US Stock market bubble will burst
by Victor Perlo
Eagerly watching the stock market has become the national pastime for middle-class people as well as capitalists.
There are tens of millions of "investors", most of them small scale. Stock market gambling rivals race tracks and the mushrooming roulette and slot machine emporiums.
Stock market operations, unlike other speculations, are affected by the real economic life of the country. "Bull" and "bear" markets influence the lives of most people, including the majority who are not investors.
Historically, ownership of stocks brought in a share of corporate profits, through dividend payments. That's still true of preferred stocks, which pay a fixed rate of return, like bonds. But the present highly publicised activity is in common stocks.
Today, most common stocks, especially the high-flying "market leaders" like Microsoft and Yahoo!, pay either no dividend or only a nominal dividend of a fraction of a percent.
They are bought for capital gains ― to sell them for more than the investor paid for them.
1998 was the fourth straight year of stock market gains, as measured by the Dow Jones index of leading New York Stock Exchange (NYSE) issues and the NASDAQ index of stocks traded on the "over-the-counter" market.
Investors whose stocks have gone up in price fuel much of the increase in consumer spending, which buttresses overall economic activity and employment.
Typically, investors with "paper profits" feel free to use their credit cards for purchases exceeding in value the actual monetary savings in their pockets.
When the stock market goes down, as it surely will sometime, they'll be pressed to pay their credit card debts, will have to spend less, and the declining consumer spending will mark the start of a cyclical crisis of overproduction, with rapidly rising unemployment of workers who never had anything to do with speculation.
Surprisingly, of common stocks listed on the New York Stock Exchange, more went down in price during 1998 than went up, belying the record new highs in indexes of the NYSE stocks as a whole.
How could that happen? The stock index is the weighted average of all the stocks listed by the NYSE, NASDAQ, etc. Because of the weighting, the index is dominated and controlled by the largest corporations.
The index of NASDAQ stocks went up twice as fast as that of the NYSE, by nearly 40 percent. But the overwhelming majority of NASDAQ stocks declined in price, perhaps four-fifths of the total.
Why? By and large, stocks traded on NASDAQ represent smaller corporations, employing a few hundred workers, and with perhaps a billion dollars or less in business. The few mega-companies with soaring market prices carry much more weight in the indexes than the bevy of smaller corporations.
Monopoly power of a handful of corporate giants dominate the stock exchanges and the economic life of the country. Smaller companies are being squeezed and become ready targets for takeover by the giants.
Large mergers soared in number and value last year in the US, reaching $2.5 trillion, a sum equal to one-third of the gross domestic product, the standard measure of the size of economic activity. The pace of mergers and takeovers is expected to rise further this year.
The soaring stock prices of the corporate behemoths have gone beyond any reasonable relation to their profits, creating an expanding bubble awaiting the shock that will cause it to burst ― with disastrous impact on the economic life of the country and the world.
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People's Weekly World, paper of Communist Party, USA.
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