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The Chairman
Victor Niederhoffer


12/12/04
Socialist Weekly Tosses Capitalist Coin, Finds Workers Lose Heads or Tails, by Victor Niederhoffer

Googling a rich topic like contagion is like taking a tour around the world and through time. One of the highlights I found on such a tour, which involved reading the first 500 entries of 42,000 covering “contagion, stock market” was a column from the World Socialist Weekly of April 4, 2001. The article focused on a “new form of financial contagion spreading via stock markets.”

Some of the reasons for being bearish included the $10 trillion loss in paper wealth which, via the wealth effect, would create a global depression. (Apparently the prior $10 trillion increase would not have an opposite effect.) This problem could have been exacerbated by big shifts in the desired balance between savings and investment in the U.S. and Japan. Such imbalances, according to the article, would be worsened because even after the recent fall stocks were still overvalued by the standard measures which then brought stocks down to the level they had realized at the previous peaks in 1928 and 1967.

(The socialist press isn’t the only media purveyor of such thinking. Indeed, a Bloomberg summary this week contained the very same argument: that stocks still are overvalued since the price is too high to be covered by earnings.) . Another bearish factor cited by the “Socialist Weekly” was the excess of consumer and business spending over income. "Suppose that a vicious circle of tumbling wealth, declining investment and increased household saving were to push a disillusioned private sector back to the spending and saving patterns of the early 1990s.”

The contagious decline in the Asian markets in 1997 was seen then (and now, whenever there's a big decline in any stock market) as a model for the kind of global reassessment that could cause spillover effects to occur. Then as now, a yen is seen as the cause of imminent disaster. The problem then was that the decline in the yen might make other Asian exports noncompetitive and thus lead to disaster. But now, when the yen is strong, that could lead to disaster as Japanese refuse to finance our current deficit with investment in stocks and bonds.

Interest rates were low then as now, but they couldn’t help spur the economy because of chronic overcapacity. Factories all over from the U.S. to Taiwan were operating at just 70% of capacity compared to 95% a year ago.

The “Socialist Weekly” sees the problem as the chronic tendency for falling profit rates in a capitalist economy. While the stock market was and is going to ever higher levels, profits peaked several by about 1997. And here's the ultimate result: "The logic of the capitalist profit system dictates only one response: the shutdown of whole areas of production, the sacking of millions of workers and the imposition of poverty." And this is a certain consequence of the expansion of such things as outsourcing, searches for efficiency in manufacturing and lower cost sources.

The next time you read that the loss of jobs from one sector such as manufacturing in the U.S. in the 2000s or the agriculture sector in the 1900s are the source of coming malaise in our economy or the stock market, please understand this is the linchpin of the socialist argument as to why capitalism must fail. The antidote is a reading of the first chapter in most modern economics books such as those written by Heyne, Stroup, or Pashigian, where the principles that lead to gains from trade, comparative advantage, division of labor and specialization are taught.

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