[PEN-L:31581] "The Late '90s Never Happened"

[Louis Proyect <lnp3@xxxxxxxxx>]

Enron Metastasized: Scandals and The Economy

by Robert Brenner

The prettification of company balance sheets helped the expansion to 
continue, but only to a point.  As the reality of the profits swoon 
gradually imposed itself over the course of 2000 and 2001, stocks 
plummeted, investors gradually awoke, and stocks fell some more.  By 
this time the stock market's wealth effect had gone into reverse: 
corporate borrowing and stock issuance was drying up, investment in new 
plant and equipment was in decline, unemployment was rising, the economy 
was languishing in recession—and the collective leadership of corporate 
America was laughing all the way to the bank.

(Clip)

"The Late '90s Never Happened"

The crisis of overproduction and equity values in telecoms took place in 
tandem, and to some extent overlapped, with a parallel crisis in the 
high technology sector more generally, prominently including computers 
and semiconductors.  The depth of this crisis is revealed in a Wall 
Street Journal analysis of 4200 companies listed on the Nasdaq Stock 
Index, home of the New Economy.  For these companies, losses in the 
twelve months between 1 July 2000 and 30 June 2001 totaled no less than 
$148.3 billion, a little more than the $145.3 billion in profits these 
same companies had reported during the entire period from September 1995 
through June 2000!

As one economist pithily put it, "What it means is that with the benefit 
of hindsight, the late `90s never happened."  Were one to take into 
account the earnings of these same companies over the year or so since 
the study was completed, as well as to adjust for the overstatements of 
profits by many of them, the trajectory would likely appear 
significantly worse.

Once the depth of the profit crisis is grasped, the pervasiveness of 
corporate manipulation of company accounts to puff up earnings is fully 
explained, especially once cognizance is taken of the openings for the 
dissemination of disinformation provided by Wall Street's accounting 
norms.  Companies use virtually any trick in the book to pump up 
so-called "pro-forma" earnings (those that are reported quarterly to 
stockholders and the financial community) before they admit their real 
earnings, calculated according to strict GAAP (Generally Accepted 
Accounting Practices) standards, to the Securities and Exchange 
Commission sometime later.

Needless to say this system of dual reporting invites abuses, such as 
exaggerating short-term earnings to sustain equity prices long enough 
for corporate insiders to unload their stock.  That just about all of 
Corporate America takes advantage of it was amply proved in a recent 
study SmartStockInvestor.com.  For the first three quarters of 2001 the 
Nasdaq 100 companies reported, on a pro forma basis, profits of $19 
billion, while these same 100 companies reported, on a GAAP basis, 
losses of $82 billion to the SEC for very same period—a little over $100 
billion less! (For the same period, Microsoft, Intel, Cisco Systems, 
Oracle, and Dell taken together overstated their profits by a factor of 
three.)

The high tech crisis has unfolded within the context of a broader U.S. 
economy already weighed down by overcapacity and over-production in 
international manufacturing.  Between their 1997 peak and the first 
quarter of 2002, manufacturing profits fell by an astounding 65%.  Until 
recently, it had been thought that profits had held up a good deal 
better in the non-manufacturing sector, but newly released government 
data has revised them sharply downward.

It is the combined realization that the official rate of profit on 
capital stock in the non-financial corporate sector as a whole is now 
(first quarter 2002) at its lowest level of the postwar period (except 
for 1980 and 1982) and that a broad swathe of America's greatest 
corporations have been lying about their earnings that has been so 
devastating to the stock market.

Yet, on top of seven straight quarters of declining investment on plant 
and equipment and a sudden decline of the growth of consumer spending 
over the past four or five months, the economy can ill-afford still 
another drop in equity prices.  The latter would inevitably carry with 
it—through the "reverse wealth effect"—a still further downward pressure 
on both corporate investment and consumer spending.  The odds in favor 
of the feared, but long scoffed at, double-dip recession get higher by 
the day.

full: http://solidarity.igc.org/indexATC.html

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