Stocks plummeted on the morning of 24 August, now histrionically dubbed “Black Monday.” In the early gray hours of this supposedly (or so the media tells us) gothic day, the Dow Jones nosedived a record 1,100 points. The world’s richest 400 people lost $124 billion in mere hours (although this money was, for the most part, later quickly “earned” back).
The media largely blamed the mini-crash on China. On the 24th, China’s stock indices fell over 8%; the next day, they fell 7% more. Oil prices dropped to their lowest levels in close to six years.
Economist Michael Hudson, however, argues that China was not solely to blame. In an interview with Democracy Now, the Wall Street financial analyst—president of the Institute for the Study of Long-Term Economic Trends and distinguished research professor of economics at the University of Missouri, Kansas City—explained that “what happened in China doesn’t have very much to do at all with what happened in the United States.”
“Wall Street would love to blame China, and the Obama administration would love to blame China, and Europe would love to blame China,” Hudson explained, but the US stock market drop was, although related, not directly caused by the economic ills across the Atlantic.
Hudson elaborates, maintaining that the problem is much bigger. The media may look for easy solutions to complex questions, but the situation is much more dire, he indicates.
The US economy has not truly recovered from the 2008 depression, Hudson avers, and Europe’s draconian imposition of austerity only continues to make things worse (emphasis mine):
The real problem is that we’re still in the aftermath of when the bubble burst in 2008, that all of the growth in the economy has only been in the financial sector, in the monopolies—only for the 1%. And it’s as if there are two economies, and the 99% has not grown. And so, the American economy is still in a debt deflation. So the real problem is, stocks have doubled in price since 2008, and the economy, for most people, certainly who listen to your show, hasn’t grown at all.
So, finally, the stocks were inflated really by the central bank, by the Fed, creating an enormous amount of money, $4.5 trillion, essentially, to drop over Wall Street to buy bonds that have pushed the yields down so high—so low, to about 0.1% for government bonds, that pension funds and investors say, “How can we make money?” So they buy stocks. And they borrowed at 1% to buy up stocks that yield maybe 4%. But who are the largest people who buy the stocks? They’re the companies themselves that have done stock buybacks. They’re the managers of the companies that have used their earnings, essentially, to push up stock prices so they get more bonuses. 90 % of all the earnings of the biggest companies in America in the last five years have gone for stock buybacks and dividends. It’s not being invested. It’s not building new factories. It’s not employing more people.
So, the real problem is that we’re in a non-recovery in America, and Europe is in an absolute class war of austerity. That’s what the eurozone is, an austerity zone. So that’s not growing. And that’s really what’s happening. And all that you saw on Monday was just sort of like a shift, tectonic shift, is people realizing, “Well, the game is up, it’s time to get out.” And once a few people want to get out, everybody sees the game’s up.
In an important reminder, Hudson also clarifies that “the economy is not the stock market.”
Just a day before, economist Dean Baker, co-director of the Center for Economic and Policy Research, made a similar point, writing “First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy.”
“Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity,” Baker continued. “It is supposed to represent the present value of future profits.” (Baker disagrees with Hudson vis-à-vis the role of the Chinese economy in the US mini-crisis, which he argues was more significant, it might be mentioned.)
Later in his interview with Democracy Now host Amy Goodman, Professor Hudson details how Wall Street is not just not the economy; the financial sector is a literal parasite on the economy, he argues (emphasis mine):
Most people think of parasites as sort of just taking, taking money from the economy, and the 1% is sort of sucking up all the income from the 99%. But in nature, what parasites do, they don’t simply take. In order to take, they have to take over the brain of the host. And economists have a word, “host economy.” It’s for a foreign country that lets American investors in. Smart parasites help the host grow. But the parasite, first of all, has to make the host believe that the intruder is actually part of the body, to be nurtured and taken care of.
And that’s what’s happened in national income accounting in America and in other countries. The newspapers and the media—not your show, but most of the media—treat the financial sector as if that’s really the economy, and when the stock market goes up, the economy is going up. But the economy isn’t going up at all.
And the financial sector somehow depicts itself as the brains of the economy, and it would like to replace government. What Larry Summers said is what—governments have to pay their debts by privatizing more, essentially, by doing what Margaret Thatcher did in England. That’s his solution to the crisis: All the governments have to do is balance the budget, sell everything to Wall Street on credit, and we won’t have any more problem. And that’s basically—the financial sector is almost at war, not only against labor, as most of the socialists talk about, but against governments and against industry. It’s cannibalizing industry.
So now most of the corporations in America are using their income not to do what industrial capitalism did a century ago, not to build more factories and employ more people and make more profits; they’re just using it, as I said, to push it to pay dividends and to buy back their shares and to somehow manipulate the financial sector in the stock prices, not the economy as a whole. So there’s been a divergence between the real economy and what I call the—economists call the FIRE sector—finance, insurance and real estate. And they’re going in separate directions.