Wall Street
continues to feed on death and economic devastation
13 August 2020
Amid mass
death, economic contractions not seen since the Great Depression, rising
unemployment, and impoverishment for millions, Wall Street continues its
relentless surge, siphoning up wealth to the heights of society.
Yesterday,
the S&P 500 index ended up by 1.4 percent. It briefly climbed above its
record high set in February during the day, before finishing within a hair’s
breadth of that level. The index has risen 3.3 percent so far this month and is
up by 4.6 percent compared to the start of the year.
The Dow rose
by 269 points, or 1 percent, and the tech-heavy NASDAQ index climbed by more
than 2 percent.
Since the
crisis of mid-March, when the market plunged and the financial system froze,
the S&P 500 has risen by 50 percent on the back of government corporate
bailouts and the pumping of trillions of dollars by the Fed and the assurances
that it will continue to function as the backstop for Wall Street.
The rise of
the US market followed similar developments in Europe, most notably in the UK
where the FTSE 100 index rose by 2 percent. This came in the face of data for
the second quarter that showed Britain had experienced its worst recession on
record. Gross domestic product fell more than 20 percent for the three months,
an annualised rate of almost 60 percent.
A breakdown
of the rise in the S&P 500 index points to the growth of monopoly and the
increasing domination of the high-tech companies, with more than one third of
yesterday’s rise coming from the increase in the share prices of just three
companies, Apple, Amazon and Microsoft.
Together
with Alphabet (the owner of Google) and Facebook, these companies dominate the
S&P 500. Amazon’s revenue alone has risen by 40 percent for the quarter as
a result of the increase in online orders due to the COVID-19 pandemic.
It is a
different story for smaller companies. Companies in the Russell 2000 stock
index have reported aggregate losses so far of $1.1 billion compared to profits
of close to $18 billion a year ago.
Predictably,
as COVID infections and deaths have continued to mount in the US, President
Trump has hailed the rise of the stock market as an indication of economic
health. Speaking at a press conference on Tuesday evening, he said the US
economy was “rebounding with a strength like nobody thought was possible… We’re
very poised for a great third quarter and very poised for some great stock
numbers.”
Amid a
continuing health disaster, by far the worst per capita in the world, he
claimed the decline in European GDP was 40 percent worse than in the US and
“we’ve built such a strong base that we’re able to do things and sustain better
than anybody in the world by far.”
But
rather than the stock market rise indicating underlying economic health, it is
a fever chart of the diseased character of the US economy and its financial
system for which Trump is the representative.
Less than
five months ago, all US financial markets—including the $20 trillion market for
US Treasury bonds, the foundation of the global financial system—froze
threatening to set off a meltdown going far beyond that of 2008.
Nothing has
been resolved since then. In essence what has taken place is that a debt crisis
has been temporarily resolved by the creation of still more debt through the
interventions of the Fed.
As a recent
article in the Financial Times noted, after spending years
warning of the dangers of excessive corporate debt, central bankers have
responded to the coronavirus storm in financial markets by creating more of
it—a continuation and intensification of the measures put in place after 2008.
“To stave
off a debt crisis, monetary policymakers create conditions that allow companies
to borrow even more, increasing the potential severity of the next crisis,” the
article noted.
So far this
year, more corporate bonds have been issued than in the whole of 2019 with more
debt expected next year under conditions where the capacity to repay this debt
is being weakened.
According to
the Bank of America, the ratio of the debt of top-rated US companies to editda
(earnings before interest, tax depreciation and amortization) hit 2.4 at the
end of the second quarter, the highest level in records going back 19 years,
and will reach 3.2 by the end of this year.
Even
companies whose bonds are rated as junk, that is, lower than investment grade,
have been able to cash in. Earlier this month, the Financial Times reported
that one such company, Ball Corporation, a maker of aluminium cans, was able to
raise $1.3 billion by issuing a 10-year bond paying below 3 percent—the lowest
borrowing cost ever recorded in this market.
With the Fed
intervening in financial markets to buy up all forms of debt—from US Treasuries
to corporate bonds—companies have gorged themselves on cheap money. In the 12
years since the 2008 crisis, the level of outstanding US corporate bonds
outstanding has doubled to $12 trillion.
These
figures have far-reaching economic and social implications. On the one hand, they
signify that all the conditions are being created for a meltdown of the
financial system, leading to companies either going bankrupt or slashing jobs
and investment as they struggle to make repayments, with defaults threatening
to rip through the financial system.
On the
other, they signify a deepening of the assault on the working class already
underway.
The Fed can
create massive amounts of money through the press of a computer button, adding
to the already existing mountain of financial assets. But it cannot create new
value. Financial assets, including stocks, do not of themselves embody value.
In the final analysis they are a claim on the surplus extracted from the
working class in the process of production which must now be increased to meet
the demands of Wall Street.
The
divergence between the claims of the stock market is indicated by the rise of
the S&P index to its record high in the face of the biggest contraction in
the real economy since the Great Depression.
The price to
earnings ratio of stocks in the S&P 500 now sits at 22.5 compared to the
average of 15.5 over the past decade—an indication of the extent of the
onslaught on wages, jobs and working conditions that is already being
undertaken and which will intensify in the immediate future.
White House Seeks to Cut Capital-Gains Tax Rate via Congress: Kudlow
National Economic Council Director Larry Kudlow says he “wouldn’t mind” seeing a return to a 15 percent capital-gains tax rate, while noting that President Donald Trump wouldn’t seek such a cut through an executive order.
“We are looking at middle-class income tax cuts and capital gains tax cuts to spur investment and jobs and liquidity,” Kudlow told reporters at the White House on Aug. 12
“In another era, we used to call them tax cuts 2.0. The president has never lost those thoughts,” he said, while adding that Joe Biden, the president’s 2020 rival, would raise taxes if elected.
Kudlow said it’s imperative that legislators in Congress work to come up with a cut to capital gains taxes, adding that it’s “not part” of any Trump executive order or plans on future executive action.
White House officials “had the economic committee during the campaign,” Kudlow said. “We originally had a 15 percent capital gains tax rate. And I wouldn’t mind going back to that.”
“We’d like to take it back to 15 percent, where it was for quite a long time because it helps jobs, investment, productivity, and wages,” he reiterated. The capital-gains rate is currently 20 percent.
On Aug. 10, Trump stated that he’s considering a tax cut on the profit that results from the sale of a capital asset such as a stock, bond, or real estate. He didn’t specify how that could be carried out.
The president said at a press conference that he’s also looking at “an income tax cut for middle-income families.”
“We are looking at expanding the cuts that we have already done, but specifically for middle-income families, and you will be hearing about that in the upcoming few weeks,” Trump said, adding that a capital-gains cut will produce more jobs.
While remaining mired in talks with top Democrats about a pandemic relief measure, Trump took executive action to provide a federal unemployment benefit of $300 per week, with states paying another $100 per week. He also took action to suspend evictions for renters and homeowners, defer student loan payments, and suspend payroll taxes for people who make less than $104,000 per year.
Kudlow’s remarks on slashing the capital-gains tax mirror that of Treasury Secretary Steven Mnuchin, who told Fox News earlier that there’s a need for “legislation to do what we want on that front.”
“That’s what we need now because of COVID. So I think for the next few years while we recover, we should reduce those capital gains,” he added.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said in a note to investors that a cut to the rate “would require the support of Congress,” although a Trump executive order “allowing the indexing of capital gains to inflation might be a realizable objective.”
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