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Corporate
Gamblers 1 Trillion, Globe 0 Coincidence? Stock markets boom, inequality increases. Coincidence? No. The connection is causal, not casual. The financial markets are acting like a giant vacuum cleaner, sucking money out of the pockets of working people, into the vortex of speculation and then into the numbered Swiss bank accounts of the billionaires. That's not what the financial marketeers will tell you, though. They, and their media mouthpieces, argue that robust financial markets even out inequality by broadening ownership; encourage economic growth and prosperity; fund investment; and allocate funds efficiently to the most appropriate sectors. They say that over - but never seem able to prove it. Greater numbers of people than ever now own shares, that's true - but this has not reduced inequality even in share ownership itself. The ASX's 2000 Australian Shareowners Study claims that the total proportion of Australian adults who directly owned shares increased from 10.2% in 1991 to 40.6% in 2000, while the proportion who owned shares both directly and indirectly (for example, through their super fund) rose from 14.7% to 53.7%. Rather than being democratised by this influx of new investors, however, share ownership is still highly concentrated in the hands of the super-rich. A study published in the Economic Monitor in November 1998 by Hans Baekgaard estimated that in Australia 90% of all shares are owned by 10% of shareholders, while 60% of shares are owned by 1% of shareholders. Nor do stock markets necessarily promote economic growth. The so-called "wealth effect", whereby rising stock prices make people feel richer and therefore more disposed to spend, would better be called the "debt effect", because that's what has powered the 1990s boom in consumer spending. Households in the US, where the "wealth effect" is supposed to have been most pronounced, now have negative savings. The ratio of US household debt to equity rose from 84% to 105% during the 1990s. This burgeoning debt is just as much a sign of growing poverty as it is of growing wealth. While expanding share portfolios may have prompted a spending binge by the wealthy classes, poor and middle-income households have been borrowing just to keep their heads above water. The US Federal Reserve estimated in 1998 that 70% of debt was held by the bottom 90% of households. In a longer view, the relationship between stock market performance and economic growth is pretty much random. One analysis, by Federal Reserve Bank of New York economist John Mullin, which studied the relationship between the two in 13 countries between 1976 and 1991, found no pattern whatsoever. Rational? Stock markets play virtually no role in raising funds for investment either. The overwhelming bulk of trading on any stock exchange is trading in existing shares, which are feverishly handed from one owner to another. Proceeds from the sale of shares go to the last shareholder, not to the company, just like Ford Motor Corporation gets nothing when you sell one of its cars second-hand. The only sale of shares which could in any way be linked with investment are "equity capital raisings" - which occur either when a new company lists on the stock exchange and sells a pile of shares in itself (called an "initial public offering", or IPO) or when an existing listed company decides to issue a certain number of new shares on top of those already issued. According to ASX figures, in 1999 capital raisings accounted for $33 billion out of a domestic market capitalisation of $578.8 billion. This means that stock markets only contributed 5.7% of their value to what could potentially be new investment, about average for the decade. The long-term average rate in the US is lower, 4%. Among the companies listed on the Dow Jones Industrial index, only a handful have issued any new stock in last 30 years. Most companies fund new investment out of their retained earnings or through debt (either bonds or bank loans). Ninety-two percent of US companies' investment was funded this way between the 1950s and the 1990s; the Australian proportion is similar. As for allocation of resources, "manic" would be a better description than "rational" or "efficient". The massive speculative bubble in US information technology (IT) stocks, which is now bursting, is a case in point, probably the most extreme case in market history. The classical benchmark for judging whether a stock is overvalued is the ratio between a company's share price and the dividend paid on each share (the price-earnings or P/E ratio). For the Standard and Poor's 500 index, the broader New York Stock Exchange measure, the P/E ratio is 25:1, meaning it would take 25 years of dividends for a share to pay for itself. This is a fairly reasonable, historically average figure. In 1985, the P/E ratio on the US NASDAQ stock exchange index, where most IT stocks are listed, was 51:1. In 1999, it was 118:1; it hit its peak in 2000 at 400:1, which means a single share would take 400 years to pay for itself. Since the bubble burst in April, the NASDAQ has lost 57% of its value, or US$3.4 trillion. And no wonder. Many of these NASDAQ-listed companies had never made a profit, had little revenue, owned next to no assets and were purely a product of rampant speculation, which forced their share price up and up and up and until it popped. Does that sound rational? What do they do? So if stock markets don't democratise ownership, don't promote economic growth, don't fund investment and don't efficiently allocate resources, what do they do? The basic function of the stock market, and of all financial markets, is parasitic: they siphon funds from productive investment into the pockets of the rentier owners of corporations, who then use these funds to engage in speculative activities - that is, to gamble on the future movements of stock prices. Like a parasite, they take over parts of the host's functioning: financial markets ensure that the management of listed companies always does what's best for the big shareholders. And, again like a parasite, they endanger the health of the host: financial markets greatly multiply the risk of crisis. They are proof of how capital-first economics and politics holds back not only social equity but also economic development, the thing it is supposed to be best at. Capital's joyous, head-long flight into speculation is a retreat from investment in production, caused by a long-term decline of profitability in "real economy" industries and a vast over-capacity problem. World manufacturing capacity was operating at 65-70% in 1998, while the car industry, one of the global economy's largest and most important, can build 20 million more vehicles than it can sell each year. Obviously, in a capital-in-charge economy, companies aren't going to give their product away, so they simply stop producing and search for other ways to make a buck. As a result, investment is heading downwards. In the United States during the 1950s and 1960s, capital expenditure by non-financial corporations averaged 8.5% of GDP; in 1995-97, it averaged 6.2%. The answer to dropping profitability has been speculation. The most glaring example is the forex market. In the 1970s, 90% of foreign exchange transactions were related to trade and investment - companies bought and sold national currencies in order to buy and sell real goods or services. Today, the global annual value of exports of goods and services amounts to only four days trading on forex markets; the rest is about speculators betting against national currencies. The financial returns of speculation are huge, for those who can get in on the game. In the United States, the profit rate of non-financial corporations peaked at 7.5% in 1997, after slumping to 3% in the early 1980s; in contrast, the profit rate of mutual funds averaged 13% and that of hedge funds averaged 20% during the 1990s. In Australia, the finance and investment sector's rate of return in 1999-2000 was 11.1%, more than twice the economy-wide rate of return of 5.4%. Even industrial corporations are now devoting greater funds to speculating in the financial markets. The world's 9th largest corporation (by sales in 2000), General Electric, a giant in manufacturing, made 40% of its 1997 income from its speculative arm, GE Capital, for example. Who wins? Stock markets don't just encourage gambling; they greatly empower the gamblers. A company listed on a stock exchange is based on a division between management and ownership. The senior managers run the company day to day, but ownership is in the hands of the shareholders. It's these dividend-seeking rentiers, particularly the large institutional investors like investment bankers and fund managers, who get to pick the board of directors and, indirectly at least, the senior managers. Their shares are perpetual ownership rights in a pipeline direct into a company's profit stream, and their will is that the pipeline continues to pump out dividend cheques with ever-increasing numbers of zeroes on the end of them. The most important thing therefore for any chief executive officer is their company's share price, a 24-hour, real-time indicator of whether or not their largest shareholders are happy with them. This process is euphemistically known as "market discipline" but - markets being collections of people, rather than disembodied, ethereal things - "rentier discipline" is probably a more accurate term. A falling share price reduces the value of a firm's assets, thereby making it costlier for companies to borrow and, if sustained, even leaving a company open to a hostile takeover. It also hits CEOs where they hurt - most executive salary packages include large quantities of stock and options, a fall in share price reduces executives' salaries. Who loses? This isn't the only way that stock markets threaten the welfare of the world's people. Stock markets, and financial markets more generally, also make catastrophic financial and economic crises more likely and, when they inevitably occur, more devastating. During the 1990s, major financial crises averaged one a year, the social and economic costs of which were universally paid by working people. Some of these crises are deliberately brought on by the actions of speculators. The 36% plunge in the value of the Turkish lira on February 22 was brought about by Western portfolio investors withdrawing their money from the country's stock exchange in protest about the government's lack of progress in imposing a harsh austerity package on the population. Currency traders targeted the lira, and bought on the cheap US$7.5 billion of the country's reserves when the central bank desperately attempted to protect its value. Inflation is expected to sky-rocket as a result, hurting living standards, and the International Monetary Fund is in the process of drawing up an even harsher austerity package as a condition for bailout loans. The deliberate actions of speculators played a major role in similar crises in countries like Mexico (1994-95), East Asia (1997), Russia (1998) and Brazil (1998-99). In each case, Western speculators made a killing, while millions of people in the targeted countries suffered. Today New York tomorrow the world .. not boom, bust. .
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