By Jomo Kwame Sundaram*
The US is currently still in a stock market bubble which, if history is any guide, is likely to end, as argued by Thomas Palley. While President Trump would, of course, like to sustain it to strengthen his November re-election prospects, the Covid-19 black swan is already showing signs of pricking the bubble
Meanwhile, US business investment has declined for many years. As shares of GDP, corporate profits or even market capitalization, such investment has been in decline for at least four decades. Clearly, ‘neo-liberal’ economic policies have failed to decades-long trend.
Julius Krein has underscored some dangerous financialization trends. Global stocks are now worth almost US$90 trillion, more than world output. Including equities, bank deposits, (government plus private) debt securities, etc., the total value of financial assets rose from US$118 trillion in 2004 to over US$200 trillion in 2010, more than double world output then.
Half of Americans own no stocks, while just ten per cent own over 80 per cent of equities, and the top one per cent has almost 40 per cent. With no increase in real investments, more funds in financial markets have served to worsen wealth inequality.
‘Capital returns’ in 1980, in the form of share buybacks and dividends, were about two per cent of US GDP, when real investment was close to 15 per cent. By 2016, real investment had fallen to around 12 per cent of output, while capital returns had risen to about 6 per cent.
Ironically, in an age of ostensible globalization, rising capital returns has become increasingly national in some economies, rather than involving cross-border capital flows, which fell from US$12.4 trillion in 2007 to US$4.3 trillion, i.e., by 65%.
The rise of finance, at the expense of the real economy, over the last four decades has slowed productive investments and economic growth, ending the post-war Keynesian Golden Age quarter century. Meanwhile, as profit rates declined, debt has increased.
Inflating stock market bubbles
Since the 1980s, as Palley has shown, ‘engineered’ US stock market bubbles have obscured lessons from preceding busts, explaining them away as Schumpeterian creative destruction. While each new bubble may retrieve some of the preceding loss, it never fully restores earlier economic gains.
Investors buy stock, expecting to sell at higher prices. Such purchases push up share prices, drawing new investors into the price appreciation spiral. The share price bubble continues to inflate until faith in ever rising prices ends, with the bubble imploding when enough buyers start selling.
Each new stock market bubble seduces share market punters to invest ever more, to gain even more, while obscuring public understanding of the economic malaise. And when prices fall, many shareowners hold on to their stocks, hoping for prices to recover, to make more, or at least, to cut losses.
Thus, stock market dynamics resemble Ponzi frauds, with earlier investors profiting from new investments. Handsome gains draw in more investments until even these are insufficient to meet rising expectations. Changes in market sentiments can slow the bubble’s growth, or cause reversals, even collapse.
Along the way, all investors feel richer, triggering wealth effects and market exuberance, typically irrational. When downturns occur, many are too embarrassed to admit to losses, especially if they have induced others, relatives and friends, to invest.
Thus, the dynamics of stock market speculative bubbles are akin to a collectively self-inflicted fraud as most retail investors lack the ‘inside’ information needed to make sound portfolio investment judgements.
Promoting stock market addiction
The US Federal Reserve’s apparent commitment to the stock market since Alan Greenspan was in the chair, and its growing, albeit varying influences on financial asset prices has been seen as giving the green light to speculation, enabling serial asset price bubbles over at least three decades.
Despite its balanced official mandate, unsurprisingly, US Fed leadership is widely believed to favour Wall Street, while mainstream economists view asset price inflation as the unavoidable price of overcoming recession, sustaining economic growth and the bubble’s wealth effect.
Unlike the Roosevelt era, when economic policy and war achieved full employment and improved labour conditions, decision-making in recent decades has been seen as better serving capital, with the bias justified by insisting that the interests of capital and labour are ‘joined at the hip’.
With 401K (a US employer sponsored retirement savings plan allowing employees to invest a portion of their salaries before taxes) and other investments in the stock market, widespread ‘middle class’ addiction to stock price inflation has also been economically and politically self-deluding.
But despite the sustained US stock market bubble after the 2008-2009 global financial crisis, the US ‘middle class’ continues to be economically squeezed, with relatively few having benefited significantly.
This stock market addiction is rooted in an illusion promoted by Wall Street, their enablers in the public authorities, and their cheerleaders among mainstream economists and the business media who identify the notion of shared prosperity with stock market indices.
But the history and dynamics of stock market bubbles imply that they simply cannot be the basis for shared prosperity, as suggested by all too many emerging markets’ governments. Sadly, wishful thinking to the contrary perpetuates the mass delusion promoted and perpetuated by those who stand to gain most.
Stock market bubbles serve to obscure the dangers of neoliberal financialization for the economy. Demystification of obfuscating narratives can not only improve public understanding of the problems, dangers and challenges involved, but also inform the reforms needed to address them.