By Joe Montero
Wall Street shares are going down again due to bad news about the American economy. The S&P 500 index has just dropped by 4.2 percent, Dow Jons index by 2.8 percent in share selloffs prompted by the weakening jobs data. Month on month falls mean that the United Sates is heading into official recession territory.
Japan is doing even worse. It has just recorded its biggest decline in share prices since 1989. Its Nikkei 225 index fell by 12 percent. Germany’s Dax was down 2 percent, and London’s FTSE 200 by more than 2 percent.
Australia’s S&P/ASX index fell by 3.7 percent, meaning that I this respect Australia is at present doing nearly as badly as the United States. The graph below shows gradual decline in share values since 2014, punctured by some short-term rises that didn’t change the direction.
The trigger is fear among investors across the planet over the performance of the American economy. Its Federal Reserve has released figures showing a decline in job creation, a weak manufacturing sector, and a poorly performing economy overall. Investors are pulling out of shares and turning towards safer options like government bonds. But in the United States, the yield on them has been declining since June 2023, signalling something deeper is going on. There is also a turn towards purchasing gold and other precious metals. Their prices are going up significantly.
If this persists, it will be because the bottom line on the books of many corporations is falling. The biggest losers at present are the tech companies. All other industries are also down. Volatility in currency exchange rates is rising.
The graph below shows the performance of tech companies in Australia over recent years.
A lot is blamed ion rising interest rates. They accelerate inflation and this hots the economy in two ways. Doing business becomes more expensive and it raises the cost of living and forces consumers to tighten the belt. Although we can’t read too much into short-term statistics, they become far more meaningful when they coincide with longer term trends. And this is exactly what is happening.
Interest rates are put up to make borrowing money more expensive and this world to reduce the money supply. When this happens, it signals that the money supply is out of kilter with the productive side of the economy. When this persists here are two further implications. Ther is too much debt and too much investment in risky and unproductive areas.
Interest rates dropped sharply after 1990 during a period of massive expansion of debt and therefore the money supply. This tuned around with the onset of the Covid pandemic and lockdowns. The graph below shows the basic interest rate (cash rate) trend over the period with the recent Covid era upturn caused by a measure of recovery from h lock downs for the Australian economy. What this means in the years ahead is not clear yet.
Everything points towards a disconnection between the financial economy and the real economy. Economists not ideologically hampered or their pay checks depending on promoting a certain narrative, understand that over dependence on the world of finance as the driver of the economy damages the creation and circulation of goods and services. They understand that this happens because of the way capitals are invested in the real economy s led to a decline in the return on investment and therefore fed a search for other sources of private profit.
There isn’t enough space here to delve into a proper explanation as to what this means. Mention has been made of it because it is critical to understanding what is happening. The economic system is failing to deliver, and the sooner this is recognised and dealt with the better.
In Australia, this is playing out in its own way. Reacting to flak from the public and the needs of political expediency, the Reserve Bank of Australia (RBA) has pulled back from raising the interest rate this time. It does nothing to ease the forces at play in the economy. The jobs situation and overall economic performance is as bad here as it is in the United States. Australia’s tight integration into this economy ensures it. After all, American multinationals operate in and are a decisive part of the Australian economy.
Should this integration and the underlying forces persist, future economic prospects are dismal. Turning this around depends on decoupling from the American economy and asserting control over the financial economy, to ensure that it operates in harmony with the real economy of providing needed goods and services.
This is too much of an ask for the existing political order. Political change is the prerequisite for economic change.
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