P/E Ratio
The Western economy, under the Bush laissez-faire business and trade doctrine, has become a dragon eating its own tail. While the dangers of the Bush regime’s political extremism are already evident in the chaos and endless war and violence that the regime has imposed on the world, the dangers of the regime’s economic extremism are just becoming evident. The neocons’ strategy of oversimplifying everything to single, extreme principles is undoing the checks and balances that are the only hope for a peaceful and stable world, both politically and economically.

Bush’s economic extremism was best summarized by one of his own neocons, Grover Norquist, who said “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.” Thom Hartmann explains this horrendously simplistic and dangerous philosopy here. This philosophy might be summarized as follows:

Politics: America is the defender of the free world. Most of the rest of the world is run by evil tyrants who hate freedom or by cowards who lack the courage to confront the tyrants. America must therefore unilaterally take on the responsibility to run the whole world according to American values. Any country, and any person within America, who does not share this vision is our enemy. Our enemies sacrifice their rights, which are a privilege the government can give and take away. Politics is war: it is about obtaining and holding power by any legal means. In politics there are only winners and losers. There is no room for fairness, honesty or compromise. Might makes right and the end justifies the means.

Economics: The market is always right. Any restrictions on business or trade distort the market and must be eliminated. Government and business should always help each other out. Anyone who wants to restrict business is our enemy. Business is war: it is about making profit by any legal means. In business there are only winners and losers. There is no room for fairness, honesty or compromise. The winners are entitled to their spoils. Anyone who wants to succeed in business can. The poor and the unemployed are losers who just aren’t trying hard enough. They have to learn to help themselves, not get help from government.

As Hartmann points out, the anti-abortion, pro-capital punishment, god-fearing components of the neocon agenda are merely window-dressing to “fill the tent”. They’re expedient but not essential to the philosophy.

With government control over big business largely eliminated, the economic system quickly becomes dangerously unstable. We have recently seen unprecedented whipsaw movements in stock markets and currency markets. ‘Free’ trade has bankrupted most third world economies. Small businesses have been crushed by the ever-increasing power of the oligopolies that now control almost every industry. More than half of us describe ourselves as ‘underemployed’ — doing work that is beneath our capabilities and underpaid accordingly. Most of us have our retirement incomes dependent on the continued prosperity of the Fortune 500, in which our pensions are invested. There is no alternative investment: fixed-income investments pay almost no interest (thanks to the successful corporatist campaign to brand inflation as ‘evil’, which it is not), and the housing market is so overheated that a bubble burst is inevitable. Because of the staggering and unprecedented US debt and trade deficit, interest rates are poised to spike, which will make repayment of mortgages and consumer debt impossible and force millions into bankruptcy, send stock and bond markets and the US dollar into a tailspin, and force abandonment of the US dollar as the global monetary standard in favour of the Euro. That in turn will force huge increases in tax rates in the US to repay the colossal debt.

The chart above shows the Price/Earnings (P/E) ratio of the S&P 500 (blue line). With the run-up in the last week since that chart, the P/E ratio stands at about 30. That means that the average price per share is thirty times the average expected earnings per share for the next year. Why would people pay thirty dollars for a share that is only earning one dollar per year? Would you give someone thirty dollars today with the promise of getting a dollar a year in return? Of course not. These stock prices are discounting anticipated massive increases in profits for the S&P 500 companies in the future. One rule of thumb suggests that the P/E ratio discounts what annual percentage increase in profits is ‘built in’ to the current stock price. By that measure, the profits of the S&P 500 will have to increase by 30% per year, more or less forever, to justify the current prices. If you gave someone $30 today with a promise of getting back $1 next year, plus $1.30 the following year, plus $1.69 the year after that, etc., it now looks like at least a reasonable investment.

So if the stock market (and your pension) requires the typical S&P 500 company’s profits to grow endlessly by 30% per year, how is that going to be achieved? Most of these companies are now global, so the increase is not going to be achieved by expanding into new markets. If they take over another company, they’ll have more profits but also more shares, so growth can’t come that way either. There’s very little innovation in the economy, and what there is tends to be more than offset by the inevitable drop in prices (and hence profits) once a product becomes ‘mature’. In short, there is no reason to believe that these 500 globally dominant companies can expect to increase revenues considerably in the future at all. Consumer debt is already at record levels, the little guys have already been squeezed out by the oligopolies, and spending on new products is simply replacing spending on older, obsolete ones.

How do you increase profits if revenues are flat? You cut costs. Material costs have already dropped in recent years, so the principal way you cut costs today is by reducing the cost of labour. That means offshoring, outsourcing, getting rid of the union, firing older workers to bring in cheaper younger ones, and lowering product and service quality. All of that means laying off and under-employing domestic workers, creating unemployment and underemployment. This of course becomes a vicious cycle, since this further reduces consumer spending power and forces yet more ‘productivity’ improvements (offshoring and layoffs) to keep profits rising, the ‘Wal-Mart Dilemma’.

Eventually you crash into a wall: At some point there are simply no further ‘productivity’ improvements to be had, even if you ‘win’ the treacherous Race to the Bottom. Then what? Then you realize that a reasonable P/E ratio for the S&P 500 is 10 to 15 (which is what it always was until a generation ago), not 30. After you’ve lost your job to ‘productivity’ cuts, and after you’ve been forced to buy stuff from Wal-Mart made and serviced by the third world people that took your job away, then you lose half or two thirds or more of your pension as stock markets tank.

Mind you, once the calamity of the Bush debt, the Bush trade deficit, the Bush tax cuts for the rich, the profligate Bush war spending, the Bush subsidies and handouts to corporate friends start to register on the ‘free’ markets, you probably won’t have to wait for the no-more-productivity-improvements wall to eliminate your retirement income. The ‘efficient market’ should wipe them out well before that. And watch for an interest rate spike to accelerate the decline further, and a housing price bubble burst to accompany the collapse.

Oh, well, there’s always reverse mortgages.

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  1. Kev says:

    I agree with a lot of what you said. There are plenty of polcies of the Bush administration that deserve critisism, and you hit on several. A lot of the recent economic problems can be blamed on the 90’s bubble. The crash was inevitable. I don’t like Bush either, but you can’t blame the 90’s bubble on him. So, should we blame Clinton — the one in power at the time? No, the bubble had little to do with any president, least of all Bush.

  2. Raging Bee says:

    Capitalism is ALWAYS “a dragon eating its own tail” (and other bits as well). It’s been that way since at least the 1600s. That’s how – and why – it works. Karl Marx mentioned this and predicted it would lead to a “crisis of capitalism.” He was right about this, but wrong to think that the crisis would lead to its overthrow; in fact, the (recurring) crisis is part of the game.

  3. joke says:

    I think you’re victim of a common confusion: self-interested, rich man’s back-scratching is not “pro-market” or “laissez faire.” Which of these major Bush policies would you call laissez-faire: steel and softwood lumber tariffs, increased farm subsidies, an energy bill full of handouts, a Medicare bill that subsidises pharmaceutical companies and corporate drug plans, nepotism in assigning reconstruction contracts in Iraq, massive increases in defense spending and sinking the federal budget. I think all these policies are wrong, and we would be in heaven — relatively speaking — if the Bush administration were pro-market.

  4. Burkhard says:

    You say “‘Free’ trade has bankrupted most third world economies.” No, I don’t think so – there are a lot of reasons why there’s poverty in the world, but free trade is not among them. I recommend Johan Norberg’s “In Defense of Global Capitalism” to everyone; it’s only a slim book, but it’s well researched and a real eye opener.The previous poster puts his finger on the spot, though: A lot of what goes under the name of ‘free market’ is actually anything but. Viz punitive tariffs on steel – hardly the action of a free marketeer. But anyway, could you clarify why you think that a) interest rates are too low and b) they are going to skyrocket? Also I’m not quite clear why you think inflation is a good thing, or “corporatists” would think it isn’t.

  5. Raging Bee says:

    “‘Free’ trade has bankrupted most third world economies.”Don’t corrupt or incompetent rulers get honorable mention? What about protracted, vicious ethnic wars? Was the entire “third world” peaceful and prosperous before free trade came along?Once upon a time, the Western left saw free trade as the key to freedom from complacent corporations who clung to monopoly as a substitute for innovation. Now that same left seems to view free trade as a threat to just about everything good. Am I the only person who sees something sad and pathetic in this?

  6. Charles2 says:

    I think seeing the left as having changed its mind on “free trade” is a semantic problem. A problem of all our making. At least as far as I’m concerned, what progressives once called free trade would now rightly be called “fair trade.” This confusion and a lack of self-correction on the part of the right continues to pollute the dialog on trade practices. The right can point to past statements by liberals and say, “see, they used to be free-traders; how inconsistent.” But the words have morphed to mean something entirely different. The right, masters at framing the conversation (without interference from any other view point), then control that conversation. Their statements become the accepted wisdom.We on the left and the press roll over, play dead and accept the newly minted paradigm.

  7. Raging Bee says:

    On of the ways in which “We on the left … roll over, play dead and accept the newly minted paradigm” is by openly advocating policies that restrict international trade. If you give the right the ammo, expect it to be fired at you.

  8. Dave Pollard says:

    Charles: You’re right — the right are masters at mangling semantics to suit their political agenda. I keep thinking everyone is clear that the alternative to ‘free’ trade (which I always put in quotes because it’s a misnomer), is fair trade or regulated trade. Not ‘no trade’.

  9. Mike says:

    I’m with Charles on this one. It seems that in several places ‘Free Trade’ means no restrictions on beating up union organizers. Also, for more on the ways the right is dominating contemporary discourse, google Lakoff and read the first few hits.

  10. Raging Bee says:

    If “in several places ‘Free Trade’ means no restrictions on beating up union organizers,” perhaps we should be working with union organizers to make labor a global movement, to match global management. How many lefties are even discussing this?I once brought this idea up with a Naderite, and he said that was a bad idea, because automation would make most labor obsolete anyway. This particular Naderite was an idiot, but I was still appalled by the total lack of concern for the condition of workers.

  11. Raging Bee says:

    “I keep thinking everyone is clear that the alternative to ‘free’ trade (which I always put in quotes because it’s a misnomer), is fair trade or regulated trade. Not ‘no trade’.”The left have been making this mistake since the ’60s, at least: they “keep thinking everyone is clear” how enlightened and right they are, and make no effort to BE clear, then wonder why no one takes them seriously.Case in point du jour: your statement about “fair trade or regulated trade.” What we’re not clear on, is what sort of regulation is being offered by the anti-globalization crowd to make trade “fair.” You have explicitly advocated reducing inter-regional or international trade and encouraging each region to be as self-sufficient as possible (item T1 in your big table, among other posts). Can you blame others for thinking you advocate “no trade?”

  12. Dave Pollard says:

    PTW: Yes, I can blame others for believing local self-sufficiency is the same as ‘no trade’. It goes to show they don’t read what I write very carefully, since they’re not the same at all.You do have a valid point on the inability of Greens to deal with workers’ rights articulately. It’s a huge opportunity, especailly since the US is the only country in the developed world that doesn’t have a Labour party.

  13. Raging Bee says:

    I can’t speak for anyone else, but I read your posts carefully enough to understand that the policies you advocated would restrict trade so much as to make the whole world poorer, as similar reactive policies did at the start of the Great Depression. No, that’s not the same as “no trade,” but it’s close enough to make the anti-globalization crowd look like isolationist Luddites.

  14. Mike says:

    I can appreciate both free-trade and anti-globalization points of view. It’s a difficult subject and seems far from the black and white extremists on both sides want to portray it as.

  15. Raging Bee says:

    I tend to favor free trade, but one possible exception was described by the Economist, a generaly pro-free-trade and anti-regulation weekly out of London: each nation should have its own banking system, and encourage its people and businesses to invest in them. This way, even ill-gotten gains will stay in the country and contribute to domestic growth, and domestic corruption will tend to diminish as well. (They didn’t go into a lot of detail as to what sort of laws would be needed to make this happen.)

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