Fool’s gold, snake oil and make-believe
Fool’s gold Guyana and the Wider World
By Dr Clive Thomas
Stabroek News
September 8, 2002
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The capitalist market has an unmatched reputation for hard-headedness and realism. The search for profit drives the market place to ensure one primary outcome: that only the most efficient survive and thrive.

When this process breaks down it is usually attributed to the work of crooks and thieves who hide in every corner of every market place seeking to get rich from ill-gotten gains. I have already drawn the lesson from this phenomenon in the US stock market crash, when stressing the importance of regulatory oversight and superintendence of all market places, if they are to be effective.

There is however, another side to the market, which is not so well known and certainly not commented upon nearly enough. That is, despite its realism, the market, and particularly stock markets, is also a place where peddlers of ‘make-believe’ or as it is also termed ‘fool’s gold’ also thrive. Without these peddlers, a financial bubble, such as that in the USA would not have enough energy to sustain itself.

‘Make-believe’ can take many forms. At times it is deliberate deception of the gullible by those who know better. Sometimes it is very simply self-delusion, and wishful thinking. Very often it is a mixture of both. Consider two examples.

Selling snake oil

Treasury Secretary Paul O’Neil in an effort to defend against the criticism that President Bush’s $1.35 trillion tax cut over 10 years was forcing the federal government into deficit spending, a situation that Republicans had railed against and which Clinton had done so much to bring to an end, declared on the major networks television late July that the US economy was sound and stock market volatility could not affect it.

Indeed he went further than this outlandish proposition, and, as the Americans termed it, tried to sell the population ‘snake oil.’ He predicted that the US economy would grow by 3.5 per cent this year, and even faster next year! When challenged that the USA was already in recession, he blandly asserted on NBC-TV’s Meet The Press that, “if people count as a recession one quarter (3 months) of negative growth, God bless them, I don’t care.”

Fortune’s Global 500

The above is crude and unworthy of such a high official of state. But there are other instances of ‘make-believe.’ Take the case of the recent publication of the Fortune 500 list for 2001. This list reveals that the economic downturn was already well established last year and already had global ramifications.

The profit and loss situation, which is the ultimate barometer of the health of the capitalist economy, shows that of the 500 largest corporations worldwide (based on the measure of revenues), as many as 297 had reduced profits for 2001.

Indeed total net earnings last year was less than half that obtained in 2000! This was the largest single decline since Fortune started publishing the Global 500 list in 1995. (The list from 1995 onwards covers both industrial and service corporations.)

The impact of last year’s decline was very uneven. Corporations dealing with telephones were particularly hard hit.

This included such stellar names as Nortel Networks and Britain’s Vodaphone, along with Nippon Telegraph and Telephone Company, which was ranked number 16 on the Global 500 list last year.

As a group the 24 telecommunications corporations in the Global 500 list were worse off by $78 billion in 2001, when compared to 2000.

This uneven impact is best revealed in the changing relationship among the leaders on this list. In 1995, the four largest global corporations were all Japanese: Mitsubishi, Mitsui, Itochu and Sumitomo. Indeed in 1995 Japan accounted for 6 of the top 10 corporations worldwide. By 2001, however, there was only one Japanese company among the top 10 (Toyota).

In the six-year span three European companies had joined the elite group:

British Petroleum, Royal Dutch-Shell, and Daimler Chrysler. Strikingly, the remaining six were all American. These also included the top three, Walmart, Exxon Mobil and General Motors.

For the record it should be noted that 11 of the top 500 corporations are from China. All are state-owned. In 1995 China did not have a single corporation among the top 500. South Korea also accounted for 12 of the top 500, this was an increase from 8 in 1995. Africa did not have a single corporation in the list, while India had only one.

The data on dramatically falling profits for the world’s 500 largest corporations cited above, therefore indicate that a global recession was in the making in 2001.

Indeed, everyone accepts that Japan had already by that time slipped into a depression, which continues to threaten up to today the entire global economy.

Prior to September 11, it was hoped that the US and Europe would not slip into a serious recession with Japan’s economy already in serious trouble. However, since the Enron affair, and the consequent loss of investor confidence, the collapsing but volatile stock market crash, has revealed that there is much uncertainty about the future of the US economy.

Europe has since been infected by these developments and several of its national economies are teetering on the brink of recession.

The new economy myth

It is amazing with such evidence at hand therefore, that investment houses and brokerage firms continued to sell stock and promote the idea that over the past few years a ‘new capitalist economy’ had arrived in the USA. In this new economy they argued there would be no recession or depression. Not only would these not occur, but growth, fed by technology, would always be positive and strong, as there would be a continuous rise in the productivity of all the productive factors.

In this environment there was no technical upper limit to stock prices. In fact stock crashes only occur in economies that had not yet arrived at the stage of ‘new economy,’ which the US had achieved.

With the benefit of 20-20 hindsight vision it is amazing that such arrant nonsense could pass for the wisdom of the period. It did, and those of us who challenged this view of the economic picture remained a small minority. The lesson however must be clear, development will not occur if some set about to dupe others or we just simply dupe ourselves.