Vol. 71/No. 11      March 19, 2007

Much of the big-business media claimed that a 9 percent drop in Shanghai's stock market triggered the international downswing.

Leading Democratic politicians seized on the news to promote protectionism and American nationalism. Sen. Hillary Clinton, especially, blamed the growing U.S. deficit and the "foreign holders" of the U.S. debt, whom she claimed threaten the "economic sovereignty" of the United States.

Wall Street's jitters, however, did not originate in China, and the U.S. debt or its "foreign holders" have nothing to do with them.

The tremor on Wall Street and in other imperialist financial centers registered the growing instability and world disorder of capitalism.

It was a sign that the stock market boom of the past decade and a half could turn into a bust, since it is largely based on speculation and not on productive investments, in a period of a long-term decline of industrial profit rates.

The day of the plunge, a major mortgage-buying institution and the U.S. Commerce Department both made announcements that revealed further stagnation in U.S. manufacturing and erosion in the confidence of lenders, who made billions on risky loans to home buyers and others in the last decade.  
 
The hype about China
“A lot of the issues we need to deal with … are made all the more difficult if we are dependent upon foreign governments, such as China,” Hillary Clinton told Bill Griffeth, the CNBC TV interviewer March 1. Washington is too “dependent upon fiscal and other economic decisions that are made in foreign capitals,” she said.

Others have presented a similarly inflated view of the weight of China in the world capitalist economy.

“The emergence of China’s economy on the world stage may be the biggest investment story of our time,” columnist Chris Mayer said in an opinion piece in the March 2 issue of Moneyweek. “In 1990, China was the world’s 10th largest economy. Today, it is the fourth largest. That’s mind-boggling growth.”

Facts, however, give a lie to the contention that China's economy or stock market could be the cause of instability in the world capitalist economy.

Investment in the Chinese stock market has become a growing fad on Wall Street. The paper value of the stocks on the Shanghai index increased 210 percent in one year, from the end of 2005 to the end of 2006. They are now valued at $1.3 trillion.

But that figure is only 6 percent of the value of the stocks listed on the New York Stock Exchange. And much of the stock on the Shanghai exchange is held in state-owned companies and other entities that can’t currently be traded.

"In 2005, China leapfrogged over France and Great Britain to become the world's fourth-largest economy," said an article in the February 27 issue of the German magazine Der Spiegel, making a similar point as Moneyweek. "If China continues to grow at the same pace, it will oust Germany as the world's third-biggest economy in only two years, perhaps even dethroning the United States from its leading position one day."

Such assertions, however, don't take into account that China has one-fifth of the world’s population. The populations of Britain, France, Germany, and the United States combined are 506 million—only 39 percent of China’s population of 1.3 billion.

In per capita terms China’s gross domestic product ranks 109th in the world. There remains a vast disparity between the size, character, and development of the economies of the imperialist countries and that of the Chinese workers state that came into being after the 1949 revolution. This is true despite the sweeping experiment in state capitalism led by the governing bureaucracy in Beijing.  
 
Stock market bubble
A giant bubble of paper values has been the heart of the “miracle on Wall Street.” In January the Dow Jones set another record high. Between 1995 and 2004 the nominal worldwide value of derivatives—which are bets on the future value of the dollar and other currencies, interest rates, stocks and commodities, among others—more than tripled to over $200 trillion, with more than a third held by U.S. banks. The top five holders among U.S. banks accounted for 94 percent of all U.S. derivatives by the end of the first quarter of 2004, with JP Morgan Chase holding 50 percent. That means one of the largest financial institutions in the country has bet almost $40 trillion on such shaky “futures” markets.

Just prior to the market plunge, the Commerce Department reported that sales of durable goods—factory equipment and other large purchases—fell almost 8 percent in January nationwide.

The next day, the key index of factory output and purchasing in the Chicago area released its figures for February. Its business barometer had fallen to 47.9—the lowest since 2002.

“The nation’s manufacturing sector managed to slip into a recession with almost nobody seeming to notice,” said an article in the February 28 New York Times. "In two of the last three months, the manufacturing sector has shrunk, according to surveys by the Institute for Supply Management that have been out for weeks."  
 
Rise in mortgage defaults
At the same time, Freddie Mac, a massive semi-state-run mortgage buyer, announced February 27 that it is tightening its lending standards. The reason? More and more people who were lured during the recent housing boom into buying homes with “subprime” mortgages—high interest loans that require very little down payment and no proof of income—are now defaulting, and scores of the lenders that offered them are beginning to go belly up.

“During the housing boom that ended in 2005, money was poured with abandon into exotic home loans that let people buy homes with little down or without verifying their incomes,” another Times article commented. Now, it said, “The easy money is making a quick exit out of risky mortgages.”

“We made so much money you couldn’t believe it,” Kal Elsayed, a former executive at New Century Financial, the nation’s number two subprime lender, told the New York Times. “And you didn’t have to do anything. You just had to show up.”

Those heady days are gone. Some 13.5 percent of subprime borrowers are either behind on payments or in foreclosure, according to the Mortgage Bankers Association.

On March 5, New Century Financial’s shares plunged nearly 70 percent. And six of the top 25 firms specializing in subprime mortgages have joined the list of 28 such firms that have gone bankrupt.

The biggest losers are the thousands of people who bought into the idea that they could bank their ability to pay the loan on the increasing value of their home.

New home sales plunged by 16.6 percent in January, the most in 13 years. Builders are slashing inventories as housing starts fell by more than 14 percent and new home prices dropped.

“The notion that we saw a bottoming of the housing market in January is ludicrous,” financial commentator John Maudlin noted in a March 2 article. That, he said, “takes years to accomplish, not a few quarters.” He noted that “a lot of homes are going to come back onto the market over the next 12 months, when there is already a 7.8-month supply of homes for sale. This is going to depress house prices.”

“Ben Bernanke, the chairman of the Federal Reserve, managed to calm the market, saying that one could reasonably hope for a stronger economy by midyear if housing stabilized soon, and if manufacturing strengthened,” a New York Times editorial said two days after the market fall. “But those are big ifs.”
 
 
Related articles:
Wall Street’s capitalist greed  
 
 
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