[OPE-L:5356] Re: Re: the bursting bubble and the U.S. working class

From: Rakesh Narpat Bhandari (rakeshb@Stanford.EDU)
Date: Tue Apr 17 2001 - 19:07:34 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%.

Steve, according to today's WSJ:
after the debt binge of the 80s, corporate interest rate costs stood 
at about 5% of total sales. By 99, after a period of falling interest 
rates and rising equity sales, companies had pared back their debt 
burden to 2.8%  So the situtation may not be as dire as you suggest. 
To be sure, profitability can't really improve from continued 
interest rate reductions. one expert in WSJ estimates interest costs 
may rise to 3/1% of sales by the end of the year.

>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 this is an excellent point. Since people were borrowing 
against their homes, it's not clear that higher margin requirements 
would have in any way prevented the inflation of the balloon.

>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).

Highly unlikely. Maybe 1200 to 1300, at least that's what I heard 
from a few software CEO's.

Yours, Rakesh

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