Saturday, February 12, 2005

Timing the Buy

Stop Loss

For 1, 2, almost 3 years, critics on both left and right have breathlessly reported the "decline" of US capitalism, its loss of hegemony, its deterioration in lockstep with the depreciation of the dollar, the dollars replacement by the euro, the imminent creation of euro-denominated oil markets, the abandonment of US securities by the rest of the world, and last, not least, ultimately the advance of the China as the new star of industry, capital markets, and daytime television. Quite a mouthful to peat and repeat while holding one's breath. Circular breathing is capable of taking us to the sublime, as in Coltrane's A Love Supreme, but circular reasoning, and wishful thinkers, gets us nowhere but to the ridiculous. And fast. And hard.

So if the strategy against capitalism was once promoted as "Create 2, 3, many Vietnams," today we're getting to "Create 2, 3, mini bourses. And a couple more Chinas while you're at it."

Market Order (No Fun, Fun With Numbers)

With the US trade deficits at $600 billion dollars annually, federal deficits of approximately $500 billion, and the 35 percent depreciation of the dollar vs. the euro, this certainly appears to be the right time for international investors, official and private, to take what's left of their money after conversion and run. Such capital flight has not occurred.

US liabilities are estimated at more than $4 trillion with more than $1.3 trillion held by "foreign" investors. Of this $1.3 trillion, 70 percent is held by central banks. Japan is the largest holder of US dollar-denominated assets, followed by China, and Russia. None of the big three has taken action to reduce these holdings, although Japan did reduce its participation in Treasury offerings during part of 2004. And they have not taken actions for reasons that are painfully clear: selling of dollar denominated assets may further devalue the dollar itself, making exports to the US more expensive.

While final figures for 2004 have not yet been published, final figures for 2003 and preliminary figures for 2004 show increases for foreign owned US assets, in direct investment in US government securities, and in US corporate debt and equity securities.

In 2003 foreign official owned assets of all kinds (as opposed to solely debt securities) increased to $1.474 trillion, a 21% increase over 2002, and a level 64.5% above the 1998 mark. Holdings of securities other than US treasury offerings increased 22% and measured 78% above the 1998 level. Holdings of corporate bonds were 156% above that level. While wishful thinkers see the dollar decline as a "loss of confidence," international investors have voted with their wallets and increased purchases of dollar assets, particularly debt instruments. Equity purchases increased 29% in 2003, but only because such purchases had fallen off significantly in 2002. Foreign equity purchases failed to exceed their 2000 peak.

The movement, "preference" for debt instruments over equity ownership is not the result of any loss of hegemony, but rather reflects the difficulties in realizing and sustaining sufficient rates and masses of profit in production itself. That is the shared predicament of capital, a unity of distress that prefigures and predetermines the lack of unity in trade, fiscal, monetary policies of governments. It is that predicament that makes the incremental transfer of wealth, rather than its expanded reproduction the objective of the individual and collective capitals. It is that, a predicament of all, that drives both convergence and divergence of interest. And it is that predicament of all that appears as inter-national capitalist conflict, intra-capitalist class splits, and or as disappearing hegemony.

Good News, Bad News (Fun, No Fun With Numbers)

Net foreign purchases of US stocks (purchases minus sales) quadrupled between 1998 and 2000, only to fall 40% in 2001. Net purchases continued to decline in 2002 and 2003, with the net falling below the 1998 mark.

During this same period net corporate bond purchases have steadily increased. The amounts of such purchases are only a portion of the equity purchases, about one-third, but between 1998 and 2003, the value of the total transactions in debt grew from 21% to 60% of the equity values .

In the 1998-2000 period gross US purchases of foreign stocks increased 90%, but net purchases increased only modestly as increasedsales matched the purchases. The volume of total equity transactions, which had doubled to 2000 has since declined by one-third.

US investors activity in foreign bond markets declined after the Asian, Russian, Brazil crises of 1997, 1998, expanding dramatically, by some 60%, in 2003. Of significance, the value of US transactions in foreign debt exceeded the value in equity transactions by 50% in 2003, and, in 2003, for the third year in a succession, US redemptions of bonds exceeded purchases.

In the first 9 months of 2004 financial inflows into US assets exceeded the year earlier period by 68 percent, with net purchase of US government securities doubling. This hardly amounts to a capital flight.

Accumulation vs. Accumulation (Good News is Bad News)

In the capital and financial markets, as in the merchandise markets, the transaction point, and point of transactions, is the realization of an income, of earnings. Expropriated values, hidden in the commodity form, of which debt is the most acute representation, appearing both and simultaneously as ownership and against ownership, as value and the negation of value, are transubstantiated as profit, income, earnings.

Foreign holdings of US assets exceeded US holdings of foreign assets by $2.43 trillion in 2003. Still, US income receipts exceed the income paid to the foreign holders by 12.7%, some $33 billion. In the first 9 months of 2004, US income exceeded year earlier levels by $55 billion. Payments grew $49 billion, with net US income exceeding exceeding payments by $24 billion.

In 2003, US corporate profits from domestic and international activities finally exceeded the previous high recorded in 1997 and the mini-peak of 2000 (the "live-cat bounce," hitting the wall, on the way down to hitting the floor). The distribution of earnings, however, experienced a notable shift from the 1997 and 2000 patterns.

For 1997, domestic non-financial corporate profits were 62% of total profits. Financial corporate profits were 24% of the total, and earnings from foreign subsidiaries measured 14% of the total.

In 2003, overall corporate profits were 9.6% above the 1997 high. Domestic non-financial profits however were only 80% of the previous high, and this portion of had declined from 62% to 45.4% of total corporate profits . Profits from foreign subsidiaries were 60% above the 1997 level, accounting for 20% of total profits. Financial profits, up 55%, increase from the 24% mark and represented 34% of all earnings.

This changing pattern for overall earnings is reproduced, more or less, in the breakdown of US income from direct foreign investment, and foreign earnings from US holdings.

In 2003, total earnings were 22% above 2000 earnings. US manufacturing earnings from direct investment abroad were still 12% below the 2000 level, with the manufacturing portion of the total earnings declining from 32% to 22% of the total.

Earnings from financial institutions and life insurance companies increased 25% in the 2000-2003 period, maintaining their ratio of of total earnings. Holding company earnings (excluding banks), however, increased earnings 44%. That share grew from 28% to 32% of the total.

Foreign earnings from manufacturing activities in the US similarly collapsed in 2001, recovering in 2003 to 80% of the 2000 mark. Earnings from financial activities in 2003 exceeded 2000 levels by half, increasing to 19% of the total.

So now the banks rule? Absolutely, and not so absolutely.

Banks, holding companies, and wholesale trade rules. Profits from wholesale trade for US international investment and foreign investment in the US grew 40% in 2003. The WTO's analysis in 2003 concludes that two thirds of the growth in world trade was due to the dollar's decline. For better or for worse, for better and for worse, the lower dollar rules.

Closing Bell

In the critique of capitalism, as in capitalism itself, it is the over-valuation of the production of production, the reproduction, that determines the over-depreciation. The hegemony of US capitalism, such as it was and is, exists not in its balance of payments, its capital accounts, its currency's reserve status, but plainly and simply in its profitability. That profitability exists in its "superior" exploitation of its wage-labor.

The distress of US capitalism is a distress experienced in the capitalist markets as a whole; a distress manageable by the US as long as it can maintain its superior exploitation of wage-labor; a distress made manageable by trade, fiscal, currency policies, and OPEC price increases; actions that make the increase the distress for its trading partners.

And it is OPEC that is the US's joker in its deck of aces and eights. Reports The Financial Times (January 13, 2005):

To appreciate the transformation in relative performance, one needs to look at the entire period since the second world war. In 1950, the weighted average GDP per head of the four big non-English speaking industrial countries [Japan, Germany, France, Italy] was just 35 percent of US levels. By 1991, this had risen to 79 percent. By 2004, the ratio was back to 70 percent, where it had been in 1973....

...Japan's GDP per head rose from just 20 percent of US levels in 1950 to peak at 85 percent in 1991, only to decline to 74 percent in 2004. The patterns for...Germany, France, Italy are similar, although less dramatic...

Since the golden era of 1950-1973, the growth performance of the four non-English-speaking countries [Japan, Italy, Germany, France] has deteriorated over each successive cycle-- the era of the two oil shocks (1973-1981), then the expansion of the 1980s (1981-91) and finally the most recent expansion (1991-2004)...

...Still more revealing is what has happened in return on investment. A simple way of understanding this is via the incremental-capital-output-ratio (ICOR)-- the quantity of investment divided by the increase in output it generates. In the four English-speaking countries [US, UK, Canada, Australia], a given amount of gross investment has, over the last decade, generated at least twice as much ouput as in the other four countries...

OPEC was/is the cudgel the US has deployed 2,3, many times to impose austerity on its workers, to transfer income away from reproduction and into "negative accumulation."

And until the US working class moves, nothing will threaten the dominance of the US bourgeoisie.

s. artesian 022105

address all comments to:

Those who wish to check the numbers can find the data in the FRB's Flow of Funds Analysis 12/9/2004, and the US BEA's US International Transactions Account Data.

All errors are mine, unless someone else takes the blame.

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