Crises of the early 2000s: the burst of US dot-com bubble

During the latter half of the 1990s the faltering world economy was being increasingly propped up by a surge in the economic performance of the US. American GDP growth doubled from around 2 % during the first half of the 1990s to an annual average of 4 % from 1995 to 2000; US profits peaked at a twenty-five year high in 1994; and labour

30 From 1996 to 1999 short-term interest rates were reduced from an average of 4.3% to 3.4%, while the growth of narrow money increased from 4.9% to 8.2% (Krugman and Obstfeld 2008, p.548)

productivity grew from an average of around 1.5 % during the mid-1970s to the mid-1990s, to around 2.25 % during the latter half of the decade, stimulated by the extensive application of information technology and by a more intensive rate of exploitation than in other advanced economies (including longer working hours and lower hourly earnings) (Kettell 2006, p.40; IMF 2003). While the Reagan era’s military Keynesianism was not the answer to the low levels of economic performance, it was at least politically successful in disciplining labour and thus restoring class power to capitalists (Harvey 2007, p.90). And this, together with the impact of the severe recession of the early 1990s, enabled the Clinton administration to ‘complete’ the Reagan era’s neo-liberal reform processes (through large cuts in social programmes and balanced budget). Flexibility in labour markets and drastic reductions in welfare provision (social wages) began to pay off for the US, putting competitive pressures on the more rigid labour markets that prevailed in most of Europe and Japan (Harvey 2007, p.92).

This brisk growth referred to as ‘New Economy’, however, was largely predicated on relatively low interest rates supported by the large transfer of capital searching for a ‘safe heaven’ away from emerging markets’ currency risks (and in part from the impacts of the

‘Reverse Plaza Accord’ which artificially lowered the yen against the dollar in 1995). As low interest rates made stocks relatively more attractive than bonds, a significant portion of this increase of foreign capital went into the US stock market. When financial instability in developing countries became serious in 1997, this torrent of financial capital became even stronger, generating a speculative bubble once again; it was in effect a transfer of bubble from East Asia and Japan to the US. Net foreign purchases of US stocks rose rapidly from

$12.6 billion in 1996 to $66.9 billion in 1997, thereby boosting the demand for stocks further. This was over three times the previous record of $19.0 billion in 1993. As a result, stock prices have increased roughly 50% between 1998 and 1999 (and have increased 150%

since 1993) (Moseley, 1999, p.36). Without a corresponding breakthrough in production conditions and generation of more profits, the enormous amount of funds injected into the stock market would necessarily form a speculative bubble which was bound to burst with a financial crisis and a subsequent recession just as occurred in East Asia. In the late-1990s, for example, price-earnings ratios on the NASDAQ were recording an all-time high at more than eleven times the post-war average (Kettell 2006, p.39). During the early months

of 2000, as it became evident that high-tech stocks were now massively overvalued given their rate of return, the dot-com boom rapidly collapsed, driving stock markets around the world into a precipitous decline followed by the severe global recession in 2001.

At that time the recession was presented as the deepest since the Great Depression.

However, another quick bout of interest rate cuts by the Fed, coupled with large tax cuts and massive military spending favoured by the Bush administration, made the effects of the crisis brief. It seemed inevitable for the US monetary authority and government to adopt such measures, considering the growing burden of servicing the huge debts piled up by both business and household during the period of stagnating real wages and speculative property boom. The interest burden of the US corporate sector (expressed as a proportion of its fixed costs), for example, had grown from around 10% in 1996 to around 18% by 2001, while the ratio of household debt to disposable income had reached the unprecedented height of 94% by the year 2000 (Harman 2007; Glyn 2006, p.53). In this situation, allowing interest rates to rise meant a widespread outbreak of default that would pressure the banking system as a whole. Also, it would trigger the onset of a global crisis as global economic growth and the ability of developing countries to continue servicing their debt burden, since the end of 1990s, had become ever more dependent on the US’

growing consumption market which itself was also heavily based on growing household-indebtedness (by 2000, for instance, US imports accounted for almost 20% of world exports, and 4% of global GDP).

Consequently, over the course of several decades for the US and all other countries reliant on US consumption demands, as Harman put it, “credit expansion acted like a drug for the system, seeming to give it great energy and creating a sense of euphoria, with each brief hangover being followed by a further dose until the metabolism as a whole suddenly found itself being poisoned” (Harman 2009, p.280).

6. Conclusion

This chapter has briefly outlined the history of the contradictory process of accumulation of capital in the world market from the late 1960s to the early 2000s. During this period, the world economy was driven by the dynamics of an overaccumulation crisis. The

tendency to overinvestment and overproduction inherent in the capitalist mode of production expressed itself as falling profit rates, decreasing growth rates, and intensifying class struggle on a world scale, which was accompanied by a growing pool of workers and capitals sat idle from the production process. While governments tended to respond to rising unemployment and growing social tensions by expanding the supply of money and credit, surplus capital ‘unemployed’ in the increasingly unprofitable productive activities began to reinforce the global torrent of money moving across the world in search of more favourable exploitative conditions and/or more profitable speculative outlets, entailing brisk yet temporary economic growth on the one hand, and a destructive financial crisis on the other. It was this contradictory development of capital accumulation and crisis in the world market that had enabled or forced indivdual national economies including the US and China to develop in the specific form. Keeping this historic context of the global accumulation process in mind, the following chapters will explore particular policies and socio-economic developments of China and the US that formed the peculiar phenomenon of the global imbalance from the mid-1990s until the mid-2000s.