UNITED STATES
Bush's financial Vietnam THE "third oil shock" is approaching. A ready made explanation for the chill in the world economy has been found. In the Saudi Arabian deserts, some have caught a cold, and others bronchitis. The following article on the recession now underway in the United States is taken from the October 19, 1990, number of La Breche, the French-language journal of
1990, of the Tokyo stock exchange (which has now lost 42% of its value since the beginning of the year). It comes in the middle of a "financial Vietnam" in the United States, symbolized by the collapse of the Savings and Loans associations, of property giants, and so on. That is what explains the bronchitis, more than the simple increase partly speculative and thus perhaps temporary -in oil prices.
New York Times of September 2 headlined, and on its impact on the rest of the world economy.
The unadmitted recession
For several quarters, there has been a striking fall in the profits of the principal US companies. It is this that explained (and explains) the pronounced sluggishness of Wall Street and of productive investment. In March, Business Week (BW) introduced thus its quarterly analysis of the results of 900 key enterprises in the US for the fourth quarter of 1989; "the American economy is not in recession, yet you would not know it by examining the results of the companies ... [they] have fallen by 19% in relation to the preceding year"4 the Swiss section of the Fourth
International.
CHARLES-ANDRE UDRY
T IS being called the "third shock" because of two previous dramatic increases in the oil price. In 1973, in Kuwait, OPEC (the Organization of Petroleum Exporting Countries) decided to break the old agreements with the big oil companies. The price per barrel (159 litres) of oil was increased to $10. The generalized recession of the imperialist economies — brought about by a fall off in demand, an increase in surplus production capacity (under-utilization of the means of production) and a decline in profits — followed in 1974-75. The oil crisis" accentuated, but did not provoke, this recession.
The second shock came in 1979 and lasted until 1981 - the price per barrel reached $34. Three years after, in 198182, a second recession developed in the imperialist countries, which also engulfed the dependent countries (through the debt crisis primarily) and a certain number of countries in Eastern Europe (Poland, Rumania, Yugoslavia). It came after a very lukewarm period of upturn, marked by a high rate of unemployment and a persistent depression in some third world countries. The explosion of oil prices deepened the crisis.
Since 1985, the price of oil has fallen -along with the exchange rate of the dollar in relation to other currencies oil is paid for in dollars) — and this has favoured an economic upturn. In 1990, the "third shock" (see box) has come, at a time when the US economy has already been in a phase of downturn for some months. The same is true, to varying degrees, of Canada, Great Britain, Australia, Spain and very probably Italy. The economies of a united Germany and of Japan are still buoyant, albeit with question marks.
The current shock comes after the financial crashes of October 1987 and October 1989, and the long slide, since February in oil prices.
The Wall Street Journal sums up the picture thus; "George Bush has a problem Bush has a problem which is bigger than Saddam Hussein; the Saddam Hussein; the
In August 1990, BW made nearly the same remark for the second quarter of 1990, under the headline, "Are we in recession?"5. The weekly noted that economists still answered no to this question, but added, wisely, "But call any company economy - slowing up well before the Iraqi oil shock — which is now staggering towards recession". Lester Thurow, a well-known economist who lectures at the Massachusetts Institute of Technology, evokes in these terms the gravity of the possible repercussions of a recession for the United States; "Because of the debts and banking problems accumulated during the 1980s, any kind of recession in the 1990s will produce a volume of bankruptcies never seen since the Great Depression. Even without a recession, the savings of the middle class will melt away when house prices collapse in a great part of the United States, in reaction to the excess of indebtedness in the 1980s"2.
•
The recession has undoubtedly arrived in the United States and the real debate is about its depth and its duration, as the
1980-1988
FISCAL HEART FACES WAY CAN'T You
NOW.
FACE REALI REDUCTiON PERICIT SUFFERING boss, and he will certainly say yes". This impression was borne out by the New
York Times in July 1990, in a survey that showed that states (of the USA) covering a third of the population were in recession or on the point of being so (according to the official definition of three consecutive quarters of negative growth).
The survey revealed that nine out of ten households had the "feeling" that their incomes were being squeezed by insurance premiums, taxes and other fixed
1. The Wall Street Journal (TWS), August 17-18,
1990.
2. International Herald Tribure (IHT), October 9,
1990, "How Supply-Side Myths Warp the Political
Process"
3. New York Times, September 2, 1990, debate between F.H. Schott, Allen Sinai and H.D. Ranson, P
F9.
4. Business Week (BW), March 19, 1990.
5. BW, August 6 and 13, 1990.
1989-1990
Fiscal
E Fantasys
Yol. 2
9+ The
AUTH
TY!?
• WAA
WAA
Lill
HOUSE
REPUBLICANS - E
15
UNITED STATES costs which are growing more quickly than their salaries. The author of the survey drew the conclusion "this is not a recession peopled by the unemployed ....It is a recession affecting people who have a job, but whose income is ever more squeezed"6
Company profit figures for the second quarter of 1990 and the beginning of the third confirmed the tendency' , sharply felt by Wall Street. But from June, unemployment has begun to be a feature of the emerging recession.
It passed from 5.2% of the active population in June 1990 to 5.7% in September 1990 (figures which underestimate the reality, according to the statisticians of the Department of Labor themselves). Those who lose their job are taking very much more time to find another. Only 44% of the 356 industries examined by the Department of Labor took on new workers in September. The number of industrial jobs lost since the beginning of the year rose to 520,000 — of which 114,000 have been pruned in the last two months (48,000 in August and 66,000 in September).
### Rise in unemployment construction, since February, 194,000 jobs have gone, 20,000 in September alone. Jobs in services, which gencrated around 80% of new jobs in the post-1983 upturn, are falling more than in the course of six of the eight recessions since the war®. The initial rise in unemployment and above all the decrease in overtime (so important in the United States to "complete" income), linked with the price rises, lead to a reduction in purchasing power (demand).
The figures for distribution (trade) for September confirm the depression of the buyers, despite the discounts and credits so plentifully available in the pre-Xmas period. The relation of total consumer debt to disposable income (what remains after taxes) is 20% higher than at the beginning of the recession of 1981-82. "Personal bankruptcies" (incapacity to meet debts), which rose to 500,000 in 1987, will pass well beyond the million mark in 1990°.
Logically, jobs will also be cut in the commercial sector!°. The fall in the value of houses — which form part of the savings of a large layer of employees in the United States — does not encourage consumer spending.
This situation demolishes an argument advanced by fashionable economists according to which the growth of services - relative to industry — acts as a safety catch against recessions. This argument was in fact advanced in 1979 - before the recession of 1981-82.
First, the insecurity of employment in services is transparent from the beginning 16 16 firms in the service sector much harder. of the slowdown. Then, bankruptcies hit firms in the service sector much harder. International Viewpoint #194 • November 12,
Finally, as underlined already in July by Joseph Carson, a former economist for the Department of Commerce and General Motors and one of the best analysts of the US conjuncture, "I think that people should remember that in the service sector you will not necessarily lose jobs as much as in the manufacturing sector, but you will lose income"'!! . In other words, salaries decline during a slowing up of the economy (accompanied by an inflation rate of over 6%). Moreover, a considerable proportion of incomes in services are linked to various bonuses and commissions. These form an important part of the revenue of employees or independent operators in insurance, property, banking, and so on. They go up in smoke when things turn bad. All this depresses demand.
Economic pseudo-science
Another argument advanced by "economic science" to explain the reduction of economic cycles is also coming to grief. Industrial strategy, it is said, has led to a reduction of stocks with high "maintenance" costs. From this it has been concluded that, should there be a fall in demand, industries will not be weighed down with stocks and will avoid massive production cuts and lay offs while waiting to get rid of them.
This description is not false, with the exception of the part about lay offs. The problem is that it is not the stocks which unleash a depression. This time, as before, it has been provoked by a series of factors leading to a fall off in demand for durable goods, production goods (investment), and to an "excess" of building (villas, hotels, offices, shops) which leads to a collapse of property prices and to a fall in construction.
As little as five months ago, it was still fashionable enough to denounce the Cassandras who predicted recession. Today "very many (economists) say that it will be severe"12 . After the "soft landing" of the cconomy proclaimed over the last two years, the possibility of a "mild recession" is admitted. Karen Pennar notes correctly, "However, for those who have short memories or who simply know nothing, a dwarf recession is a very rare animal. The last eight recessions since the war have lasted an average of 11 months and have meant a decline in GNP (in real terms) of 2.5%"13
The two last recessions in the United States have spread out over 16 months and have sent unemployment soaring to 9% in 1974-75 and more than 11% in 1982.
Faced with such a perspective, the traditional government response is to reduce taxes and inject money — "deficit spending" — into the circuit to get the engine going again. However, the budget deficit is such that the very opposite - the reduction of the deficit and increases in 1990 taxes — is being discussed. In more than one state, such increases have already been imposed. They do not stimulate demand.
This Reaganite budget deficit — stimulated by the combination of growth of arms expenditure, cuts in social expenditure and tax breaks for the rich and the companies — has important repercussions on the national and international economy. The payment of interest on the federal debt forms a decisive component of the budget. For the fiscal year 1990-91, it was equal to the total of expenditure on social security. Or again, it equalled half of revenue from taxes on the incomes of private persons. The servicing of the debt is growing rapidly — it should reach $259.8 billion this year, more than the budget deficit envisaged for the year to comel4
The argument according to which this public debt is no higher than at the end of the 1940s is not very convincing. On the one hand, the place of the US economy in the world economy was different then. On the other, the cost of the servicing of the debt measured by relation to GNP was less (lower interest rates, growth, and so on). This recession will diminish incomes (thus revenues) and increase more or less unavoidable social expenditures, above all unemployment benefits. This could be neutralized by taxes, but, above all, the deficit will remain a problem even after the recession, all the more so if the federal government finds itself compelled to guarantee unsafe loans through various federal funds, as in the Savings & Loans affair.
### Massive private debt
Moreover, it is the total sum of public and private indebtedness (of individuals and companies) which is more "worrying" — it is more than 2.5 times the GNP (the national production of goods and services), the highest ratio since the middle of the 1930s.
Some economists argue that the upturn will take place thanks to arms expenditure!. This hypothesis seems far-fetched. Certainly, the arms firms "could have reasons to thank Saddam for the moment chosen for his attack", as the Financial Times put it 6 . It is obvious that the govemment, while reducing the costs of the general functioning of the US Army, is maintaining and in some sectors increas6. Published in International Herald Tribune, July 17, 1990. 7. BW, October 22, 1990 and Tribune de l' Expansion, October 16, 1990 (IBM) and October 15, 1990 (ALCOA). 8. BW, October 15 and 22, 1990. 9. BW, August 20, 1990. 10. USA Today, October 13-15, 1990. 11. Barron's, July 2, 1990. 12. TWSJ, October 11, 1990. 13. BW, October 15, 1990. 14. The Washington Post, reproduced in The Guardian Weekly, October 14, 1990.
ing arms orders. This was evident even before the Gulf crisis!? . Nonetheless, even if a part of the "credits" allocated to the arms industry come from the recycling of the petrodollars of Saudi Arabia and the Emirates, their effects on the conjuncture will be fairly limited, unless there is a long war. They will stabilize, at best, the current level of arms expenditure, which has not stopped the recession, but on the contrary stimulated inflation. They will also be allocated in part to the more "technologised" industries which employ less workers, like Raytheon, Martin Marrietta or E-Systems 18
Financial fragility
Private company debt has not diminished during the long period of expansion. The debt of firms is as high as 46% of their capital — ten years ago the threshold was at 36%. Indeed, the particular characteristic of this US recession resides in the interconnection between the fall of production, demand and profits, and the financial fragility of the industrial firms, the big property developers and certain banks and insurance companies.
Other bankruptcies will follow the Savings & Loans disaster. The property and insurance sectors are likely to be hard hit!?. The banks are not being spared. Chase Manhattan announced some weeks ago that it had written off $350 million swallowed up in the collapse of the property market.
It has placed in reserves a sum of $650 million for insurance "non-performing" property loans. Analysts consider that the City Bank has $2.3 billion of virtually worthless property commitments on its books, as against $1.8 billion for Chase (or for both an average of 17% of their total portfolio in property). For Manufacturer Hanover's, the percentage is 16% 20
The upturn of these last years has been symbolized by a property boom - the collapse of this sector now will be on the same scale. Empty offices, an image reminiscent of the 1930s, indicate the severity of the recession.
The phase of upturn in 1983-89 in the United States was largely financed through an inflow of European and Japanese capital?. The decisive question today is whether this flow can continue.
This is another element, as important, if not more so, than the direct effects of the oil shock. The recycling of petrodollars, 15. Sophie Gherardi in Le Monde, October 16, 1990, p.29. 16. Financial Times, August 11-12, 1990. 17. La Brèche, no. 454, June 29, 1990. 18. Barron's, October 15, 1990, "Targeting Defense Stock" and US News and World Report, October 15, 1990, "War gains in the Gulf". 19. See in this respect the survey done in Barron's, October 1, 1990 and the /HT, October 12, 1990, "Real Estate Slide Threatens Insurers". 20. US News and World Report, October 1, 1990, "Rotten to the Core". 21. See La Brèche, no. 396, November 13, 1987.
UNITED STATES A sense of shock
THE fluctuations in the price of crude oil (until 1986, the spot reference price was that of Arabian light - since then, it has been Brent crude from the North Sea are not strictly linked to the relation between supply and demand. The International Energy Agency indicates that an Increase in production by Saudi Arabla, the Emirates, Venezuela, Mexico, Nigeria, and so on would be able to replace the two million barrels taken off the market by the embargo against Iraq and Kuwait. A part of the increase is due then to speculation, precipitated by the low stocks of the big companies.
However, a specific problem does exist — refining facilities are used to near full capacity and certain replacement oils cannot be refined in the same Installations. Moreover, disposable stocks have been frozen for the use of US armed forces in the Gulf. Finally the Japanese, who are very dependent on Gulf off, are ready to accept the price rises in order to obtain new suppliers.
The evolution of the price of crude will depend in great part on politco-military events. If a long conflict with considerable destruction of oil wells can be avoided, the oil supply problem will not be acute and refinIng can be reorganized in time. in real terms — taking account of inflation and the fall in value of the dollar in relation to other currencies - a barrel at $35 would be equivalent to the price before the crisis of 1979 and half of that attained in 1980-81. The "shock" Is in some sense a readjustment - which becomes even more apparent if one compares it to the evolution of the prices of manufactured products imported by the "Third World" oil producing countries. If the more efficient use of fuel effected by the Imperlalist economies since 1974-75 Is added, the intrinsic effect of the oil shock should not be exaggerated
The Increase in oil prices accentuates existing recessionary tendencles. There is an Increase in the "cost of production" (oil can be compared to an element of constant capital), and thus the anticipated profit has to be revised down. This discourages investment, with repercussions on production goods. The stock exchange fall has already registered this.
As the price increase is passed on to consumer goods, pressure is exercised on consumption, all the more so when the crisis leads to the immediate revival of austerity policies which deepen the recessive tendencies at work.
The transfer of surplus value from the imperialist countries to the producer countries, through an increased "oil bill", is a complex operation.
It has nothing in common with the transfers from the countries of the periphery to the centre through the servicing of the debt. Indeed, a great part of this "bill" returns to the Imperialist countries, under the form of orders (recycling) to industries and to the civil construction giants, who export manufactured goods and build infrastructures in the oil producing countries. There could be a transfer of surplus values between different branches inside the industrialized countries. Great
Britain and Norway will profit also from a price rise; the Soviet Union could do the same, if it is capable of increasing its production.
The big oll companies (Exxon, Royal Dutch, Mobil, BP, Texaco, Chevron, Amoco, and so on) will make gigantic gains, all the more so because they have direct access to crude oil. BP draws 54% of its operational profits from extraction (see the Financial Times of October 26,
1990, or Fortune, September 10, 1990). Big dealers, like Mark Rich of
Zoug, who operate on forward contracts, have obtained absolutely staggering returns" (L'AGEFI, October 13, 1990).
The car Industry, which has for some years put the emphasis on the bigger, more profitable, cars, will be amongst the sectors most affected by a lasting rise in the price of oil. But the car groups are often diversified and they also benefit from arms orders (Mercedes, Flat, General Motors, Renault, and so on). The Japanese use oil more efficiently, but are dependent on Imports for 99% of it. Their car sector will be the most affected, even more so because their biggest market, the United States, is In recession.
In the final instance, the oil shock is paid for in several forms — taxes, intlation, wage freezes - and by the workers above all. The embargo does not affect Saddam Hussein alone. * 17 November 12, 1990 • #194 International Viewpoint
UNITED STATES / WESTERN EUROPE imposed by the US presence in the Gulf, assures a certain flow of funds. However, the rise of interest rates in Japan and the losses suffered on the Tokyo stock exchange are impelling the Japanese to invest their surplus on the domestic market, while the approach of 1992 leads them to direct their investments towards Europe.
As very many Japanese investors have borrowed on the Japanese market at floating interest rates, they tend to return their capital to Japan, because the returns are too low in the United States in relation to Japan, where the rates are rising. Finally Japanese and European investments, the source of numerous industrial jobs in the United States, are going to be reduced.
Since the beginning of this year, Japanese investors have bought only 10 billion US treasury bonds — the lowest total since 1984. They have repatriated some $8.9 billion during the first six months?. If the dollar declines in relation to the yen the withdrawal of Japanese capital could be dramatic, despite the "solidarity" which Washington will demand from Japan in the fight against Saddam Hussein. Without the Japanese lending machine and with Germany preoccupied by its own process of unification - and more generally, with its projects in Eastern Europe - the US economy must submit itself to a brutal slimming down.
Music of the future
Certainly, the ruling circles will demand international support - in this the struggle against the "Hitler of the Middle East" has a role — and attempt to accelerate the Canada-USA-Mexico integration. But this is the music of the future. There is a more pressing problem — to attract capital, in case of a Japanese withdrawal, the Fed (the US central bank) must raise interest rates (all the more so if the dollar is weak). The effects of such an operation are predictable; accentuation of the recession (the cost of loans for consumption and investment is higher, the charges on the debts also) and the risk of a financial crash, given the differential of return between shares (in free fall and more interesting investments. Obviously, there remain exports •to countries which are not yet in recession. But, while a lower dollar benefits exports, are US industries competitive? It is far from certain. And, above all, exports cannot compensate for the weakness of the internal sectors in difficulty. The recession will be serious. * 22. TWSJ, October 11, 1990; Journal de Genève, 18 October 9,1990; AGEFI, October 12, 1990; US News and World Report, September 17, 1990. International Viewpoint #194 • November 12,