[OPE-L:6158] Re: Re: Re: Re: falling profits

From: Patrick L. Mason (pmason@garnet.acns.fsu.edu)
Date: Mon Nov 05 2001 - 15:28:43 EST


The exchanges on the current US and world macro economy have generated lots 
of empirical content. I've briefly (and sometimes crudely) edited some of 
the highlights of this discussion.

Mostly, I'm in agreement with Fred and Rakesh. However, if in fact the 
world economy is headed into a depression (I don't believe that it is) more 
- not less - foreign capital is likely to pure into the US. Capital will 
seek security. Although the 30 year US treasury is disappearing, other 
Treasury bonds will be snapped up by nervous investors seeking a safe haven.

Ultimately, profitability, unemployment, and the stock market are affected 
by the same forces. The unemployment is a lagging indicator. Similarly, 
Fred's profit calculations indicate where the economy has been. The stock 
market indicates where it's going, say in 6 - 9 months. My reading of the 
tea leaves (the stock market data) suggests that the economy is already at 
or near bottom. If P/E ratios remain high after nearly 19 months of decline 
in the market - nearly 60 percent in the NASDAQ and about 25 - 30 percent 
in the Dow - it may be an indicator of substantial strength.

If there is an implementation of military keynesian and if the US economy 
does recover to say 2 percent for 2002, that will aid Europe and Japan. 
Although, the internal problems of Japan may mean some decline in that 
economy regardless of what happens in the US and Europe.

With low energy prices, low interest interests, low wages, and a burst of 
federal spending, I don't see anything that will keep the US economy in 
recession.

peace, patrick


(Patrick) In order to avoid a deep and unusually long recession, i.e., 
greater than 9 -11 months, huge federal deficits are necessary along with 
lower interest rates. I would also through into the mix tax cuts for the 
low and moderate income households. Other options may also be necessary.

(Rakesh)
Huge federal deficits without runaway interest rates and credit crunches 
would not be possible in the US, given the total debt situation, if the US 
did not have the political power to coerce the Sa'udis and other Gulf 
elites to hold its (overpriced) Treasuries and to convince the BoJ that it 
has to do likewise if there is to be access to the US market and no 
retrenchment of the US military.

At this point American Keynesianism is only a euphemism for the IPE 
theoretic euphemism of exploitative hegemonism. That is, America can escape 
the ravages of a global depression by Keynesian deficits only because it 
can as the lone superpower exercise imperial power. As the political 
scientist Susan Strange put it in Mad Money (1998): the US can use "its 
bargaining power as military protector, or as interventionist meddler, or 
as major trading partner to get its own way and to make others undergo the 
painful adjustments." American Keynesianism, potentially enabled by the 
inflow of global capital,may lessen the severity of the downturn in the US 
but it will not stimulate the world economy sufficiently to lift it out of 
the impending global depression. I have submitted such an idea here before, 
Jerry has challenged it, and I welcome hisrestating or adding to his 
criticism.

(Fred)
Current profit rates are about 30% below post-war peak of late 1940s, which 
is pretty close to 1991  92 levels.
The rate of profit declined about 50% from the late 1940s to the early 
1970s, and then recovered about one-third of that decline through 1994, so 
that the rate of profit in the early 90s remained about 30% below its early 
postwar peak.

US and Japan are in a recession and Europe is headed toward recession

Rate of unemployment and stock market indicators give slightly different 
picture of US economy than rate of profit and indebtedness.
The stock market is still a bubble, in spite of the 25% decline so far.As 
Rakesh pointed out, price-earning ratios are still high by historical 
standards. The stock market boom of the late 90s was also due in part to 
the inflow of foreign capital, much of which went into the US stock market. 
The boom was also due to US firms repurchasing their own stock. Roughly 
half of the very large amounts of money borrowed by US corporations in the 
90s was used to repurchase their own stock. This is not a sign of a healthy 
economy.

US economy has been able to achieve low rates of unemployment, despite the 
low rate of profit, because of a huge inflow of foreign capital into the US 
- $400-500 billion a year for the last several years, after averaging 
around $200 billion a year since the early 1980s.

(Rakesh)
Despite the US feds efforts to decrease both short term and now long term 
rates, junk debt borrowing costs have risen considerably; the spread over 
comparable Treasurys
has risen about 3x since mid 1998. There has been a squeeze on the supply of
credit of highly leveraged businesses and companies--see WSJ 10/29/01, p. C1.

(Fred)
Interest rates began to rise in 1999, but (surprisingly) interest payment 
of the NFCB sector increased about 25% before that, from 1997 to 1999, 
while the gross profit (profit plus interest) remained more or less 
constant. The explanation must be that the NFCB sector took on more debt in 
relation to its income or gross profit.

Rising energy prices contributed to the decline in the rate of profit since 
1999, but falling energy prices had the opposite effect from 1997 to 1999.

The rate of surplus value has not declined in the 1990s.



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