Louis Proyect lnp3 at
Mon Mar 19 10:25:14 MST 2001

World deflation - led by Japan

By Michael Roberts

The complacent optimism of capitalist consensus is fast disappearing. At
the beginning of this year, the general view about the world economy was
that US growth would slow gradually to about 3% from 5%, Japan would pick
up a little to about 2% and Europe would trundle along at about 2.5%. The
US central bank, the Federal Reserve, would cut interest rates to ensure
that any slowdown would not mean a loss of investor confidence or consumer

Harold Wilson once said that a week was a long time in politics. Well,
January seems like eons ago in global economics. After a non-stop spate of
warnings about lower profits from the main US corporations and the release
of economic data each day that showed a weakening economy, US stock prices
have plummeted. And it's not just been the so-called hi-tech stocks, but
also all the mainstream company stocks as well.

The 60% drop in the value of share prices in the last year has meant that
American households have lost $3trn in financial wealth from their peak at
the beginning of 2000. At that time, nearly one-third of all household
assets (including property) were held in shares. Americans still have a lot
more in the value of shares than they had five years ago, but the shock on
the psychology of middle-class households is palpable. They are going to
save more and spend less. As a result, the US economy is going to slide
even further.

And US companies are also suffering. According to the latest figures
provided by the Federal Reserve, corporate profits are now falling at
annualised rate of 26%. Although they are cutting back on investment
spending, the drop in profits means that companies have less profit to
reinvest. So they are borrowing even more. US companies have never been
more in debt and have never spent so much more than they can raise in
revenues. Their cash deficit has now reached over 5% of GDP. Companies are
going to have to cut back even more on investment and production in order
to narrow that borrowing gap and many will go bust. That means lower
investment and economic recession on the way.

The coming slump in the US is already mirrored across the Pacific in Japan,
which has been stagnating since its stock market collapsed at the end of
1980s. The bursting of that bubble has continued taking out Japan's
stockbrokers and banks by the dozen and bringing down the likes of Barings
in the infamous 'Nick Leeson' rogue trader scandal. Now the Tokyo stock
market is at a 16-year low. It's the future for Wall Street.

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Louis Proyect
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