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Stocks, shares, boom or bust
“MAYHEM IN the market.” “Bloodbath.”
That was how the Daily Mail and Mirror described recent falls in the stock markets that started in the US, and spread to Britain and other countries. Share prices fell, wiping billions off their value. A freefall on the stock market doesn’t just hit the City dealers. It can hurt workers’ pension funds, which are invested in the stock exchange. Companies can try to recover some of their value by cutting jobs and closing factories.
Commentators are worried that the underlying problems in the world’s leading economies, the US and Japan, mean there is more turmoil to come. Socialist Worker explains what the stock markets are, why they go into crisis, and argues the root cause is how economies are organised under capitalism.
WHAT IS the stock market?
THE STOCK market is a giant gambling den that the rich dominate. Traders hope to make huge amounts of money by buying stocks at one price and selling them for a higher price. During a boom speculators feel their gamble can only pay off. As more people invest, the share prices go higher. This fuels the boom even further as investors don’t want to miss out on making “easy money” on a “sure-fire bet”.
In the US many middle class households invested money in stocks. They gained as the share prices rose, encouraging them to spend their extra money on household goods and services. Companies increased their production to meet the demand. Some commentators argued that the boom in the US could go on forever. The same arguments were made in Britain about the dot.com companies and mobile phone companies. The shares in this “new economy” rose massively, as traders believed high-tech firms were more dynamic than the old companies and demand for their products was not going to fall.
WHAT WENT wrong?
THE STOCK market may seem to have a life of its own, separate from the daily production of goods and services inside factories and businesses. But the stock market cannot escape from fundamental problems at the heart of the economy.
A boom means firms rush to make as much profit as possible. Each is fighting for their product to be bought as opposed to their rivals’. Intense competition means some firms go bust. Workers are thrown on the dole and factories close, leaving workers with less money to buy the goods that pile up unsold. Suddenly companies which have pushed workers to increase production claim there is “overcapacity”. Leading firms scale back production.
This happened with the “new economy” companies. Ericsson, the third biggest mobile phone maker, announced recently it was likely to make a loss, not break even as it had assured investors. Vodafone, the leading mobile phone company, admits it overestimated how many people would want to buy a phone by up to 10 percent. Motorola, the second biggest mobile phone maker, plans to axe 7,000 jobs, and Cable and Wireless is cutting 4,000 jobs to save money. These companies had helped to fuel the “bubble” of speculation on the stock market, and they then helped to burst that bubble.
Panic replaced the old confidence on the stock market and became just as infectious. Traders wanted to sell their shares for the security of hard cash, and the small investors who couldn’t do so fast enough lost money. Crisis on the stock market can exacerbate existing economic problems. The US economy has been slowing down recently after years of expansion. Industrial production has not grown since September. Figures show unsold goods are piling up in US warehouses. The US is the biggest economy in the world. It plays a key role in the global market. If it suffers an economic crisis, it will affect countries in the West, and have a massive impact on Third World and Latin American countries.
WHAT IS the role of Japan in the crisis? IN THE 1980s Japan’s economy was promoted as a model for others to follow. It seemed to prove the market economy could work. There was low unemployment and the economy grew massively by selling highly profitable goods around the world. Banks lent heavily to finance companies’ expansion and the government promoted such investment.
There was a huge boom in real estate, with new buildings on prime urban sites selling for ridiculously high prices. At the boom’s height in 1987 the value of property on these sites was worth 20 percent more than Japan’s gross national product for that whole year. But in 1990 the bubble burst in the world’s second largest economy. The banks faced massive loans that companies weren’t paying off. The bad debt went alongside stockpiles of goods that companies couldn’t sell. Japan has been in recession ever since. Workers have had their lives turned upside down. “Secure” jobs have been axed or put under threat. The Japanese government has tried many measures to tackle the problem. It has pumped money into public works schemes to try to stimulate the economy. It has cut interest rates to nothing to try to encourage people to borrow money and then spend it.
But it has not succeeded. Unemployment is higher than in the US. Real wages have fallen four times in the last five years. Many people have no confidence that the government has a strategy that can get them out of the crisis. The prime minister, Yoshiro Mori, has an approval rating in Japan of just 6 percent. The Japanese and US economies are tied together. Japanese banks have lent heavily to the US, and the US sucks in many Japanese exports. If the economic crisis gets worse in one of the two most powerful economies in the world, it will pull the other down with it.
HOW SERIOUS is the crisis?
IT IS not possible to say at this moment whether the current economic problems will turn into a catastrophe. But one thing is sure-capitalism is prone to booms and slumps, and the question is when, not if, the next one is coming.
Karl Marx identified this in his writings over 150 years ago. He argued that speculators are supremely confident profits will increase until they realise a slump has hit them. “Business always appears thoroughly sound until suddenly the debacle takes place,” he said.
Or, as the pro-market Economist put it last week, “like all good cartoon characters, the world’s biggest technology companies kept running obliviously in mid-air long after the economic ground fell away beneath them.” That is why it is dangerous nonsense for the chancellor, Gordon Brown, to claim New Labour’s economic policies brought about “the end of boom and bust”. A slump devastates workers’ lives-they are chucked on the dole with little prospect of finding another job. Any savings they have can be wiped out. Many smaller businesses go bust and are gobbled up by the few big players that survive, increasing the power of multinational companies.
Not every jitter on the stock market translates into a slump. But sharp falls in share prices can be an expression of deeper problems in the economy. Some commentators today fear there could be a return to the great slump of the 1930s. This was a key turning point in history. People responded to the devastating economic crisis by looking for alternatives on both the far left and the far right.
What is the socialist alternative?
EVERY TIME there is an economic crisis the bosses want to make us pay for their mess. Steel company Corus is already trying to cut 6,000 jobs and close factories. Bosses are putting pressure on workers everywhere to work longer hours, increase productivity and hold back demands for a decent pay rise. They will step this up if the stock market falls continue and a recession hits. This is the reality of the free market that New Labour worships. Socialists argue there is an alternative. Some 200 multinationals control a quarter of the world’s output. They are run in competition with each other for the profit of a handful of billionaires.
If the workers in these multinationals took over control of these factories then we could have production for need and economic crisis would not occur. This would be the socialist alternative to capitalism that puts people’s needs before profit, and stops the rich forcing poor people across the world to pick up the debt for their stock market gambling.
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