From: Misty 
Subject: SNET: Corporate Gamblers 1 Trillion, Globe 0
Date: 29 Mar 2001 21:47:08 -0500
To: SNET ,
        Armageddon or New Age? 

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Corporate Gamblers 1 Trillion, Globe 0
Posted 28th March 2001
Edited from original article by Sean Healy from Green Left Weekly Australia,
http://www.pl.net/6business/gamblers.html

14 March 2001 The Australian Stock Exchange will cop a pasting on May 1,
when thousands of anti-corporate protesters blockade its offices and
surrounding streets. The major reason for protesters' choice of target is
obvious - the stock exchange is symbolic of the capital-first global
economy, the power, greed and unsustainability of global corporations. But
what do protesters have against the exchange itself? The world's stock
exchanges, and the wider financial markets they sit at the centre of, have
ballooned in the last decade, pumped up by the privatisation of state
assets, the enormous growth in superannuation and pension funds, the
liberalisation of capital accounts, allowing finance to flow almost freely
across most national borders, and, most of all, an enormous and until
recently ever-growing speculative bubble. Since 1980, the value of the
global stock of financial assets has increased more than twice as fast as
the gross domestic product (GDP) of the rich countries, from $12 trillion
then to $80 trillion now. The most dramatic has been the growth in the
foreign exchange, or forex, market. According to the Bank of International
Settlements, each day more than US$1.5 trillion crosses the wires in
currency trades; in 1989, the figure was US$590 billion, in 1977, it was
$18.3 billion. Yearly trading on forex markets is today worth more than 10
times world GDP. During the 1990s, the value of shares traded on the New
York Stock Exchange, the largest in the world, increased more than fivefold,
from US$1.74 trillion in 1992 to US$8.94 trillion in 1999. Even the
Australian Stock Exchange, middle-ranking in world terms and a fraction the
size of its giant Wall Street brother, has boomed in the last decade.
According to ASX figures, the total value of equities traded over the year
1989 was $56.6 billion; 10 years later, that figure had increased sixfold,
to $306.8 billion. The total market capitalisation (that is, the number of a
company's shares multiplied by its share price) was $163.3 billion in 1989
and nearly four times larger, $593.6 billion, in 1999. During the same
decade, inequality between rich and poor has also expanded massively, both
between and within countries. According to the United Nations Development
Program's Human Development Report 2000, the distance between the incomes of
the richest and poorest countries has increased from 3:1 in 1820, 35:1 in
1950, 44:1 in 1973, 72:1 in 1992 and would be even greater today if a
similar calculation was made. The Australian Bureau of Statistics' latest
annual yearbook reports that the gap in after-tax income between high and
low-income households in Australia in the mid-1990s was the fourth highest
of 21 First World countries surveyed, and has become more uneven since the
1960s.

Coincidence?

Stock markets boom, inequality increases. Coincidence? No. The connection is
causal, not casual. The financial markets are acting like a giant vacuum
cleaner, sucking money out of the pockets of working people, into the vortex
of speculation and then into the numbered Swiss bank accounts of the
billionaires. That's not what the financial marketeers will tell you,
though. They, and their media mouthpieces, argue that robust financial
markets even out inequality by broadening ownership; encourage economic
growth and prosperity; fund investment; and allocate funds efficiently to
the most appropriate sectors. They say that over - but never seem able to
prove it. Greater numbers of people than ever now own shares, that's true -
but this has not reduced inequality even in share ownership itself. The
ASX's 2000 Australian Shareowners Study claims that the total proportion of
Australian adults who directly owned shares increased from 10.2% in 1991 to
40.6% in 2000, while the proportion who owned shares both directly and
indirectly (for example, through their super fund) rose from 14.7% to 53.7%.
Rather than being democratised by this influx of new investors, however,
share ownership is still highly concentrated in the hands of the super-rich.
A study published in the Economic Monitor in November 1998 by Hans Baekgaard
estimated that in Australia 90% of all shares are owned by 10% of
shareholders, while 60% of shares are owned by 1% of shareholders. Nor do
stock markets necessarily promote economic growth. The so-called "wealth
effect", whereby rising stock prices make people feel richer and therefore
more disposed to spend, would better be called the "debt effect", because
that's what has powered the 1990s boom in consumer spending. Households in
the US, where the "wealth effect" is supposed to have been most pronounced,
now have negative savings. The ratio of US household debt to equity rose
from 84% to 105% during the 1990s. This burgeoning debt is just as much a
sign of growing poverty as it is of growing wealth. While expanding share
portfolios may have prompted a spending binge by the wealthy classes, poor
and middle-income households have been borrowing just to keep their heads
above water. The US Federal Reserve estimated in 1998 that 70% of debt was
held by the bottom 90% of households. In a longer view, the relationship
between stock market performance and economic growth is pretty much random.
One analysis, by Federal Reserve Bank of New York economist John Mullin,
which studied the relationship between the two in 13 countries between 1976
and 1991, found no pattern whatsoever.

Rational?

Stock markets play virtually no role in raising funds for investment either.
The overwhelming bulk of trading on any stock exchange is trading in
existing shares, which are feverishly handed from one owner to another.
Proceeds from the sale of shares go to the last shareholder, not to the
company, just like Ford Motor Corporation gets nothing when you sell one of
its cars second-hand. The only sale of shares which could in any way be
linked with investment are "equity capital raisings" - which occur either
when a new company lists on the stock exchange and sells a pile of shares in
itself (called an "initial public offering", or IPO) or when an existing
listed company decides to issue a certain number of new shares on top of
those already issued. According to ASX figures, in 1999 capital raisings
accounted for $33 billion out of a domestic market capitalisation of $578.8
billion. This means that stock markets only contributed 5.7% of their value
to what could potentially be new investment, about average for the decade.
The long-term average rate in the US is lower, 4%. Among the companies
listed on the Dow Jones Industrial index, only a handful have issued any new
stock in last 30 years. Most companies fund new investment out of their
retained earnings or through debt (either bonds or bank loans). Ninety-two
percent of US companies' investment was funded this way between the 1950s
and the 1990s; the Australian proportion is similar. As for allocation of
resources, "manic" would be a better description than "rational" or
"efficient". The massive speculative bubble in US information technology
(IT) stocks, which is now bursting, is a case in point, probably the most
extreme case in market history. The classical benchmark for judging whether
a stock is overvalued is the ratio between a company's share price and the
dividend paid on each share (the price-earnings or P/E ratio). For the
Standard and Poor's 500 index, the broader New York Stock Exchange measure,
the P/E ratio is 25:1, meaning it would take 25 years of dividends for a
share to pay for itself. This is a fairly reasonable, historically average
figure. In 1985, the P/E ratio on the US NASDAQ stock exchange index, where
most IT stocks are listed, was 51:1. In 1999, it was 118:1; it hit its peak
in 2000 at 400:1, which means a single share would take 400 years to pay for
itself. Since the bubble burst in April, the NASDAQ has lost 57% of its
value, or US$3.4 trillion. And no wonder. Many of these NASDAQ-listed
companies had never made a profit, had little revenue, owned next to no
assets and were purely a product of rampant speculation, which forced their
share price up and up and up and until it popped. Does that sound rational?

What do they do?

So if stock markets don't democratise ownership, don't promote economic
growth, don't fund investment and don't efficiently allocate resources, what
do they do? The basic function of the stock market, and of all financial
markets, is parasitic: they siphon funds from productive investment into the
pockets of the rentier owners of corporations, who then use these funds to
engage in speculative activities - that is, to gamble on the future
movements of stock prices. Like a parasite, they take over parts of the
host's functioning: financial markets ensure that the management of listed
companies always does what's best for the big shareholders. And, again like
a parasite, they endanger the health of the host: financial markets greatly
multiply the risk of crisis. They are proof of how capital-first economics
and politics holds back not only social equity but also economic
development, the thing it is supposed to be best at. Capital's joyous,
head-long flight into speculation is a retreat from investment in
production, caused by a long-term decline of profitability in "real economy"
industries and a vast over-capacity problem. World manufacturing capacity
was operating at 65-70% in 1998, while the car industry, one of the global
economy's largest and most important, can build 20 million more vehicles
than it can sell each year. Obviously, in a capital-in-charge economy,
companies aren't going to give their product away, so they simply stop
producing and search for other ways to make a buck. As a result, investment
is heading downwards. In the United States during the 1950s and 1960s,
capital expenditure by non-financial corporations averaged 8.5% of GDP; in
1995-97, it averaged 6.2%. The answer to dropping profitability has been
speculation. The most glaring example is the forex market. In the 1970s, 90%
of foreign exchange transactions were related to trade and investment -
companies bought and sold national currencies in order to buy and sell real
goods or services. Today, the global annual value of exports of goods and
services amounts to only four days trading on forex markets; the rest is
about speculators betting against national currencies. The financial returns
of speculation are huge, for those who can get in on the game. In the United
States, the profit rate of non-financial corporations peaked at 7.5% in
1997, after slumping to 3% in the early 1980s; in contrast, the profit rate
of mutual funds averaged 13% and that of hedge funds averaged 20% during the
1990s. In Australia, the finance and investment sector's rate of return in
1999-2000 was 11.1%, more than twice the economy-wide rate of return of
5.4%. Even industrial corporations are now devoting greater funds to
speculating in the financial markets. The world's 9th largest corporation
(by sales in 2000), General Electric, a giant in manufacturing, made 40% of
its 1997 income from its speculative arm, GE Capital, for example.

Who wins?

Stock markets don't just encourage gambling; they greatly empower the
gamblers. A company listed on a stock exchange is based on a division
between management and ownership. The senior managers run the company day to
day, but ownership is in the hands of the shareholders. It's these
dividend-seeking rentiers, particularly the large institutional investors
like investment bankers and fund managers, who get to pick the board of
directors and, indirectly at least, the senior managers. Their shares are
perpetual ownership rights in a pipeline direct into a company's profit
stream, and their will is that the pipeline continues to pump out dividend
cheques with ever-increasing numbers of zeroes on the end of them. The most
important thing therefore for any chief executive officer is their company's
share price, a 24-hour, real-time indicator of whether or not their largest
shareholders are happy with them. This process is euphemistically known as
"market discipline" but - markets being collections of people, rather than
disembodied, ethereal things - "rentier discipline" is probably a more
accurate term. A falling share price reduces the value of a firm's assets,
thereby making it costlier for companies to borrow and, if sustained, even
leaving a company open to a hostile takeover. It also hits CEOs where they
hurt - most executive salary packages include large quantities of stock and
options, a fall in share price reduces executives' salaries.

Who loses?

This isn't the only way that stock markets threaten the welfare of the
world's people. Stock markets, and financial markets more generally, also
make catastrophic financial and economic crises more likely and, when they
inevitably occur, more devastating. During the 1990s, major financial crises
averaged one a year, the social and economic costs of which were universally
paid by working people. Some of these crises are deliberately brought on by
the actions of speculators. The 36% plunge in the value of the Turkish lira
on February 22 was brought about by Western portfolio investors withdrawing
their money from the country's stock exchange in protest about the
government's lack of progress in imposing a harsh austerity package on the
population. Currency traders targeted the lira, and bought on the cheap
US$7.5 billion of the country's reserves when the central bank desperately
attempted to protect its value. Inflation is expected to sky-rocket as a
result, hurting living standards, and the International Monetary Fund is in
the process of drawing up an even harsher austerity package as a condition
for bailout loans. The deliberate actions of speculators played a major role
in similar crises in countries like Mexico (1994-95), East Asia (1997),
Russia (1998) and Brazil (1998-99). In each case, Western speculators made a
killing, while millions of people in the targeted countries suffered. Today
New York tomorrow the world .. not boom, bust. .




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