Arresting The U.S. Economy’s Suicidal Trajectory

Although their objectives are to provide support to the capitalist economy, financial advisers, business consultants, etc. continually stumble over the undesired truth of what the future holds for their clients. Occasionally, they will, perhaps with misgivings, express these truths openly, but will treat them merely as a challenge to the system’s continued success. A good example of this was the startling declaration made by Mercer Management Consultants in 1997, which, as reported by the Wall Street Journal, went as follows:

“I feel like the prophet of doom…It’s our belief that the downturn has started. I can’t tell you how far it’s going to go. But it could be a very ugly one.” [1]

One might wonder that with such clarity about the future, what such a company would be doing today. Business is business. And Mercer Management Consulting is today talking about what it calls “value growth”, or how traditional corporate growth strategies have to be replaced by up-to-date ones that take account of today’s realities (i.e. what they refer to as a recession) –we shall return to that later.

Meanwhile, the perspicacious Bill Parish has been forecasting the dangers ahead for investors for several years now. He focuses on the financial reporting of American companies. His detailed analyses reveal that “pyramid schemes” and “watered stock” (based on the “pooling accounting loophole”) have been used by the largest American companies to dominate the market, and that the recent collapses of large U.S. companies are the result of this. He stresses that what underlies this are fraudulent accounting practices.

Thus, in April, 2001, he stated:

“Is it not astonishing that no one has determined that the whole energy crisis is manufactured by financial engineering and can be traced directly to financial fraud at the Microsoft Corporation?” [2]

Bill Parish has elaborated strategies to avoid this, but the big corporations have proven obstructive. For instance, he details how his plan to save two of Microsoft’s employees from bankruptcy was crushed by Microsoft in combination with the New York Times (which he suspects depends upon Microsoft for a lot of its advertising revenue, among other things). He complains that his analyses are not published by the mainstream press, but are altered by it to serve its own short-term ends –serving the powerful corporations he criticizes. While AOL collapsed in July, this year, and several others have also gone the same way, we have yet to see what will happen to the really big frauds (Microsoft, Citigroup, et al.), which Bill Parish puts at the top of his list of accounting fraud.

One of the many examples he gives involves the firing by Microsoft of its head of internal audit:

“a respected former partner of Deloitte and Touche, who told them what they were doing with respect to manipulating earnings was in violation of securities laws and constituted fraud. Microsoft gave him two options, resign or be fired, and he later settled for US$4 million under the Federal Whistleblowers Act, as reported by ABC News. [3]

Later (in the same article), Parish comments:

“Can you imagine what would happen if investors no longer trusted financial statements? The market would clearly collapse as it did in 1929, and that is why the SEC was created in 1934.” [4]

And the market has been collapsing, although these things do not just happen overnight; they also take time. Inflated earnings and performance led to inflated share prices. The possibility of a stock market crash, similar to (though probably much worse than) what happened in 1929, with a depression following it, had already been predicted in 1987, by Robert R. Prechter.

His view should not be taken lightly –he had correctly predicted a bull market at the end of the 1970s in which the Dow would move up to nearly 4000 (of course, it shot up well beyond this during the 1990s). At the time, he predicted a bear market that would last 96 years, with the Dow falling back to 381, or even below 1932’s low of 41 points. He went on to predict a wave of credit liquidations, global depression and a major war. A similarly cataclysmic view was expressed by William Houston, among others.

Things did not develop within the time horizon expected by these writers. America relied on growing productivity and the new economy (hi-tech) to keep share prices moving up throughout most of the 1990s. However, doubts were expressed during that period about the extent of the effect of the hi-tech economy on the rest of the economy and true growth of productivity. As things began to falter, some people also began talking about the so-called “Plunge Prevention Team”, i.e. clandestine intervention in U.S. financial markets by the financial authorities aimed at stabilizing stock and bond prices…

This matter of “watered stock” can, of course be traced back much further than the 1990s. Matthew Josephson, for example, refers to the process in “ The Robber Barons, the Great American Capitalists, 1861-1901” (1962) and “ The Money Lords; The Great Finance Capitalists, 1925-1950” (1972). Similar scenarios were presented by the 19th century commercial crises, which descended upon the capitalist economy roughly every nine years. These are documented by H.M. Hyndman, for example, in his work “ Commercial Crises of the Nineteenth Century” (1892).

Once we consider this we realize that we are looking at a historical phenomenon, and not some unique catastrophe. Indeed, it is instructive to reflect on the following:

“…in scale, intensity and duration today’s continuing disintegration of the Wall Street capital market is of a magnitude comparable to that of the Great Crash [i.e., 1929]. In some respects it has been, if anything, a greater crash.” [5]

This was not written yesterday, but in the mid-1970s, when once again people were worrying what would happen next. Capitalism has not merely divided the world into rich and poor, and intensified this polarization since the 19th century (the “immiseration” Marx talked about), but it has repeatedly brought about tremendous volatility in the world.

For instance, the book “Modern Economic Crises and Recessions” [6] lists 5 separate recessions from the end of World War II and 1960, with a pause in the economy beginning in Europe in 1966-67. Their book deals only with the United States, Germany, France and the United Kingdom. Despite this and the prevailing optimism based on the predominance of state intervention in the economy at the time, the authors concluded:

“Crises may have changed in frequency, in severity, even in their basic character, but –whatever new name they are given –they certainly appear to remain a feature of capitalist development.”

The corporate and financial community has tried to stop people from seeing this, however. History blindness has been cultivated on Wall Street for decades. And it doesn’t seem to matter how bright the people are who deal in all the elaborate financial instruments which have grown and grown since World War II, they all follow the same short-sighted dogma: history is bunk! Parallels with the past cannot be made, then? And suddenly we find ourselves facing what Capitalism has always brought about –a “commercial crisis”, or what is better described as a crisis of overproduction.

“In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises there breaks out an epidemic that in all earlier epochs, would have seemed an absurdity –the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism…” [7]

Looked at it this way, we should see that what has happened is not the result of crafty accounting tricks. Rather, crafty accounting tricks are the result of the underlying crisis of the economic system. But things have got much worse than they were in Marx’ and Engels’ time. Modern barbarism is no longer “momentary”, but has become the norm for the capitalist system since the end of the 19th century. And today, it is impossible to distinguish between the capitalist status quo and organized crime – the two have merged.

Returning to what we said when we came in, although Mercer Management has not allowed the judgment it made of things in 1997 to lead it to see the need to change this capitalist system, it does get close to the heart of the problem. Looking at some of the problems that were emerging in the 1990s, we can see that over production was already writ large.

Bernard Wysocki, the writer of The Wall Street Journal article from which the Mercer Management statement is taken went on to state:

“So far, demand isn’t a big problem. In many industries it is still growing steadily, though slowly. What is developing is too much supply, stemming from the recurrent problem of over investment.” [8]

He noted that this was particularly evident in the car industry, where future over capacity would lead to increased unemployment. Indeed, the capacity to build cars and trucks around the world has gone on growing faster than demand, and this has implied further cuts in company work forces (and further restructuring), with more planned for the future.

It was known towards the end of last year, for example, that Ford had plans to cut 21,000 jobs in North America by about 2005 –the same thing can be said for the other large car-makers, and even more so for the independent parts suppliers. Thus, the trend was already well established years before September 11, 2001, and has continued apace since. In fact, car sales in the United States (and elsewhere) have only held up thanks to zero-rated loans and other special offers, which naturally assumes that the repayments will be made by the purchasers at some period in the future.

At the time, hints of over production (and over capacity) could be seen in many other industries by 1997. Although The Economist (Nov. 15, 1997: “ Will the World Slump”) cavalierly dismissed the idea, a whole lot of evidence was piling up to support this view of things. The following are just a few examples from the second half of the 1990s.

“ UN sees world crude steel glut looming”, July 23, 1996, Reuters. The story points out that steel producers were depending on Asian demand growth.

“It will be difficult, however, for the Asian countries alone to absorb all the steel supply arising from crude steelmaking capacity from 1995/96 to 1998/99…Furthermore, there are still many expansion plans to go into effect after 1999/2000 and when about 18 million tonnes of new capacity in North America is materialized by 1998/99.”

While reporting tightness in copper supply with prices rising in May, 1997, by August of the same year Reuters referred to a world copper glut which was expected to grow into the year 2000, largely due to an increase in supplies from Chile. [9]

“Most oil products are oversupplied in Europe and the United States”. So reported Reuters in March, 1997, noting that the only real demand was in Asia. Of course, Asia was one of the first places where the crisis broke out.

Moreover, a spokesman for the oil industry told Reuters in March, 1997:

“Oil companies are growing at an average annual rate of 5.5%, while oil demand growth is pegged at 2% a year and gas demand at 4%” [10]

And despite the continuing famines all over the world, food output also showed signs of overproduction. Reuters reported poor prospects in European grain markets in January, 1998 and the Economist Intelligence Unit expected a world coffee surplus in 1998/99.

Since then, the hallmark of a crisis of over-production has made itself felt –declining industrial profits. For example, U.S. corporate profit growth accelerated from 1985 (when it was 18%) to 1995 (when it was 116%). But by 1998, corporate profits were growing by only 27%. After that, corporate profits not merely grew more slowly but actually dropped absolutely –between the second quarter of 2000 and the first quarter of 2001, U.S. manufacturing profits almost halved. [11]

Mercer Management today seems to be pointing towards companies exploiting the US domestic market rather than the rest of the world as their focus for “value growth”. But this turning in on itself is typical of what happens in a recession or a depression.

Overproduction led to inflated balance sheets as the big corporations sought to attract investors and breed confidence in themselves. Moreover, as industrial earnings fell due to over capacity and over production, financial earnings remained firm. In line with this stock prices grew even faster (the same movement occurred in the years leading up to 1929). As Bill Parish said it would, the bubble began to burst as these inflated balance sheets were exposed, even though some market watchers had long warned that share prices, the New York Stock Exchange Index and the NASDAQ (etc.) were inflated.

The point is that the powerful knew.

Even though leading people at America’s largest corporations seem to have believed they could get away with their fraudulent accounting, while corporate bosses and financial analysts (persuaded by the myth that history could not repeat itself) appeared to believe that the boom could go on for ever, it is impossible to believe that the powerful were unaware of what was going to happen.

Even the general public had the opportunity to see some of the signs, although putting things together requires more thought than most people have time for. The powerful not only have all the key information at their fingertips but also know what they are doing in this world.

The powerful are not some talented business consultant, stock analyst or options trader on the New York Stock Exchange. The powerful, the elite, the financial oligarchy, the real rulers of the planet use such crises to further their designs, however, catastrophic this will be for the human race and (today) for the planet itself. The question remains, however:

Will the world lurch backward into an even more consolidated form of modern barbarism, or can we pull ourselves out of this suicidal trajectory?

August, November , 2002

FOOTNOTES:
1. A Duane Dickson of Mercer Management Consultants, in “Same Old Cycles” by Bernard Wysocki, Jnr., August 7, 1997, Wall Street Journal.
2. Bill Parish on the AOL-Time Warner acquisition, April, 2001 –see Parish and Co. Homepage
3. Ibid.
4. Ibid.
5. David Fromkin, “The Crash Worse than ‘29”, in “The Economic Crisis Reader”, edited by David Mermelstein, 1975.
6. Maurice Flamant and Jeanne Singer Kèrel, English edition, 1970.
7. Karl Marx and Friederich Engels, “Manifesto of the Communist Party”, 1848.
8. Wysocki, ibid.
9. Reuters, May, 1997 and August 28, 1997.
10. Richard Gordon of US oil consultants John S Herold, November 18, 1997, Reuters.
11. U.S. Bureau of Economic Analysis

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