Behind the shares sell-off

The turmoil on the world’s stock markets, which yesterday saw the steepest fall in the Dow Jones index in New York since September 11, 2001, reflects a deeper malaise in the global capitalist economy. Behind the shares sell-off, which began in China, is a combined crisis. This is characterised by a vast over-capacity in the production of consumer goods and a phenomenal rise in the total credit floating around the planet. At the level of individual consumers, cheap finance has driven large sections into personal debt, especially in the United States and Britain where interest rates have risen. This in turn has led to a fall in consumer demand for goods which are now mainly produced in China. Yesterday, for example, it was announced that demand in the US for durable goods had fallen 8%. In the United States, personal debt has also produced a sharp downturn in the housing market and a rapid rise in repossessions. At the same time, large sections of US industry are unable to compete on the world’s markets. As a result, the country’s trade deficit with the rest of the world, particularly China, is out of control. The dollar’s value is only maintained by foreign investors and is highly vulnerable to a rapid depreciation should sentiment switch to the Euro, for example.

While all this has been going on, stock market values have risen exponentially – for example, they have more than doubled in China inside a year – fuelled by a sharp growth in mergers and acquisitions. These deals have themselves in turn been financed by borrowings and are increasingly the work of what is known as private equity funds. These are the modern version of the asset stripper, using other people’s money to take companies over with the aim of driving up returns in the short term. "Rationalisation and restructuring", involving sell-offs and job losses, then follow. This has been the case with the AA and Bird’s Eye in Britain. Latest targets for private equity funds in Britain include supermarket giant Sainsbury’s. New Labour has accepted donations from directors of equity funds without blinking. Hazel Blears, party chair and candidate for the deputy leadership, said at the weekend that private equity funds often "breathed new life" into businesses that would otherwise close down.

The sell-off in China was triggered partly by government moves to control speculation but was also linked to the assassination attempt on Vice-President Dick Cheney in Afghanistan, US war moves against Iran and fears about the American economy itself. Graham Neale, head of equities at the stockbroker Killik & Co, said: "Any major issues in China will have far greater impact on global markets than they might have done five years ago. The Chinese growth story is vitally important to Western [sectors], including mining and oil, and the slightest hint of a slowdown is a catalyst for selling." The chain-reaction that followed events in China startled some analysts Chris Low, an economist at the financial services firm FTN Financial, in New York, said: "What is striking to us is not the big move in Chinese stocks, but the contagion driving stocks down around the world. For the past couple of years, contagion was a thing of the past." He added: "Still, a synchronous drop in equities world-wide is noteworthy, especially since we have escaped this sort of thing for so long... this looks to be one more sign that the global liquidity glut is drying up." The drying up of liquidity that he refers to is a sure sign that global casino capitalism is not only unsustainable but is heading for the rocks, taking countless jobs and livelihoods with it.

Paul Feldman, communications editor