Wednesday, February 28, 2007

Shanghai surprise

Yesterday the Shanghai stock exchange dropped 9 per cent in a single day, apparently setting off a worldwide round of selling as panicked investors sought safe instruments. Wall Street had its biggest fall since September 11, the TSE had its worst day in a year, and several 'emerging' exchanges, in Brazil, Turkey and Russia suffered big drops.

The Shanghai surprise clearly shows the herd mentality of global finance. Shanghai is an exchange which is largely domestic, with limited global participation. The drop was a demonstration of how the market is increasingly dictating policy: there were rumours that the government was going to place restrictions on some of the practices around the buying, selling and taxing of transactions, and in order to prevent this, the market collectively dropped, demonstrating who is in charge of policy (the fact that many big investors are Party people is not unimportant here). In any event, the drop in Shanghai was almost exactly the same as the previous day's rise--so the net effect was profits for some, with limited losses for others.

Why then did this largely domestic event spread? The answer lies in the vulnerability of the world economy. The US is dangerously imbalanced, both externally, in terms of its current account deficit and economic exposure to political events in oil producers, and internally, in terms of its budgetary deficit and the share of profits in total income. This vulnerability is what worries global finance capital. The possibility of a recession in the US has already been raised by Alan Greenspan, and global markets still respect him. A recession in the US will hurt the slow recovery in the European Union, and particularly Germany and France, and this has the possibility of spreading to other EU members. In short, the world economy, dominated as it is by finance capital, is vulnerable, because, simply put, the economy is not leading the market, and has not been for a long time indeed. Market finance is leading, but its fictitious character means that the global economy is being led by shadows and light. In shadows and light, the possibility of a bumpy ride for the real economy is strong. This year should be an interesting one as finance and productive capital struggle to exert dominance over the global economy and global development.

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