October 19th 2002

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Articles from this issue:

COVER STORY: Bush changes US strategic doctrine

NATIONAL AFFAIRS: ALP Conference: triumph of 'spin' over substance

CANBERRA OBSERVED: PM's loopy housing scheme evades rebuke

SOUTH AUSTRALIA: Social 'reforms': Rann's devious politics

STRAWS IN THE WIND: Yes - it is about oil, and arms, and ... doublethink

SUGAR: Behind the sugar crisis

OBITUARY: Ted Serong: a great Australian

FINANCE: A $50 billion war chest for the ALP?

LETTERS: Superannuation and the ALP (letter)

LETTERS: Democrats (letter)

LETTERS: Life matters (letter)

WATER: Wimmera-Mallee major water conservation project underway

CHINA: China will remain the major challenge to America

COMMENT: Share collapse: we've seen it all before

BUSINESS: Just how 'ethical' can business be?

COMMENT: Dysfunctional Victoria

BOOKS: Wilful murder: the Sinking of the Lusitania, by Diana Preston

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Share collapse: we've seen it all before

by Max Teichmann

News Weekly, October 19, 2002
The global financial meltdown that so many people have been predicting has not occurred, but there is little doubt that most national economies have been performing quite poorly in recent years, with the IMF having to bail out more and more countries. Few of these bail outs seem to confer long term benefits, and mainly buy time until the next crisis.

Very often this international bail out appears mandatory, for the economic/financial disorder in the country concerned turns into a political emergency, and then a challenge to the state's very legitimacy.

Unfortunately, the conditions which the IMF requires the recipient state to fulfil in order to regain some balance and stability, sets in train such local resentments and hardships, as to usher in a second political confrontation. And so the cycle goes on.

Western European countries and Japan, erstwhile pillars of the global economic structure, are in many cases too big to bail out, but they are finding it almost impossible to regain their old vitality. Successive politicians promise lights at the end of tunnels, lower unemployment, etc, but the decline goes on.


Two continents - quite apart from their own difficulties - are suffering from the debilitation of their main markets. In the case of Africa, the European market; while South America, with its heavier trading exposure to North America, Europe and Japan, is perhaps the most beleaguered of all.

Share prices, which have become absurdly over-exposed to the endless prognostications of financial journalists, and money men, appear to be increasingly unreliable sources of basic economic information.

There are now so many short-term factors here - e.g., Solly Lew buying up Coles Myer shares before the Annual Meeting (will this increase Myers' counter sales?) - and peculiar, not to say irregular, interpretations of corporate balance sheets by CEOs. So, shareholders and the public are beginning to retreat into a fortress of suspicion and distrust.

From data now surfacing, the global downturn seems to have started a good deal earlier than we had realised. In 2000, not last year - and so was independent of the recently exposed corporate skullduggeries in the USA - and elsewhere. And certainly independent of the Iraq crisis: which some failing corporate leaders are beginning to claim.

But these new stresses can only make things worse. It seems that shares in many places, e.g., the US and Europe, were in any case riding for a fall because they were overvalued, as some courageous commentators periodically said. And of the order of 20-25 per cent.

The ratio between profits and dividends on the one hand, and the price being paid for the share on the other, had deteriorated until the only reasonable motive for outlaying money was to sell later, when the stock had appreciated. That is, the goal was a capital gain, not a regular return from an investment.

This is speculation, not bona fide investment. Individuals can get in, get out and win. But as a permanent mass investment phenomenon, it is a formula for asset inflation and ultimate major correction. Like musical chairs, the one last holding the suddenly unwanted shares, has no place to sit. Or to go; except out of the game. Investors in real estate can suffer the same fate: and doubtless will.

So we might have expected these declines. But, a secondary factor, which probably turned an orderly retreat into a major fall in the US, Europe, even Japan, was the revelation that the true economic performances of many corporations - including some large and rapidly-expanding ones - had been concealed or falsified. Instead of big profits, shareholders found themselves facing big losses. Instead of a strong affluent company, a debt-riddled house of cards with creditors starting to line up with angry faces.

Following upon the new accountability order being imposed upon corporate capitalism, firms are suddenly reporting reduced profits, even registering losses, and providing modest, even gloomy, predictions for coming years. Another moment of truth.

So we could be looking at a 40 per cent fall in share prices. It will be interesting to see how the financial system takes such a correction en masse.

One difficulty in deciding how much bona fide activity is occurring, as reflected in stock exchange registers, is judging how much is coming from mergers and takeovers, as against new companies, new industries.

An ailing company that sells off loss-bearing parts sees its shares rise from relief. The firm which takes over used to be seen as having picked up a bargain, for the new acquisition could be "turned around" and made profitable. Usually by cost-cutting. That is, retrenchment. So, the more takeovers, the more retrenchments.

Major Western states seem to me to be in a symmetrical situation to that of the 1930s; then, trying to recover from a Depression; now, trying not to fall into one.

In the 1930s, the Western rulers saw their economies and the world trading and banking systems, as fragile in the extreme - nothing should be allowed to shake them.

So, war, or even the threat of war, was out; plans to help unfortunates who had been attacked - e.g., China by Japan in 1937, out. Offending, let alone challenging nations you disliked, even feared, was out.

It was better to turn the increased economic activities of the new, expanding militant nations to your advantage. By selling them things and, where necessary, lending them money so they can import more things. Those states had hinted that their new economic strength would translate into military power, to be used to change the status quo to your disadvantage. Possibly great disadvantage. But you tried not to think about it. It mightn't happen. Meantime, Western countries competed for favours from the new rising states who were able to play them off against one another. (Idi Amin was especially good at this.)

Hitler was convinced that the West was corrupt and decadent - so much so that it would never fight. And so divided by greed and political divisions as to never cooperate. Qualities such as patriotism, loyalty and courage had trickled away in the West, most especially among the rulers and businessmen. Their journalists were for sale. Europe was a prize waiting to be taken.

I would think that the behaviour of most Western states now, except, for the moment, of Britain and Bush's America (only part of the USA), should lead Saddam or anyone in his position, to believe that he had no real worries. Eventually he would win against virtually no opposition.

So the moral, I suppose, is keep a strong economy and a united, politically-upright citizenry. And, like Polonius, neither a lender nor a borrower be.

Now try telling that to our pressure groups, and Adolf's favourite: the Western media. For they are just about all that remains of our liberal democracy.

  • Max Teichmann

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