Issue #1564 12 September 2012
Culture & Life
Get ready for a rough ride
The classic description of capitalism in action usually involves an individual (or corporate) employer, who pays his employees less than the value of the things they produce (or the services they provide). The employer pockets the difference, which is called profit. This difference between the value of what workers produce and what they are paid for producing it (a difference that is never in the workers’ favour) means that the workers can never afford to buy everything they produce, leading ultimately to crises of overproduction, layoffs, economic depression.
That is grossly oversimplified, but the essentials are there. To raise the capital needed to finance production, companies sold (and sell) shares in their business to investors. In return for the use of their capital, shareholders receive a share of the profits every year (sometimes more often).
Once upon a time, facilitating the buying and selling of shares in profitable companies was the main business of the stock market. Shareholders made their money from the dividends paid by the companies in which they held shares. Investors sought companies that were deemed likely to make a profit on their year’s business.
Fifty years ago, most shares tended to be held in an investor’s portfolio for at least four years before being sold to someone else. But there were always some investors who preferred speculating to investing. They took the riskier route of gambling on a rise or fall in the price of a company’s shares, buying shares when they were low and selling them hastily when they rose (as the result of predatory action by a competitor, the floating of a well-engineered rumour, the leaking of confidential financial information, or some similar act calculated to promote speculation).
These people who buy stocks and shares when they are comparatively low and sell when they rise are called profit-takers. They do not care whether the company whose shares they are trading is running profitably or at a loss: they care only whether the shares in question are likely to rise or fall in price in the immediate future. Aptly, this form of gambling on the stock market is called “casino capitalism”. It has become the dominant form of stock market trading today, with small changes in share prices, currency exchange rates and the like being reported on the nightly and midday news as though it is of real concern to every one.
And in a way it is, of course: in the event of a stock market crash it is ordinary people whose pockets suffer the most harm. Banks and other capitalist speculators will have their losses made up to them by helpful governments using our money for the purpose.
And anyway, it’s all academic, isn’t it? Capitalism has learnt how to master economic crises and avoid another Great Depression, hasn’t it? Well, that is a popular belief, but reality says otherwise. The financial commentator Paul Sheehan pointed out in The Sydney Morning Herald on September 3 that “sharemarket crashes used to be once-in-a-generation events but serious structural failures have occurred five times in the past 14 years.”
He then proceeded to list them, beginning in 1998 with the collapse of the giant hedge fund Long Term Capital Management, that wiped off US$5 billion in market value. Two years later saw the bursting of the “dot.com bubble” and all those young geeks who were being touted as future billionaires saw all their potential investment capital (some US$ 5 trillion worth) disappear in six months.
But these were only the warm-up acts: in 2008 came the global financial crisis. Lehman Brothers bank went down the tube, and so many others were in deep trouble that governments all over the place had to pour loads of public money into the private banks (whose speculative practices were responsible for the mess in the first place) to keep these pillars of the capitalist system in business.
Only two years later, Wall Street’s computerised trading system fell in a heap and millions of trades had to be cancelled. It may sound inconsequential, but it is the heart of the capitalist system, and basically it had a heart attack.
Another two years later and half a dozen giant banks were discovered to be manipulating the core interest rate that underpins several hundred trillion dollars in annual derivatives trading. Banks routinely cheat, manipulate and let’s be frank, rob their depositors, customers, clients, call them what you will; but they don’t like it when it is done to them, especially by some of their own. It’s just not cricket!
Sheehan’s main point is that today, sharemarket trading is computer-controlled and superfast. The length of time stocks may be held in a portfolio is now often measured in fractions of a second. Only investors with appropriate computer power and portfolios of sufficient size to allow for a relatively small profit on each of a very large number of shares or stocks to be acceptable to them stand a chance of making money.
However, the sharemarket is only the more visible part of capitalism. Sheehan notes that there are also “giant pools of liquidity which financial institutions use to trade with each other, outside the sharemarkets“.
No, far from eliminating crises and financial disasters, capitalism’s insatiable quest for more and bigger profits is propelling the system towards deeper and more frequent financial crises. Traditionally, capitalism’s solution to economic crises was to start a war, thereby destroying stockpiles of surplus goods, and “boosting” the economy again. But today, even with several powers already engaged in the process of “endless war”, the global capitalist economy is still going downhill, fast.
I fear it’s going to be a rough ride.
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