Committee for the Abolition of Illegitimate Debt

This global surge has been helped mainly by the US stock index, the S&P 500, which closed at a record high on 22 separate occasions during the last quarter. The AI hype has fuelled the market’s gains, with the major AI chip designer Nvidia adding more than $1tn in market value, equivalent to about one-fifth of the total gain for global stock markets this year! Nvidia’s market capitalisation rose by about $277bn — roughly equivalent to the market value of every listed company in the Philippines, according to HSBC. And as I reported in my last post, there has been a 60% rally in bitcoin dollar prices.

Euphoria in the US stock market is continuing as investors are convinced that any US economic recession is off the agenda, and instead US economic growth will accelerate this year and drive up global corporate profits. Are they right?

Finance capitalists usually measure the value of a company by the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. price divided by annual profits. If you add up all the shares issued by a company and multiply it by the share price, you get the ‘market capitalisation’ of the company — in other words what the market thinks the company is worth. This ‘market cap’ can be ten, 20, 30 or even more times annual earnings. Another way of looking at it is to say that if a company’s market cap is 20 times earnings and you bought its shares, you would have to wait for 20 years of profits to double your investment. And we can get a sort of average price of all the company shares on a stock market by using a basket of share prices from a range of companies and index it. That gives us a stock market index like the S&P-500 index for the top 500 US companies in market capitalization.

As company stock prices are based on the subjective judgements of financial investors, they can get way out of line with the actual profits made by companies and relative to the value of the assets (machinery, plant, technology etc) that companies own. That’s the current situation. We can measure that divergence in several ways.

The leftist economist, James Tobin developed a measure of the relation between the market capitalisation’ of the companies in the stock market (in this case the top 500 companies in what is called the S&P-500 index) and divided that by the replacement value of tangible assets accumulated by those companies. The replacement value is the price that companies would have to pay to replace all the physical assets that they own (plant, equipment etc). This is called Tobin’s Q. The current Tobin’s Q reveals that US company shares are valued way above the actual value of the assets that companies own at a ratio of 1.48 compared to the historic average of 0.83.

Another measure of the relation between stock market prices and profits has been developed by the heterodox economist Robert Shiller. He measures the ratio of market capitalization of over corporate earnings (after inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. ) and averaged over ten years. The Shiller measure tells a similar story to Tobin’s Q.

It shows a value well above the trend average measure of stock price to earnings, surpassing the 1929 level with only 2000 being higher, just before the dot.com bust when the great hopes of the internet revolution eventually did not deliver sufficiently higher real earnings and the tech bubble burst.

Another measure of the stock market’s relation to reality is favoured by the legendary billionaire investor, Warren Buffett. Buffett monitors the market cap of the US stock market against real GDP GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. , in other words, stock prices versus the real economy. Here is the Buffett measure. Again, it is well above the historic trend growth rate.

So currently, the US and other stock markets are suspended in mid-air, well above real value, because investors hope and expect more real value to materialise. But as I have argued before: “Whatever the fluctuation in stock prices, eventually the value of a company must be judged by investors for its ability to make profits. A company’s stock price can get way out of line with the accumulated value of its stock of real assets or its earnings, but eventually the price will be dragged back into line.”

And there are already faultlines in this current market boom. In the US, the S&P 500 stock index (for the top 500 US companies) has been almost totally driven by the seven large social media, tech and chip companies – the so-called Magnificent Seven (TAlphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla). They now sport a market cap of around $12 trillion. The market prices of the other 493 companies in the S&P index have hardly moved relative to earnings.

While analysts still make huge optimistic forecasts in 2024 for the Magnificent Seven, earnings forecasts for the rest are dismal. In 2023, the Magnificent 7 grew sales by 15% yoy leading to earnings growth of 58%. In contrast, the remaining 493 stocks in the S&P 500 grew sales by only 3%, while earnings fell by 2%. So the market index depends on the Magnificent Seven sustaining these profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. gains. Earnings growth estimates in 2024 for the Magnificent Seven are 20.8%, and S&P 500 sans-Magnificent Seven at only 6.7% respectively.

And the Magnificent Seven is losing members: Apple (falling I-phone sales especially in China) and Tesla (falling EV sales as Chinese EVs take over).

Fundamentally, if US corporate profit growth slows (and it is) and interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. on borrowing stay high, then the squeeze on stock prices will eventually lead to a reversal of the current market boom.

Investors have been expecting three cuts in the policy rate of the Federal Reserve FED
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/ this year as inflation rates fall. But it seems that the ‘last mile’ in achieving ‘normal’ inflation is now in jeopardy. What caused the inflationary spike back in 2021-23 was mainly due to energy and food prices. And both these are now turning back up again.

If inflation stays ‘sticky’ or even rises, then the Fed will hold off cutting its policy rate and borrowing costs will stay high. That will eat into net profits of most companies that are already struggling. The risk of bankruptcies among so-called ‘zombie’ companies will increase.

Up to now, debt servicing costs have stayed relatively low because companies had loans or bonds issued with terms of several years when interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates were very low. But as more companies have to refinance, interest costs on their debt will rise.

Mainstream economists and media make much of rising public sector debt and the costs of servicing that debt. In the US, the cost to the budget will reach $1trn and exceed spending on public services outside of social security and Medicare. The demand is that public sector must reduce its debt through higher taxes and more public spending cuts. That’s a bleak prospect for American households.

But for the health of capitalist investment and production, it is the level of non-financial business debt that matters, not the public debt. US non-financial business debt is near all-time highs.

Goldman Sachs economists estimate that $790 billion of US corporate debt is set to mature in 2024, followed by $1.07 trillion of debt maturing in 2025. That amounts to $1.8 trillion of debt reaching maturity within the next two years. The average interest rate on corporate debt will likely rise to 4.3% in 2024 and 4.5% in 2025.

And talking of rising debt, the real crisis right now is among the countries of the Global South. Over $15 trillion was added to the global debt mountain last year, bringing the total to a new record high of $313 trillion, up from $210trn just a decade ago. Emerging and developing economies have been the worst hit by previous debt crises, World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

research shows. To meet debt payments, at least 100 countries will have to reduce spending on health, education and social protection, the IMF IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org estimates. Debt distress is when a country is unable to fulfil its financial obligations, such as repayments due on its debt. The IMF and World Bank reckon 60% of low-income countries are at or near this point.

What is to be done to end the debt distress for these countries? The existing international agencies and mainstream economists offer two alternative strategies. The first is to ‘restructure’ the debt. That means poor governments unable to meet their debt obligations must negotiate with a host of creditors like the IMF, the World Bank, other governments, banks and hedge fund bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. holders to get them to agree to a ‘haircut’ on what they are owed and/or agree to push out the times for repayments and reduce the interest on loans. But there is no cancellation of the debt (often crippling and odious), just renegotiation. And renegotiation is often blocked by private lenders which demand their pound of flesh on time.

Take Zambia. The Zambian government has finally reached an agreement with a steering committee of investors to restructure its three outstanding eurobonds, more than three years after defaulting. Two initial agreements were rejected in November, once by the IMF and twice by the Official Creditor Committee (OCC). There is no cancellation of the debt. Zambia still owes $1.35bn on one bond and will get a small reduction in the value of another. But this haircut is balanced by a steeper repayment schedule: $498m to be paid next year to the IMF; and $578m each year from 2026 to 2028.

The alternative solution offered to countries in serious debt to foreigners is to cut public spending and raise taxes to obtain sufficient budget surpluses for repay the debt – in other words, fiscal austerity. Take Jamaica, a tiny island state. Recently, Jamaica has been heralded by mainstream economists as a great success story in paying down its debt, halving its government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. to GDP ratio from 144% in 2012 to 2023.

We are told that this great achievement should be a guide to other poor countries on getting their house in order by running ‘austere’ budgets – with surpluses much higher than even Greece was forced to run after the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

IMF : https://www.ecb.europa.eu/home/html/index.en.html crisis of 2015.

It is claimed that tiny Jamaica (hardly a model for others, I think) achieved this fiscal improvement without any rise in unemployment. But even those presenting their glowing report on Jamaica’s fiscal prudence had to admit that infrastructure spending was suppressed ie government investment forced down and “we don’t have a clear sense of whether a little less fiscal consolidation— if the additional funds had gone into things like education spending or health spending — might have been equally good or better.” Indeed. Actually, during the last ten years, Jamaica’s economy and living standards have stood still -as measured by per capita income. Hardly a poster for the austerity alternative.

For Global South economies deep in unrepayable debt, the current choice is: rescheduling often on even harsher terms; or forced stagnation of the economy to pay back foreign creditors. From the Magnificent Seven to the Desperate Hundred.