This week, stock markets fell as speculators grappled with the latest employment data coming out of the US. On the surface, the data doesn’t seem all that alarming, and stocks have recovered – for now. But the markets are right to be concerned.
The markets were thrown into a panic as funds started selling off risky shares and bonds and buying safe ones. The VIX volatility index, which is supposed to measure the mood on ‘Wall Street’, is at its highest since the first weeks of the pandemic, which in turn was the highest since 2008.
The Japanese stock market plunged further than the others, with a 12 percent fall. This was because the Bank of Japan has just decided to raise interest rates for the second time this year, and announced the beginning of the end of quantitative easing.
As a result, the downward pressure on the yen is reversing, which will cause Japanese exports to become increasingly expensive and less competitive on the world market. And of course, the ‘hot’ western money that had been flowing into Japan is now flowing back out again.
On the precipice
Whilst stock markets have recovered some of their ground since, these wild gyrations show that the capitalists know that all is not well in the world economy.
The frantic response seems exaggerated if one only looks at the surface / Image: Katrina.Tuliao, Wikimedia Commons
The frantic response seems exaggerated if one only looks at the surface. The trigger was the release of employment figures in the US. They showed that the unemployment rate is up 0.2 percentage points and that the economy added only 114,000 jobs in July as opposed to 179,000 in June. The unemployment rate is now up to 4.3 percent in the US, from a low of 3.4 early 2023. These are signs of a slowing down in the economy, for sure, but it is hardly earth-shattering news.
But, though exaggeration and herd mentality are in the nature of stock trading, there is a material basis for the anxiety that the markets are displaying.
Commentators were expecting a recession last year, either a ‘hard landing’ or a ‘soft landing’… either way a landing. A year ago, we outlined some of the severe problems driving the world economy towards a crash:
- The slow-down in China
- The crisis in Europe
- The massive mountain of debt, and linked to that, the government budget deficits
- Persistent inflation
- Protectionism and wars
- Climate change
However the economy is a chaotic system which, like the weather, doesn’t lend itself to precise predictions. In spite of these obstacles, including interest rates which are at a 23-year high, the US economy powered on with exceptional growth levels. It kept the rest of the world economy from sinking into recession. But now this appears to be coming to an end. This is what is making the markets so jittery. It’s not the data in itself that is alarming. But everyone knows that the economy is very fragile, and this is a sign that it could be about to break.
Blame game
The blame game has begun. Traders are saying that the US Federal Reserve should have lowered interest rates earlier. Sure, that might have helped in dealing with the recession. But the whole point was that they needed a recession to bring inflation down. This is why the Fed has persisted with high interest rates, precisely because inflation is still at three percent after 16 months of a central bank rate of over five percent!
Traders are saying that the US Federal Reserve should have lowered interest rates earlier / Image: Federalreserve, Flickr
The persistent inflation and the corresponding high interest rates are a symptom of the illness, rather than its cause or the cure. Ted Grant pointed this out years ago when he explained: “The development of the economy in the direction of inflation or deflation compels the raising or lowering of the bank rate.” Now, expecting a recession, the markets are predicting the federal reserve will drop interest rates by 1.25 percentage points this year.
We’re not in the business of defending Jerome Powell, chairman of the Federal Reserve. His job is to make the workers pay for the crisis of capitalism. But the idea that the central bank, or the government, can solve the crisis by means of ‘clever’ policies is a complete illusion. If they could, they would have done so at some point during the past 16 years of crisis.
No amount of lowering of interest is going to solve the massive problem of debt. Rather, it would merely reinflate the bubble. Already the poor countries of the world are defaulting on their mountains of debt. The richer countries have racked up unprecedented levels of peacetime debt, and many continue to run deficits. Households and businesses are also heavily indebted. Interest rate cuts might give some relief, but it’s not going to make their debts go away.
Tech problems
The sell-off of stocks have been led by the tech sector. There, hugely inflated stock prices represent a massive speculative bubble. Now the bubble is bursting because, although these companies are posting huge profits, the money they are making simply didn’t justify the sky-high pricing of their stocks, causing investors to panic.
TSMC and Nvidia are making ridiculous profits of 30-70 percent of their income / Image: 李 季霖, Flickr
Samsung and TSMC recently reported $7 billion profits each and Nvidia (which manufactures chips essential for AI technologies) $17 billion, and this was only for three months. TSMC and Nvidia are making ridiculous profits of 30-70 percent of their income. These companies can use their monopoly position in key markets to sell their products with a massive markup.
Intel is a different matter. Its revenue has been falling over the past period as it failed to develop a range of GPUs (the processors used for AI in cars and in AI server farms). Its announcement of 15,000 layoffs is an attempt to restore the company to profitability. Needless to say, it is doing so at the expense of its workforce.
In general, the IT sector is not in crisis at the moment. But how long will that last? At some point, the limits of AI will become obvious, and the rush to buy the required parts will subside. Until that point, the profits will continue to roll in. The IT ‘correction’, as they call it, is, in this case, an accidental element.
The real underlying process is different. Interest rates are having an impact on consumption, particularly for the middle class. Luxury brands are struggling, and car brands that invested heavily in electrical vehicle production are struggling to sell their new vehicles, which are more expensive than traditional combustion engine cars.
Judgement day
The internal contradictions inside the imperialist powers are leading to increased conflicts and tensions on an international scale. Protectionism, the attempt to export social problems, is on the rise, as well as wars. If the conflict in the Middle East escalates into a regional war, it will threaten crucial oil supplies, in particular to Europe, where the economy is already stagnating. Prices in the rest of the world will reach unsustainable levels.
At a time when the economy is slowing down, the inevitable cuts in government spending to reduce massive deficits will have a depressing effect on the world economy. At the same time, protectionism and climate change risk pushing prices higher, thus forcing central banks to keep interest rates higher.
The market jitters reflect this uncomfortable truth. For the past 16 years, the ruling class has attempted to postpone the evil day, but it’s getting harder and harder. How long will they be able to keep it going? The truth is that the situation for the working class is already intolerable. Capitalism is revealing its limits, and if it enters into depression, it will stand totally exposed. The ruling class is aware of this, which is why they have desperately attempted to avoid it.
Capitalism is preparing another bitter pill for us all to swallow. We, on the contrary, state what is becoming clear to millions: only a nationalised planned economy, under the control of the working class, can liberate us from this rotten society.