Capitalism Isn’t Collapsing…Yet

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By Arun Gupta (February 6, 2018)

If you are hoping capitalism is going to implode because the markets tanked today, don’t hold your breath.

The drop on Monday, February 5, in percentage terms was far from historic. If you look at the first picture, a six-month chart of the Dow Jones Industrial Average, it looks like it fell off a cliff. 1175 points sounds big, but it’s only a 4.6% loss.

Now look at the third picture. Today’s loss is nowhere close to the 20 biggest drops in history, the lowest of which was about 7%. I saw one report that said today’s drop barely cracked the top 300 in terms of single-worst daily losses.

The second picture tells the real story. This chart starts in 1987, right before the Black Monday crash that obliterated 22% of market value in one day. And it goes up to the present, a 31-year span. At the far left, you can barely see the blip that was the 1987 crash.

Since tangerine dumpster fire squeaked into the Oval Office by his tiny hands, the DJIA has jumped 45%. That’s a yuuuge run in just 14 months. But look at the middle of the 31-year chart, starting in January 1995. That’s the beginning of the “irrational exuberance” phase of the Clinton-Summers-Rubin-Greenspan market. It peaked in March 2000.

During that five-year stretch the Dow Jones nearly tripled, gaining almost 200%. In the same period, the Nasdaq soared nearly 600%. That 45% gain suddenly looks like a lot less.

So while the Trump bump happened fast, this type of rise is not unusual in the era of neoliberalism and financialization that began with Reagan. The explosion of financial instruments like options, futures, derivatives — which play an important role for capitalists to hedge risk — increase stock price movements, whether up or down, as do trading algorithms.

Financialization is marked by bubbles and crises, so it’s natural to conclude one is inflating right now. And capitalism can be thought of as a bubble going back centuries. But there isn’t a sign of a catastrophic bubble on the horizon. There have been lots of predictions of a global bubble over the last decade: property values, emerging markets, government debt, energy prices, but there are no impending signs of disaster as there was in the later stages of the last two major bubbles: the internet/tech bubble and the housing bubble. The internet bubble wiped out about $6 trillion in value, while the financial crisis cost something like $22 trillion. The first caused a mild recession that was worsened by the 9/11 attacks, and the second, well, the global economy still hasn’t recovered from that. Though the .01% engineered it to increase their wealth at the expense of the rest of humanity and the planet.

It’s also worth remembering that these bubbles didn’t pop overnight. The Internet bubble took about 18 months to go from peak to trough, while the housing bubble, in the stock market at least, had a decline of nearly two years. This downturn is not even two weeks old.

Currently, the only obvious bubble is cryptocurrencies, and that’s popped. It’s shed 65% of its value in two months, around $550 billion. All cryptocurrencies combined are now worth barely $300 billion. While everyone should enjoy some schadenfreude at the expense of the libertarian cryptoassholes who’ve taken a beating in their Bitcoin as they dream of a disruptive currency that would eliminate the state, an $850 billion bubble is a dot in a $76 trillion global economy.

As for what will happen, I don’t have a crystal ball. But if you look at the bottom of the first chart, there are two indicators from February 5 (relative strength indicator and stochastics) that have plunged, which indicate the market is in an oversold condition. It can keep going down, but the Dow is unlikely to drop much further. In technical terms, the 200-day moving average is around 22,800, and at that point a lot of big banks, technical traders, quants, hedge funds will pour in money seeking short-term profits. That alone would likely stabilize the markets. And lo and behold, the next day, Tuesday, February 6, the markets jumped, erasing half the losses of the previous day.

There are numerous problems with the U.S. economy — such as low savings rates, widespread poverty, stagnation in wage growth, extreme bullishness and complacency in the markets, perception of inflation affecting the bond market, the budget deficit and government debt — but these are nothing new or severe enough to trigger a general economic crisis. There is no existential problem evident that means this downturn is the start of a gut-wrenching years-long plummet on the scale of the internet and housing bubbles that spilled over into the global economy. Most likely this will be forgotten about in a few weeks.

The only prediction I’ll make is my analysis will upset left-wing collapsitarians who pin their political hopes on the deus ex machina of a breakdown in capitalism because they lack any hope in being able to achieve progress through collective mass action.

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