| The Turn of the Tide
By Alan Woods
"People of the same trade seldom meet together, even for merriment or
diversion, but the conversation ends in a conspiracy against the public, or
in some contrivance to raise prices." (Adam Smith, The Wealth of Nations)
So, after all the talk of an economic revival in the USA, the headlines are
now dominated by an epidemic of financial scandals, steep falls on the
stock markets, waning confidence and increasing uncertainty. The
nervousness on the stock markets is just a surface manifestation of a far
deeper crisis that expresses itself on a global plane in extreme
instability at every level - economic, social, political and military.
Last Wednesday there was a massive 282-point fall on Wall Street, which
triggered slumps on Asian and European markets before continuing with fresh
falls in New York. The FTSE 100 index of leading UK shares slumped more
than 4 percent the next day - its worst one-day fall since the 6 percent it
lost after the terrorist attacks on New York and Washington. In one day,
more than £45 billion was wiped off the value of shares.
The immediate cause of the panic was that the wave of accounting scandals
and grim corporate news dealt a hard blow to investors' confidence around
the world and by the end of the week, the FTSE 100 index stood at a
US investors were dumping stocks amid reports of a federal investigation
into accounting practices at the pharmaceuticals giant Bristol-Myers Squibb
and a second downgrade in as many days for General Motors' shares. By
lunchtime, the Dow Jones industrial index had slumped by as much as 200
points, which the Guardian described as a "dizzying nosedive". The panic on
the floor of the stock exchange was palpable: "When is this going to stop?"
asked Brian Belski, market strategist for US Bancorp Piper Jaffray, an
investment bank. "It's anyone's guess. No one knows."
The financial authorities moved to calm the market as investors showed
signs of panic. The French Finance Minister, Francis Mer, described the
falls as "extreme, even excessive" as he pledged to tighten the regulation
of markets. In London a spokesman for the Treasury said that Britain was
"better placed to withstand the ups and downs of the financial markets"
than in the past. He continued to sing the same old song: "The fundamentals
of the economy remain sound and we remain cautiously optimistic about the
prospects of the UK economy both this year and next."
On Thursday Bristol-Myers shares sank 13.6 per cent, down $3.15 at $20,
after the Securities and Exchange Commission revealed it had launched an
investigation into whether the company had inflated its revenues last year
by $1 billion. Efforts by President George Bush to pledge tough new reforms
for corporate leaders did nothing to allay the fears. The influential
Nasdaq technology market ended on Wednesday lower than at any time since
What is the reason for this sudden attack of nerves? Wall Street has been
hammered by continuing worries about future profits. But the underlying
crisis is far deeper than that. The violent swings on the world's stock
markets are a graphic expression of the violent mood swings of the
bourgeoisie. Ten years after the fall of the USSR, capitalism is gripped by
a mood of pessimism and fear of the future. Gone is the old boastful
confidence. Gone are the times when the great majority of economists
expressed blind faith in the so-called New Economic Paradigm. The truth has
at last dawned on even the most obtuse defenders of "market economics" -
that the ship is leaking badly, and has entered rudderless into uncharted
and stormy seas.
The bourgeoisie and its strategists really have no idea where they are
going. In place of a strategy, they have resorted to a series of improvised
expedients. Alan Greenspan pushed through eleven increases in interest
rates in as many months. This unprecedented behaviour on the part of a
supposedly conservative and responsible banker is fairly typical of the
general conduct of corporate America. They were drunk with success. The
party seemed to have no end. The sky was the limit!
Now they have woken up the morning after with a bad head. The profits of
the big corporations have collapsed. And as everyone knows, profits are the
lifeblood of the capitalist system. No profits, no investments. That is
such an elementary statement that a child should be able to grasp it.
Unless and until there is a recovery in profitability, no real economic
recovery is conceivable.
Yes, it is all so obvious. And yet, and yet…as the poet wrote: "Hope
springs eternal in the human breast." People often prefer to cling to an
outdated illusion rather than face the facts. This especially applies to
investors, who are a very superstitious breed. Look! The recession is all
over! The US economy is booming again! What was all the fuss about?
Old Heraclitus, a wonderfully profound philosopher, once wrote: "Eyes and
ears are bad witnesses for men who understand not their language." On the
basis of statistics of one or two months, people who should know better
concluded that the recession in America was over. This kind of superficial
empiricism is quite unable to see the woods for the trees.
The alleged recovery in the USA was based entirely on two factors: a
continuing spending boom and the continued influx of foreign capital. But
this provides no stable basis for a recovery. Is it really necessary to
remind ourselves that the economy is based ultimately not on consumption
but production? The consumer boom in America was based on credit, which
extends the market beyond its natural limits. The result is an
extraordinary expansion of debt, which cannot be sustained.
The whole structure is fundamentally unsound. America is currently defying
the laws of economic gravity. On top of its current account deficit and its
colossal levels of private and corporate indebtedness, there is now a huge
and growing budget deficit. This is a concrete reminder of the seriousness
of the crisis. It is basically the result of falling tax revenues in a
recession, but it is being compounded by the decision of George W. Bush to
cut taxes while increasing public spending on such things as military
expenditure and subsidies to American farmers.
If any other economy in the world conducted itself in this way, it would
come under the harsh scrutiny of the IMF, money would flow out by the
billion, and its currency would immediately be a target for predatory
speculation. Only the special situation of the USA as the world's biggest
economy and only superpower enables it to get away with this. But this
situation is completely artificial and cannot last. The US economy is
balancing precariously on a mountain of debt. Mountains sooner or later
experience avalanches. The recent falls on the stock exchanges are
reminiscent of the small avalanches that are an early warning of greater
falls to come.
A crisis of overproduction
Falls on the stock exchanges are spectacular events that grab the
headlines. Some superficial observers even imagine that the cause of the
crisis is in the stock markets. This, however, is only an optical illusion.
The panic on the stock markets is only a symptom of the underlying crisis,
not the cause. The fact that present share values bear absolutely no
relation either to company profits or future prospects has been clear for a
long time. We explained this when the boom was at its height and there is
no need to repeat it.
Marx explained that the final cause of all real capitalist crises is
overproduction. The capitalist system is an anarchic system, where
individual capitalists, driven by the greed for surplus value, produce for
the market irrespective of whether the market can absorb their products or
not. In a period of boom they all pile into the market, sales and profits
soar, demand increases constantly, driving up investment and production,
until the point is reached where the market is saturated. At this point the
whole spiral is thrown into reverse, with falling sales, prices and
profits. The capitalists are no longer able to realise the surplus value,
and cease investing, creating a crisis. This is precisely what has happened
over the last two years.
This is how Marx describes the phenomenon: "The market can absorb a mass of
commodities at falling prices, prices that have fallen below their prices
of production, which it could not absorb at their former market prices. The
excess of commodities is always relative, that is, it is an excess at
certain prices. The prices at which the commodities are then absorbed are
ruinous for the producer or merchant." (Theories of Surplus Value, C, ii,
This is precisely what has happened. Let us give just one example, which is
entirely typical. In January Global Crossing - which until then was
considered to be one of the hottest telecoms companies - filed for
bankruptcy after being brought down by a massive strategic gamble that went
wrong. The company thought that it could make a fortune by borrowing
billions of dollars to lay fibre-optic cable and selling its
signal-carrying capacity to corporations. Unfortunately, many other
manufacturers had exactly the same idea. Result: the market for fibre-optic
cable is saturated. There is huge overproduction and prices have slumped.
During booms, credit is plentiful and cheap, and investors are willing to
take the most absurd risks. This last boom was no exception. Money was no
object. With a booming stock exchange, the system was awash with surplus
capital. Any hare-brained scheme with "dot.com" attached to it could raise
millions overnight with no questions asked. Apparently reputable banks and
investment companies joined in the spending spree with wild abandon, asking
Now everything has changed. The new technology sector was the first to go
under. Investors suddenly realised that they were unlikely to get their
money back, let alone make a profit. The stampede out of shares is an
expression of this belated realisation. In such circumstances, a little
creative accountancy was necessary to prove to the shareholders that there
was no need to panic, that their money was still in the bank, and that
everything in the garden would be lovely…
Not long ago, at the time of the Asian collapse, American commentators were
writing smug articles about the evils of "crony capitalism" in Asia. Now it
is plain to all that the same sickness affects the USA - and every other
capitalist state. As long as the boom continued, with its "irrational
exuberance" and merry carnival of money-making, nobody was inclined to
probe too deeply into the workings of the boardrooms. But now, when the
cold winds of recession begin to blow, things appear in a very different
light. It is now official: corruption, greed and criminality are deeply
embedded in the heart of corporate America.
During the boom years, executive fat cats at giant companies were quietly
cooking the books and rewarding themselves richly from the proceeds. These
are the very same corporate dictators who have mercilessly squeezed the
workforce, demanding - and getting - ever greater productivity, sackings,
downsizing, bullying, exerting relentless pressure on the nerves and
muscles of their employees to extract the last ounce of surplus value. They
have become fabulously rich at the expense of their workers. Yet now they
stand exposed as corrupt criminals who have driven their companies to the
point of bankruptcy. Such is the character of the "captains of industry" in
modern America. How ironical that the same people used to pontificate about
the corruption and inefficiency of the bureaucrats in the Soviet Union!
The present revelations are damaging in more ways than one. From an
economic point of view, the fact that people now know that some of the
biggest and most celebrated companies have falsified their balance-sheets
to over-state profitability will undermine confidence still further. If
investors feel that they are being cheated, and that they stand to lose
their money, it will make it harder for firms to raise money for
investment. The nervousness of investors will create further instability,
preparing the way for further falls.
An epidemic of corruption
The dismal litany of corporate corruption continues without any let up:
Qwest Communications, the biggest local-telephone company in 14 American
states, has joined the growing list of firms whose affairs are being
investigated, along with those highly respectable auditing firms that were
their partners in crime. Prestigious accountancy firms failed to warn of
financial problems at nearly half the companies that filed for bankruptcy
protection during the past 18 months, according to a study by Weiss
Ratings, a Florida data-processing company.
The giant energy group Enron filed for bankruptcy protection last December
after admitting that its profits over the previous few years had been
nearly $600 million lower than what had been claimed. This was America's
biggest corporate collapse. It emerged that the company had used "special
purpose vehicles", or off-balance sheet entities, to enhance its earnings
and reduce its debt. Worse still it was revealed that Andrew Fastow had a
role in running one of the off-balance sheet partnerships in conflict with
his role as Enron's chief financial officer. He made the trifling sum of
$30 million from that partnership. In scenes reminiscent of old mafia
movies, both Mr Fastow and Kenneth Lay, Enron's chief executive, pleaded
the Fifth Amendment to avoid self-incrimination when asked to testify in
front of a Senate committee. A Senate committee in July then found that
directors had "missed several warning signs" that something was wrong with
After Enron it was the turn of Andersen - Enron's auditors. They were
destroyed as a firm, even before being found guilty of obstruction of
justice in June. Andersen's chief executive, Joe Berardino, initially
admitted only to a few misjudgements, but the firm collapsed when it
admitted that an "expedited" shredding of Enron-related documents had taken
place in its Houston office after the Securities and Exchange Commission
(SEC) had launched an investigation into Enron's accounting. The partner
who led the Enron account, David Duncan, has admitted that he is guilty of
obstruction of justice, but he is expected to be "treated leniently" (of
course!) after agreeing to turn state's evidence.
Tyco, a healthcare-to-telecoms conglomerate built up from a small New
England electronics maker by Dennis Kozlowski, was a typical example of the
kind of company held up as a glowing example during the boom years of the
nineties. In June, Kozlowski was indicted on charges that he had evaded $1
million of New York sales tax on art purchases.
Next on the list was Global Crossing, the star-performing fibre-optic
company already mentioned. Only five years old, it is being investigated
for swapping capacity with other operators in an attempt to boost revenues.
In July another telco, Qwest Communications, announced that it was facing a
criminal investigation. In June, Qwest's chief executive, Joe Nacchio, was
forced out by the board, having sold more than $300 million of stock during
his tenure. The company is desperately trying to sell assets before the
year-end to avoid defaulting on repayments of its $26.6 billion of debt.
WorldCom, which was dealt with by Michael Roberts last week, is another big
telecoms group. It admitted in June that it had "mistakenly" booked $3.8
billion of costs as capital expenditure, and that the profits it recorded
over five quarters from the beginning of 2001 should have been losses. A
trifling error indeed!
Xerox, the world famous company that made its name in the field of office
equipment, restated its accounts in June because the office-equipment
company said that a so-called "misapplication of GAAP" (generally accepted
accounting standards) overstated its profits by $1.4 billion over five
years. Xerox had already settled SEC charges by paying a $10 million fine,
and has seen several senior executives quit. However, investors are still
nervous and its shares have fallen.
Merck, a giant pharmaceutical company, has admitted in early July that it
had overstated its revenues -and its costs - by some $14 billion over three
years. And that it had included as revenues money that was paid to retail
pharmacies and that it never touched.
Nor are these problems confined to the other side of the Atlantic. The
French conglomerate Vivendi recently sacked its chief executive Jean-Marie
Messier in July, after its two main banks refused to extend it any more
money. The French company is now burdened with around €33 billion of debt
having bought Universal Music, Universal Studios and USA Networks. It has
denied allegations that it tried to overstate its accounts.
Elan, an Irish pharmaceutical company, is also in trouble. Its share price
came under pressure in January after newspaper speculation about its
accounting policies. The company has admitted to using off-balance sheet
vehicles, and is under investigation.