PKT message, The Gathering Storm

The Gathering Storm

In discussions I had with the distinguished analyst Dr Kurt Richebächer on 8 October 2002, he again emphasised the slide in corporate profits in the United States. In his September 2002 Letter, he said that "sliding profits have been the obvious, primary cause of the crisis in business capital spending in the United States, which, in turn, has been driving the U.S. economy's downturn."
From this, he went on to emphasise "a second major depressing effect on the economy...: declining credit availabilty for business."
In other words, business is losing faith in business and that includes the great financial houses on whom "recovery" depends.
What is the reason for this disastrous loss by business, including the banks and financial houses generally, of faith in itself?
Richebächer says it is "obvious: dwindling corporate creditworthiness due to the prolonged, very poor profit performance and badly ravaged, highly fragile balance sheets. Frightened rating agencies, criticised for not seeing through accounting frauds, are more aggressively reviewing and downgrading companies."
What does this mean for you and me?
What will the fallout be for Mr Everyman and Ms Everywoman?
If we have any yardstick at all for what awaits us, it is the Great Depression of the 1930s when the whole "free-enterprise," capitalist "system" seemed about to collapse and misery worldwide was on a scale that, we thought, was as ultimate as it was unprecedented.
The terrifying thing for you and me is that we are going into this crisis, right now, in much worse shape than we did at the time of the Great Crash in 1929.
In our discussion on 8 October, Dr Richebächer and I noted several contrasts, including that the United States was the world's greatest creditor in 1929 and is now the world's greatest debtor; that real capital investment had then been high but, during the 'nineties and up to the present, it has been disastrously low; that the United States had a large trade surplus in 1929 but now has a trade deficit unmatched by any other country at any other time.
And so it goes on.
But here let us look at some more detailed data and, in particular, let us take a look at those corporate balance sheets.
Richebächer warns that "we are looking out for financial turmoil in the United States of a gravity without precedence in the whole postwar period. Our main consideration in this respect is the balance sheets of businesses and private households that have been recklessly devastated in the past few years."
He then draws a contrast with the 1930s. Thinking explicitly of 1930, he says that "businesses went into the Depression with balance sheets that they had strengthened with record-high stock issues during the boom, taking advantage of the cheapness of equity capital. To quote [the eminent economist] Joseph Schumpeter: American business 'eventually entered the Great Depression with a financial outfit which was nothing short of luxurious.'"
What a contrast with today!
For almost a decade in the 1990s, "American businesses chose with vehemence to do the exact opposite [of what they had done up to and as they crossed the threshold of the Great Depression]. In order to comply [in the 1990s]with the Wall Street request of maximising stock prices in the short run, they leveraged their balance sheets with the recklessness of desperados who have everything to gain in the short run and nothing to lose in the long run...the trick was to dupe investors...Though it was a plain case of systematic deception, everybody liked it because it apparently helped to lift share prices...mergers and acquisitions became the hallmark and centerpiece of the new corporate growth strategies [with] the acquiring firms [having] to pay a large premium over the prevailing market price of the stock that, in turn, happened to vastly exceed the acquired book values."
All of this could be no other than the road to ruin, for the corporations themselves, for the United States economy to the extent that it came to dominate the behaviour of its major players, and for the world economy as a whole given the number-one, dominating role of the United States.
The chickens are now coming home to roost with every indicator to which we can reasonably give significant weight being worse now than in 1929.
Unless we act quickly - and effectively - we are almost certainly faced with economic, social and political catastrophe.
What are governments and international agencies doing about the gathering storm?
Nothing!
There is total paralysis at the policymaking level - at the level of governance by those who are formally charged with the responsibility of avoiding a catastrophic economic collapse, with its social, political and strategic consequences.
The only way out now is through direct democratic action.
We have proposed a process for Victory Over Want which will tackle effectively both the imminent threat of economic collapse and the problem of chronic poverty around the world. That process will also lead us in a step-by-step movement towards pragmatic world governance.
We must invigorate this direct-democratic process with the greatest urgency - before the rapidly developing crisis snatches away from us any remedy except turmoil and violence.

James Cumes