The value of public companies listed on stock markets has dropped by about a third in the past year. This means that shareholders believe that this group of companies, which are an important but not dominant factor in the global economy (the public sector, notably health and education, and privately-owned enterprises, are collectively much larger, both in what they contributed to productive output and in the number of people they employ) will generate 1/3 less future total profits than had previously been forecast.
The response of governments to this assessment has been immediate and unanimous — such a reassessment is unacceptable, so unacceptable that trillions of dollars of taxpayer money (money that governments cannot afford to spend) need to be spent immediately to “increase liquidity”. By increasing liquidity they mean creating enough new cash for investors to need to park somewhere (i.e. in the stock market, pushing prices back up again) and for consumers to buy the stuff these companies are producing.
In short, governments and corporations are working furiously together to ensure that all of us — governments, corporations and consumers — remain addicted to growth, which means addicted to ever-increasing consumption and ever-increasing debt. This is the fragile foundation on which this portion of our economy (the publicly-listed private sector) utterly depends.
It should be noted that most unlisted (privately-held) private-sector enterprises, companies that do not have outside shareholders with insatiable demands for double-digit annual profit growth, and public sector enterprises (government, education, health and other public services) are not addicted to growth. They can do just fine in a steady-state economy. They are vulnerable to a collapse in the stock market, however, because (a) if the publicly-listed companies lay off millions of workers (which they tend to do in a recession) that affects consumers’ ability to buy from anyone, and (b) most consumers’ wealth and pensions are tied up in publicly-listed company investments, and in housing whose value tends to move in lockstep with stock market values (because they vie for investors’ cash).
I recently (before the stock market collapse) wrote a two-part article (part one; part two) about the advantages of moving from a growth economy to a steady-state economy, in part because it is better for our environment, and in part because the growth economy is simply not sustainable and will soon have to end anyway. Does the current stock market collapse provide an opportunity to move there now, instead of waiting until the last possible moment?
As I noted in the earlier articles, such a transition would require a major redistribution of wealth from rich to poor, a large investment in entrepreneurial education and infrastructure, fair trade laws and a collective commitment to collaboration instead of competition for resources and jobs. I’m not sure if that’s possible, but perhaps the current free-fall of markets might make the prospect more palatable.
What we should not be doing is giving trillions of dollars away to large public corporations. As economist Paul Krugman has noted, if we must invest this money (money, remember, we have no way of knowing how we’re going to collect or repay) to prevent a collapse that will plunge us into the next Great Depression, that investment should be in equity in these companies — we the taxpayers should be buying up these companies so we can own them and determine their future direction, and prevent recurrence of the ignorance- and greed-driven errors they made that has led to this crisis of confidence. In effect, we are nationalizing most of the financial services industry, which in the US accounts for a third of GDP and millions of jobs. For conservatives and libertarians, this is a ghastly process.
What drives the entire economy is consumer spending. Since the 1970s, levels of consumer spending, in real terms, have more than doubled, despite the fact that, for 90% of the population, income in real terms has not changed. The doubling has all been financed by increases in personal debt. Much of that debt has been secured by home ownership (which has recently lost much of its collateral value), and much of it has been unsecured. Most of it, arguably, should never have been advanced because the consumers’ ability to repay it depends of endless increases in future income and increases in the value of homes and investments. We have been banking for nearly forty years on the continuance of growth that we knew full well was unsustainable. These loans were simply reckless and speculative. They were gambling on perpetual growth. Now we are seeing the economy unravel because of this.
By lowering interest rates and throwing cash at insolvent financial corporations, governments are trying to get consumers to start buying again, to addict them to even more spending and more debt. This is just crazy. What we really need is to rein in our spending to what we can reasonably afford to repay (and that applies to governments and corporations, not just consumers), and then restructure the economy to be able to thrive with zero growth.
This will be very difficult (and painful) but not impossible. For a start, what we need to do is increase interest rates to reflect the risk of non-repayment and to provide a sufficient return (especially for those on fixed incomes) to enable pensions and other long-term investments to cover the real inflation in our economy (which is already much higher than the “official” rates, and likely to grow much higher as Peak Oil, water shortages and other resource scarcities come due). We also need responsible limits to credit and spending by consumers, corporations and governments. That means a reintroduction of usury laws. The “deregulation” that eliminated these laws has allowed lenders to charge obscene (20%+) interest rates, and hence has encouraged them to offer credit to people who have no capacity to repay their debts. Lenders need to accept responsibility, and to encourage this, capping interest rates at a few points over prime, and reversing recent laws that restrict individuals’ ability to declare bankruptcy, are necessary.
The consequence of all this would be a drastic reduction in consumer spending and consumption. Publicly-listed companies (which are most dependent on ever-accelerating consumer spending) would be most hurt by this, though all companies and most investment and pension portfolios would suffer too. It’s really a matter of whether this can and should happen now, or whether we stall it off a few years and have it hit even harder then (with a disproportionate and unfair impact on future generations that did not incur these reckless debts and did not steal more than their share of the Earth’s resources). The recent drop in share values would already cover part of this shrinkage, but in a zero growth economy shares would really only be worth the present value of future dividends, a steady and no longer perpetually-increasing stream. So these shares will likely have to drop a lot further.
The drop in share values would mostly affect high-income earners, which would actually help in the necessary redistribution of wealth and income for a steady-state economy, but it would also hurt line employees and pension plans. A sharp increase in taxes on the rich, and on speculative investments and capital gains, could help fund a “negative income tax” to protect those who do not have enough income to live comfortably after this retrenchment.
An end to subsidies to big corporations, and replacing ‘free’ trade laws with fair trade laws would also encourage healthy economic relocalization (moving quality jobs back close to where the goods and services are consumed), enable higher standards of environmental protection and resource conservation, and reduce exposure to spikes in energy prices.
The biggest challenge of the shift to a zero-growth economy will be the massive re-learning that is needed by every citizen — re-learning of entrepreneurial skills (since most big multinationals will collapse to make way for many more small, locally-based companies) and of self-sufficiency skills (growing our own food, making our own clothes, maintaining and fixing our homes, appliances and tools instead of relying on others to do this for us).
It will require us to live more modestly, and within our means. It will be a much different world.
The economists from across the political and philosophical spectrum who are urging the government to step in and either bail out (the conservatives) or nationalize (the progressives) the overextended financial institutions of the world are trying to stave off a panic that could plunge us unnecessarily into another Great Depression.
The problem is that the US in particular simply has no money to pay for this. Conservatives have bankrupted the US treasury with tax cuts for the rich and trillions in spending on unwinnable, endless wars and utterly useless, staggeringly expensive “homeland security” programs. So the risk now is that the US dollar, which is really fundamentally worthless, will collapse and plunge us into that global Great Depression anyway.
The second risk is that, if the US can persuade or bully its global co-dependent trading partners to keep taking its worthless currency, even after it prints another trillion or two dollars of it with nothing of value to support it, the US and the world will go back to believing in the magical thinking of its publicly-listed companies and capital markets — that double-digit growth can resume and continue forever.
My guess is that this is exactly what will happen. This is why my prediction is that the next real Great Depression is still some twenty years ahead, when the whole house of cards will collapse. The problem is that then, the economy will be leveraged and over-extended even more than it is now, and that compounding all this will be the reality of the End of Oil, the End of Water, the first serious climate change catastrophes, massive and global civil strife (fueled with newer and ever-more dangerous weapons available to any desperate individual with a science degree and a good imagination) that the horrific inequity of wealth and income on our planet will inevitable provoke, and ghastly overpopulation and environmental desolation with another two billion humans on the planet fighting for their share of plunging natural resources and exhausted land.
The relatively modest setback to wealth and income that the recent greed- and ignorance-induced stock market collapse has wrought is perhaps our final chance to wake up to what we are doing and realize that “business as usual” simply cannot go on.
But if this is our wake-up call, we are not heeding it. Instead, the alarms are ringing and we’re just pulling the pillows and blankets up over our heads and refusing to admit that we must act. We want the governments to lull us back to sleep with their trillion-dollar bailout lullabies. We have this terrible hangover from too much growth, too much consumption, too much debt. And we’re hooked bad, unable to break the addiction.
Call us when we’re feeling better. Just another few minutes, a couple more decades, then, wepromise, we’ll get up, we’ll act, we’ll do the responsible thing.
But not now. Not today. Not this year.
Category: Understanding Economics
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Carolyn Baker (US)*
Catherine Ingram (US)
Chris Hedges (US)
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Dahr Jamail (US)
David Petraitis (US)
Dean Spillane-Walker (US)*
Derrick Jensen (US)
Dmitry Orlov (US)
Doing It Ourselves (AU)
Dougald & Paul (UK)*
Gail Tverberg (US)
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Ilargi & Nicole (CA)*
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Paul Heft (US)*
Post Carbon Inst. (US)
Richard Heinberg (US)
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Dean Walker Interview (video)
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