[Marxism] [SUSPICIOUS MESSAGE] Is the next recession on its way?
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Mon Jan 11 06:40:16 MST 2016
Is the next recession on its way?
By Robert J. Samuelson January 10 at 8:19 PM
It’s hard not to wonder: Is the stock market telling us something? True,
the market’s record in forecasting recessions is horrendous. Stocks
often move according to whim or fad. But just because the market is
wrong much of the time doesn’t mean it’s wrong all of the time. Could
last week’s turbulent trading be one of the times it’s right? By
Friday’s close, stocks had dropped 6 percent for the week, a paper loss
of $1.5 trillion, says Wilshire Associates. Are we staring at the next
The sell-off originated in China with a weaker-than-expected report on
manufacturing activity. This triggered a sharp drop in Chinese stocks,
which spread to the U.S. and European markets. Behind this chain
reaction is a huge transfer of economic power from advanced economies
(mainly North America, Europe and Japan) to “emerging-market” nations
(Brazil, Russia, India and China — called BRIC — and similar countries,
such as Indonesia). They now overshadow the advanced economies.
Robert J. Samuelson writes a weekly column on economics. View Archive
Consider: In the 1980s, emerging-market countries plus poor developing
countries accounted for 36 percent of the world economy (gross domestic
product), reports Maury Obstfeld, chief economist of the International
Monetary Fund. Now their share is about 56 percent of global GDP.
There’s nothing inherently wrong with this. Indeed, the faster growth of
these economies in the past explains why their share of global GDP has
The trouble is that their growth is slowing. Of the BRIC countries, only
India’s rapid growth has been sustained. Brazil and Russia are in
recession, and China’s expansion has flagged. Moreover, several large
problems dampen future growth prospects, says economist Hung Tran of the
Institute of International Finance, an industry group.
One is high debt levels. Many emerging-market economies escaped the
worst of the 2008-2009 financial crisis because their banks lent heavily
and their businesses borrowed heavily. From 2008 to mid-2015, corporate
debt in these countries, including bonds, exploded from $8.9 trillion to
$24.5 trillion, reports Tran. China was a big part of this. In some
countries (Thailand, South Korea), consumer lending also surged. The
upshot: Borrowers now need to conserve cash to service their loans.
The other problem is the legacy of the boom in commodities — oil,
grains, metals. From 1999 to 2011, commodity price indexes rose about 80
percent, says Tran, on the false assumption that China had an almost
unlimited appetite for raw materials. It didn’t. The China bubble has
popped. Price indexes have dropped from their peak by about 50 percent.
Supply dwarfs demand; new investments have been canceled. Collapsing
prices have devastated commodity exporters, led by oil producers.
Commodities represent 45 percent of exports from both Brazil (iron ore,
soybeans, sugar) and Malaysia (oil, copper). The China bubble has popped.
Here’s the picture that emerges. To offset that, China may be devaluing
its currency — the yuan -- to improve the competitiveness of its
exports. In advanced nations, growth seems stuck between 1 percent and 2
percent a year. With so much weakness, the world economy is vulnerable
to events (say, North Korea’s nuclear bomb test) that reduce confidence.
Any ensuing declines in business or consumer spending could plunge us
into recession. It’s also feared that China is devaluing its currency —
the yuan, also known as the renminbi — to improve the competitiveness of
Maybe that’s what the stock market is saying.
There are skeptics. Economist Mark Zandi of Moody’s Analytics argues
that the threats of emerging-market countries to the United States are
exaggerated. “The underlying strength of the economy is the job market,”
says Zandi.” We’re close to full employment. Very little of the labor
market is connected to the rest of the world through trade.” Exports
constitute only 13 percent of U.S. GDP; the other 87 percent reflects
domestic demand. In December, payroll employment expanded by a strong
Still, even Zandi worries that a significant slump in stock prices would
demoralize wealthy and upper-middle-class investors, who are the biggest
shoppers and owners of stock. (He reports that the richest 20 percent of
Americans represent 51 percent of income, 58 percent of personal outlays
and 73 percent of net worth.)
Large losses could cause a negative “wealth effect”: When people feel
poorer, they spend less (similarly, when they feel richer, they spend
more). Economists have long believed that the wealth effect for stocks
is small — about 2 or 3 cents for each dollar of profit or loss. But a
recent study by Zandi and his colleagues found that, in some recent
years, the wealth effect for stocks was as high as 12 cents. That would
magnify considerably the impact of a major market decline.
To the crucial question — does the market foretell a recession? — there
is not yet a conclusive answer. How much China slows and how the rest of
the world responds are open issues. U.S. stocks may have overreacted.
Whatever happens, this is not your father’s business cycle.
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