Thoughts on the Latest Stock Market Panic

So… Private industry wants to maximize profits. How? Increase revenues; decrease costs. This basic strategy has been going great for US companies: for the past year or so profits have reached record highs.

One of the biggest costs to private industry is employee wages. Keeping costs down means keeping wages down. But lower wages means less money to buy things, which reduces corporate revenues. What’s to be done?

Get people to spend money they haven’t earned; i.e., instead of paying them more wages, encourage them to borrow more.

People borrowed more and more, secured by the rising value of their houses, in order to keep buying. A few years ago this source of spending money dried up: real estate prices stopped going up; wages went down and jobs went away; mortgagees began defaulting. While the crisis to the lenders was immediate — and fixed via government bailout — the crisis to mortgagees has gotten worse. Prices of houses continue to go down; wages are still declining; unemployment has doubled since the housing crisis began.

So now the private sector loses its best strategy for keeping spending high while keeping wages low. What to do? Find another source of consumer borrowing. It’s the government. The government increases its borrowing, paying workers and contractors money they can spend on private-sector products. Meanwhile the private sector continues to keep its own labor costs low while keeping sales up.

Now the financial industry starts getting nervous. What if the governments start defaulting on their loans, just as the home buyers did? And isn’t the government, which on average pays higher wages than the private sector, becoming a problem for private employers that want to drive wages even lower in order to reduce costs? Isn’t it time to put a limit on government borrowing?

So now the companies get nervous. Both of the big sources of money for keeping spending up — real estate borrowing, government borrowing — are drying up. The rich have more money than ever, accounting for 50% of domestic spending. But because of widespread privatization in government, much of the government’s borrowing is spent on private-sector contractors rather than on government employees. So reducing government spending has a direct effect on reducing private revenues, which threatens to reduce the wealth of the very rich who drive spending.

No wonder the stock market is jittery. The only way to keep people buying the products without paying them more is to keep them spending borrowed money. But now both big sources of borrowing — first private, then public — are drying up. It seems inevitable that companies are going to have to spend some of those record profits on higher wages. At least in the short term, costs will go up before revenues do. That means corporate profits are likely to go down. And so their stock prices go down.

Maybe companies will hire more American workers now. If they do, unemployment has been so high for so long that people will likely be willing to go back to work at much lower rates of pay than they formerly earned. Or else companies will continue to shift jobs from the still relatively high-priced American workforce to other cheaper sources of labor. But in order to keep revenues up on a global scale, they’ll have to raise prices in other parts of the world to make up for declining sales and margins in the US. But since other countries’ governments aren’t borrowing either, than means raising the pay scale for those other countries’ low-wage workers, so they can afford to buy more of what they’re producing. Either way, the companies — and their rich investors — are going to have to spend money to make money. I expect they’ll find a way.

ADDENDUM: The latest budget showdown in Washington yielded only one tangible result that I know of: they raised the debt ceiling. Possible austerity measures for reducing government spending were mostly deferred, having been assigned to some special commission to figure out later. I wouldn’t be surprised if that commission eventually decides to impose only the smallest spending cuts. Keep borrowing, keep spending, keep corporate sales up and wages low. Maybe raise interest rates on Federal bonds a point or two to make the investment bankers happier and richer.