[OPE-L:5353] Re: the bursting bubble and the U.S. working class

From: Steve Keen (s.keen@uws.edu.au)
Date: Tue Apr 17 2001 - 08:32:18 EDT

I agree with Jerry that workers savings--either in "collectivised form" in 
pension/superannuation funds or via direct "investment" in the market--have 
played a key role in this boom.

This does make it different to 1929, but not so different to 1987. I can't 
cite US figures, but I know that in 1983, 30% of Australian superannuation 
funds went into the stock market. By 1987, that figure was 70%. Gee, isn't 
it amazing that the market boomed from 83-87? -:)

However, even compared to 87, there is more widespread ownership of shares 
this time round than ever before. The apparent wealth this has generated 
has probably also weakened what little working-class solidarity there was 
in America. Of course, something completely different could happen as the 
wealth effect unwinds when the market goes seriously into reverse (and it 
has barely even started on that route yet, in my opinion).

The truly outstanding thing about this boom, from my Minskian perspective, 
is the level of debt which accompanies it. Even if you focus only on 
private/non-financial corporation debt (i.e., personal and corporates), the 
debt to GDP ratio now exceeds 145%. That is its highest level in 
history--the 1929 ratio, for comparison's sake, was estimated by Irving 
Fisher at 60%.

This implies that when the asset bubbles finally burst (I say plural 
because there is an important bubble in real estate, which is arguably 
feeding the stock market bubble), many people will find themselves with 
unsustainable debt levels--especially if they are thrown out of work as a 
result of the crisis, and completely lose their cash flow. But even those 
who stay employed may well find themselves unable to finance debt 
commitments, or managing to pay the mortgage but watching their equity fall 
as their houses lose value faster than they repay their debts.

I think the working class will be very badly affected by the crash. Those 
who have trusted the system and bought the spiel that they should invest 
for the long term are the ones who are most likely to hang onto their 
shares till the bitter end. In 1929, those people saw their shares slump 
over 90% in 3 years. I don't think the fall in the general market will be 
quite that big this time around--more like a 50% fall from its peak (though 
the Nasduck could well fall over 90%, from above 5000 to below 500). But 
they will suffer this as well as suffering falling home values and 
effectively huge mortgages, so that rather than having saved for their 
futures, they will have negative assets as they approach retirement age. I 
think such people would have every right to feel swindled by the system, 
and there is likely to be strong pressure to restore social security to 
meaningful levels as a result.

As for employment, again my Minskian standpoint leads me to expect that the 
level of unemployment won't rise to anything like Great Depression levels, 
since government spending will provide at least some cash flows to slow the 
rate of bankruptcies. But levels of 15%, sustained for up to a decade, are 
quite possible. And of course, current US employment rates seriously 
understate the real level of unemployment anyway--so the effective, real 
level could be closer to 20% for a seriously long time, about as long as 
Japan has been in the doldrums (and that's now over a decade).

There will undoubtedly be some "smart money" speculators who helped 
encourage the boom, and bailed out before the bust; but a lot of corporate 
and high society America bought its own bullshit over this bubble, so there 
are likely to be lots of suffering middle class people--and some high 
profile suicides too--when the whole thing unravels.

At a political level, I think the time is better than it has been in 
decades to get genuine social reforms onto the agenda once more. Reform, in 
capitalism, always seems to come after crisis.

At 10:08 PM 4/17/01 Tuesday, you wrote:
>A couple of more concrete and contemporary
>questions for discussion:
>* What, if anything, is different about the current
>   bubble in the U.S. stock market?
>* How will a burst in the bubble on Wall Street
>   affect the U.S. working class?
>I. The Difference
>    ==========
>In some ways, the current bubble appears to be
>a "classic" bubble -- this is why many financial
>experts and economists have long been
>predicting a "correction" due to the "overvaluation"
>of a significant percentage of stocks on the Dow
>and Nasdeq.  Some, including Steve K, have
>referred to this bubble as the "Internet bubble"
>thus referring to the large amount of money that
>was spent (and now "lost") on "high technology"
>and ".(dot) com" stocks.  I don't dispute this,
>but I want to suggest another factor as a
>underlying force which has been inflating the
>bubble ...  WORKERS' SAVINGS.
>This takes two forms:
>1) workers'  PENSION FUNDS invested on the
>market, primarily in mutual funds (rather than
>targeted investment in individual stocks).
>2) INDIVIDUAL SAVINGS by working-class
>The role of PENSION FUNDS on Wall Street
>is widely recognized.  These pension funds
>account for BILLIONS of dollars worth of
>investment on Wall Street -- so we're not
>talking about an insignificant amount of money
>here.  Indeed, the money invested in pension
>funds is so great that some cities, in an attempt
>to make the working class pay for their financial
>distress, have coerced municipal trade unions
>into agreeing to let those cities borrow from the
>pension funds of their membership
>These pension funds have largely been set up
>through the efforts of trade unions and as a
>result of the collective bargaining process --
>i.e. they represent an advance in workers'
>benefits that was struggled for and won by
>workers in many, but not all, unions.
>It is important to note, though, that the majority
>of the working class in the US do not belong
>to trade unions or have these type of pensions
>provided by employer contributions.  Indeed, a
>significant percentage of workers have no pension
>plan at all (including yours truly) and will have to
>rely on social security and savings for retirement.
>Since there is no national health insurance in the
>US and the medical and prescription costs are
>not entirely covered by Medicaid, this means
>that workers *have* to have a certain minimum
>amount of savings if they expect that these
>medical costs will be entirely paid.
>The growth in INDIVIDUAL SAVINGS by working-
>class families can be explained as follows.
>To begin with a controversial point -- from my
>perspective there is nothing in Marx's theory of
>wages that precludes workers' savings.  Indeed,
>I believe an allowance for the possibility of
>workers' savings is  a consequence of considering
>the "moral and cultural" component of the wage
>rather than considering the wage to be a
>subsistence wage. Ajit and I had a discussion
>about this a few years ago.
>Having said that, one has to admit the reality of
>workers' savings in the US  -- again amounting
>to billions of dollars/ year.  While the individual
>amount of savings / family is not so great that
>it allows for *class mobility*  (a point I agreed
>with Ajit on), it does nonetheless amount in the
>aggregate to a very substantial quantity of money.
>How did this money increasingly end up being
>invested on Wall Street?
>Up until fairly recently,  savings by individual
>working-class families took the form of accounts
>at savings banks (in commercial banks, Savings
>and Loan banks, etc.).  The rate of interest on
>these accounts tended to be small but relatively
>steady. In other words, it seemed like a "safe"
>As recently as the late 1980's, the interest rate
>offered at many of these banks was MUCH HIGHER
>than it has been in recent years. E.g. I can
>recall having a savings account that required a
>minimum of $1500 but had an annual compound
>interest rate of 8.5%.
>But in recent years the rates offered on savings
>accounts has drastically declined -- to the point
>where an average compound interest rate of 2%
>is common. In part, this has been a consequence
>systematically attempted to keep interest rates
>relatively low as a way of lowering inflation.
>And, of course, the inflation rate in the US has
>declined.  Yet, it nonetheless remains positive.
>Under these conditions, if workers have savings
>accounts then the rate of interest offered on the
>account is often (marginally) less than the rate
>of inflation and workers'  REAL SAVINGS declines.
>This, then, lead increasingly to efforts by working-
>class families to find alternative ways of "saving"
>their money.  It should be recalled that throughout
>the 1980's and beyond, there were tremendous
>gains -- and fortunes -- being made by investors
>on Wall Street. Many of the beneficiaries of this
>(and speculation in real estate, et al)  were
>It was also a time when federal DEREGULATION
>made it easier for working-class families to purchase
>stocks, especially mutual funds (which can now be
>purchased at commercial banks).
>Thus millions of working-class families invested
>billions of dollars of their savings in stocks
>because of the huge discrepancy between the
>rates of interest offered on accounts at savings
>banks and the rates of return that were common
>during that period on stock investment.  Since the
>stock market had been on a steady upswing for a
>number of years, there was the illusion that this
>also was a "safe" investment.
>II. When the bubble bursts ...
>     ===================
>The "bubble" has already been largely deflated
>with huge losses in the Dow and (especially)
>Large investors have taken the strategy of "riding
>out the storm" or even "bottom fishing" (i.e.
>using the occasion to buy what they believe now
>to be under-valued stocks).
>Small investors, including working-class families
>who own stocks, have taken it on the chin.
>To begin with, the decline in the stock markets
>can be expected to change the anticipated
>earnings by workers'  pension funds. This might
>mean in the long run that these funds are not
>able to adequately provide for the retirement needs
>of the workers that these funds represent.
>More immediately, though, the "savings" of working-
>class families has been largely eroded. Indeed,
>the bubble bursting could result in "negative savings"
>for workers.  Yet, because the rates of interest
>offered by savings banks remain very low, many
>of these same families keep their money "on the
>market" and "hope for the best".
>The "best" is not likely to happen, though, is it?
>Compounding this problem is that if (when?) the
>US economy goes into a contraction,  the industrial
>reserve army will expand.  Thus, at the precise
>moment that many working-class families will have
>to rely on their savings, they are seeing it eroded.
>This can be expected, then, to lead to a decreased
>standard of living for the US working class.
>It can be expected to have other consequences as
>well.  E.g. when workers lose their jobs and their
>savings, how will they continue to pay back loans
>for housing and cars, etc.?   With the "farm crisis"
>of the 1980's, we saw a lot of family farms
>re-possessed by banks and sold at auction. Will
>the same happen with many working-class houses?
>Perhaps the biggest question, though, is: how can
>there can be effective WORKING-CLASS
>RESISTANCE to these attempts to drive down
>workers' standards of living and make them pay
>for the crisis?
>What do others think?
>In solidarity, Jerry

Dr. Steve Keen
Senior Lecturer
Economics & Finance
Campbelltown, Building 11 Room 30,
School of Economics and Finance
s.keen@uws.edu.au 61 2 4620-3016 Fax 61 2 4626-6683
Home 02 9558-8018 Mobile 0409 716 088
Home Page: http://bus.uws.edu.au/steve-keen/

This archive was generated by hypermail 2b30 : Wed May 02 2001 - 00:00:05 EDT