investment-led downturn. America’s long expansion in the 1990s encouraged rosy expectations about future growth and profits. Global industrial production fell at an annual rate of 6 percent in the first half of 2001. The picture may soon look even worse. Early estimates suggest that gross world product as a whole may have contracted in the second quarter, for possibly the first time in two decades. Welcome to the first global recession of the 21st century.’
Economist, 25 August

The great telecoms crash

‘A $1,000 billion (£700 billion) bonfire of wealth has brought the world to the brink of recession. Lord Simpson and Sir Roger Hurn of Marconi, the UK telecoms equipment group, are only the latest in a long series of executives to have gambled everything on the telecoms revolution-and lost.

But even Marconi’s downsizing is tiny compared with the tens of thousands of jobs disappearing every week from larger equipment manufacturers such as Lucent and Nortel. Spending on telecoms equipment and novices in Europe and the US amounted to more than $4,000 billion.

Between 1996 and 2001 banks lent $890 billion in syndicated loans. Another $415 billion of debt was provided by the bond markets, and $500 billion was raised from private equity and stock market issues. Still more came from profitable blue chip firms that drove themselves to the brink of bankruptcy or beyond in the belief that an explosive expansion of internet use would create almost infinite demand for telecoms capacity. The global financial system became addicted to fuelling this bonfire.

Nearly half European bank lending in 1999 was to telecoms companies. About 80 percent of all the high yield, or junk, bonds issued in the US at the height of the boom were to telecoms operators. Five of the ten largest mergers or acquisitions in history involved telecoms companies during the boom. Questions The enduring legacy of all this money is a glut of ‘bandwidth’ (telecom transmission capacity) so great that if the world’s six billion people were to talk solidly on the telephone for the next year their words could be transmitted over the potential capacity within a few hours. Analysts estimate that only 1 or 2 percent of the fibre-optic cable buried under Europe and North America has even been turned on.

Mobile phone companies have committed more than $200 billion in Europe alone to boost the bandwidth of their wireless internet services without any proof that consumers will use it or that the technology will work. More than 300,000 jobs at telecoms equipment manufacturers have gone within six months, with perhaps a further 200,000 in components suppliers and associated industries.

The stock market value of all telecoms operators and manufacturers has fallen by $3,800 billion since its peak in March 2000. To put this into context, the combined loss in value on all of Asia’s stock exchanges during the Asian financial crisis of the late 1990s was only $813 billion.

At least two questions arise from this debacle. How could so many clever people have got it so sensationally wrong? And how has the global financial system been able-so far at least-to absorb the loss of $3,800 billion in stock market wealth, and waste perhaps as much as $1,000 billion in real cash?’
Financial Times, Wednesday 5 September

‘THE years 2000-2 will represent the single most profound period of economic and business change that the world has ever seen, not unlike the industrial revolution but much faster-at e-speed.’
Accountancy firm Pricewaterhouse- Coopers, 1999

‘THE SLOWDOWN in the United States has had a savage effect on those countries that have come to depend on it as an export market through the boom years. Mexico, for example, which derives 25 percent of its gross domestic product from exports to the US, is expected to slow from growth of almost 7 percent last year to less than 2 percent this year.

The story is similar but even worse in the emerging economies of Asia. Singapore and Taiwan are already in recession, and Thailand is likely to join them. Europe’s emerging markets are overshadowed by the crisis in Turkey. And problems have been caused, particularly in Poland, by the European slowdown and international investors’ nervousness over Argentina.’
Financial Times, Friday 7 September

‘FORGET the bursting of the bubble. Its importance was negligible compared with the related frenzy in the telecommunications industry. Reckless optimism led to a greater increase in telecoms debt over the past three years than the UK government accumulated over two centuries.

In parts of the industry overcapacity is running at 98 percent. Market capitalisation of those firms still trading has fallen by 60 percent. All the important operators were caught up in the mania.’
Financial Times editorial, Friday 7 September

How the bubble burst

‘IN THE spring of 2000 five mobile phone companies paid a total of £22 billion during a government auction for licences to operate ‘third generation’ mobile services in the UK.

Frantic bidding for these and other 3G mobile licences throughout Western Europe marked the turning point in a four-year investment frenzy that sucked in $4,000 billion (£2,800 billion) worldwide. At the height of the boom mobile phone operators felt they had hit on a formula that guaranteed success.

The obsession with ‘bandwidth’ had its roots in 1995 at a meeting in Ireland attended by Bill Gates. He gave a presentation arguing that the internet would create insatiable demand for bandwidth. On both sides of the Atlantic the streets began to be dug up by companies that few had ever heard of in a headlong scramble to lay as much fibre-optic capacity as possible.

With privatisation in Europe and the Federal Communication Commission’s 1996 Telecoms Act in the US, the rich world enjoyed a sudden deregulation. The investment stampede was made possible by an explosion of cheap debt financing not seen since the junk bond craze of the 1980s.

Britain’s GEC turned itself inside out to focus on a telecoms equipment division renamed Marconi. Others, such as Scottish Power, National Grid, Enron and Montana, spotted the opportunity but had no experience in telecoms. Companies expected households to spend £5,830 a year on telecoms services, while average total household spending on all leisure and telecoms is only £586.’
Financial Times, Thursday 6 September

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