Editorial: What Goes Up Must Come Down
It’s funny how often people only believe what they want to believe. For instance, it might suit their interests for property prices to go up, so they convince themselves that, over the long run, they always do. It’s the same with shares. Individual shares may go up and down, so the thinking goes, but across the board – as an investment – they’re a fairly safe bet if you’re lucky enough to have some cash to spare and can play at being a capitalist for a day.
However, recent events have served to shatter some of these illusions. Stock markets across the world have tumbled and a fully-fledged “bear market“ has been pushing shares steadily lower week after week. The series of financial scandals that have been unfolding in the United States (such as at WorldCom) have dented the confidence of investors and the capitalists are now taking flight from the stock market casino. The recent symbolic decision by one investor to spend £50 million buying a lost Rubens masterpiece says it all – fine paintings and antiques are now seen as safer investments than shares.
In reality, the stock market falls are not just a recent phenomenon and they haven’t just developed since the catastrophic events of 11 September either. The bear market has been in existence for the best part of three years as financial reality has triumphed (as eventually it always does) over the baseless optimism engendered by a speculative boom. But why should this always be the case?
As legendary Wall Street investor Warren Buffett once said, in the short-term the stock market is like a voting machine – but in the long-run it acts more like a weighing machine. The growth in the paper value of shares (and property too) tends in the long-term to reflect the slow growth, over time, of the real economy, where goods and services are produced and distributed and not just bought and sold. However, two factors serve to complicate matters.
One is that the capitalist economy does not grow in a steady fashion but is periodically beset by economic convulsions which lead to notable periods of decline. The capitalist economy is not on a smooth upward curve but is a roller-coaster ride of booms and slumps. Slumps follow when companies over-invest because of their competitive drive to acquire more profits, a phenomenon which leads them to produce more than the markets they are selling to can absorb. This does not initially happen across the board, but in key sectors that have typically seen huge growth during the boom and in which, for a time, expansion seems limitless. The knock-on effect from this over-expansion can be enough to produce a slump, with falling output, rising unemployment and wage cuts for those still in work.
The second factor working against the steady growth of stock markets is that they can in some ways become de-coupled from the workings of the real economy for short periods. This can occur for all sorts of reasons, such as when shares seem a particularly risky option in an unstable economic environment (e.g. the 1930s and 1970s) or, conversely and most notably, when they become a vehicle for speculation as the act of successfully buying and selling them becomes a more profitable means of investment than long-term investment in the real economy itself.
As an example of the former situation – when share prices seem artificially low for long periods – an investor in the US share market buying their shares just before the Great Depression of the early 1930s would have had to wait well over over twenty years to see them reach their former value despite the big increases in production during that period overall as the US economy recovered from the slump. Similarly, while US Gross National Product rose by 373 percent between 1964 and 1981 the Dow Jones Index of US stocks stood at 875 – less than one point higher than 17 years earlier (Sunday Times, 15 July).
Conversely, however, in the 17 years after 1981 the US economy grew by less than half as much while at the same time the Dow Jones ballooned more than tenfold to over 9,000 points. What happened over this period in particular (not only in the US but in most other markets) is that there was a flight towards speculation, especially in the once-booming hi-tech “dotcom” and telecommunications sectors, which pushed share prices to levels where they bore no relationship whatsoever to the real underlying values of the companies involved. That speculative bubble – based on over-confidence – has now been shattered by the realisation that the profits of these companies were an ephemera. And the situation has since made worse by the discovery that many of them have been cooking the books to buy themselves a bit of time before the inevitable happened.
The fall in world stock markets is already significant (in Britain the FTSE 100 has lost over 40 percent of its value as we write, wiping tens of billions off paper share values). However, past experience from similar speculative bubbles suggest that the markets may have some way to go yet before they start to recover, prompting a serious slump in production as investors save or hoard their cash. Historically, it is not unusual for shares to fall between 70-80 per cent from their peak. That is what they did after the Wall Street Crash, it is what happened in the early 1970s during the last really sustained bear market in countries like Britain (when the FTSE fell 73 percent) and it is what has happened in Japan in recent years as the Nikkei Dow has fallen from its peak at over 39,000 points to around the 10,000 mark.
Surreal as the capitalist system may appear to be, its ridiculous speculative bubbles are always burst sooner or later – and the larger the bubble, the greater the correction that usually follows. And unfortunately, the consequences are typically worst for the most vulnerable section of society – the wage and salary earners who have nothing of real worth to sell except their ability to work for the employers. In truth, we can pretty much leave the capitalists to look after themselves – but for the workers there is only one solution to the economic crises and slumps of capitalism: a socialist revolution that will sweep away the fetters of the market economy for good.