Cannibals on Wall Street
Published in Folha
(Brazil) on 19 October 2009
by Fernando Canzian (link to original)
NEW YORK - There is something sinister in the strong recovery of the world's main stock market, the New York Stock Exchange, and it is commemorated by those who see this as a good sign.
The forces that are currently bringing stock prices up, producing value of more than 50 percent since March, are destructive. It also appears that they cannot sustain a healthy recovery of profits - which, after all, justifies the high market value.
There are two main drivers that led the Dow Jones industrial average over 10 thousand points last week, something which had not been seen for more than a year.
1) Record spending and borrowing by the U.S. government, and 2) Deep cuts in employment, salary, and private sector investments.
First, borrowing favored banks, which pushed the stock market higher in the second quarter (April to June).
The Fed 100 percent guaranteed bank issued bonds, with almost zero cost. This cheap and risk-free money was loaned to businesses and consumers at high rates, providing strong return to the banks.
Institutions like J.P. Morgan Chase and Goldman Sachs have also made fortunes using the Fed's cheap money in stocks and bonds in several markets, including emerging countries like Brazil.
The irony is that the American taxpayers subsidized these gains, giving banks cheap money that they would never give if there were no crisis.
On the other side of the coin is public debt. The U.S. budget deficit hit $1.4 trillion and already amounts to 10 percent of GDP - the highest since 1945.
On one hand, banks and the non-financial sector (which also issued securities backed by the Fed) win at the expense of the government. On the other, they have contributed little to reduce the suffering of those who ultimately will pay the bill: the workers.
In the third quarter (July-September), profits for non-financial companies clearly had only one source: job, salary and investment cuts.
By having fewer fixed costs and future expenses, these companies have higher profits in proportion to total revenue, rewarding more shareholders and pulling the value of their stock up. However, this has limits and cannot continue indefinitely.
In the U.S, more than 7 million people lost their jobs in the current recession when U.S. companies cut 45 percent more jobs than European companies. This is the main reason why the market has surged so much in Europe.
It is as if Wall Street has cannibalized the remaining economy and public finances for profit, regardless of the cost. It is squeezing the most profit from the shrinking private sector, which is deeply in debt.
This is not a good sign for anyone.
The forces that are currently bringing stock prices up, producing value of more than 50 percent since March, are destructive. It also appears that they cannot sustain a healthy recovery of profits - which, after all, justifies the high market value.
There are two main drivers that led the Dow Jones industrial average over 10 thousand points last week, something which had not been seen for more than a year.
1) Record spending and borrowing by the U.S. government, and 2) Deep cuts in employment, salary, and private sector investments.
First, borrowing favored banks, which pushed the stock market higher in the second quarter (April to June).
The Fed 100 percent guaranteed bank issued bonds, with almost zero cost. This cheap and risk-free money was loaned to businesses and consumers at high rates, providing strong return to the banks.
Institutions like J.P. Morgan Chase and Goldman Sachs have also made fortunes using the Fed's cheap money in stocks and bonds in several markets, including emerging countries like Brazil.
The irony is that the American taxpayers subsidized these gains, giving banks cheap money that they would never give if there were no crisis.
On the other side of the coin is public debt. The U.S. budget deficit hit $1.4 trillion and already amounts to 10 percent of GDP - the highest since 1945.
On one hand, banks and the non-financial sector (which also issued securities backed by the Fed) win at the expense of the government. On the other, they have contributed little to reduce the suffering of those who ultimately will pay the bill: the workers.
In the third quarter (July-September), profits for non-financial companies clearly had only one source: job, salary and investment cuts.
By having fewer fixed costs and future expenses, these companies have higher profits in proportion to total revenue, rewarding more shareholders and pulling the value of their stock up. However, this has limits and cannot continue indefinitely.
In the U.S, more than 7 million people lost their jobs in the current recession when U.S. companies cut 45 percent more jobs than European companies. This is the main reason why the market has surged so much in Europe.
It is as if Wall Street has cannibalized the remaining economy and public finances for profit, regardless of the cost. It is squeezing the most profit from the shrinking private sector, which is deeply in debt.
This is not a good sign for anyone.