From Volume 4, Issue Number 22 of EIR Online, Published May 31, 2005

World Economic News

OECD Warns of Coming Dollar Crash

OECD (Organization for Economic Cooperation and Development) chief economist Jean-Philippe Cotis, presenting the organization's semi-annual economic outlook, noted on May 24 that the U.S. trade deficit could further expand next year to $879 billion, or 6.7% of gross domestic product (GDP). An ever larger part of this deficit can only be financed by foreign central banks. Private investors are about to lose confidence in the dollar, and could engage in a capital flight out of U.S. assets. "The risk of a brutal fall is rising," Cotis stated at the press conference in Paris. The OECD report describes the global current-account imbalances as unsustainable and presents results of a simulation on the consequences of a dollar crash. A 30% drop in the dollar would boost inflation in the U.S., forcing the Federal Reserve to sharply increase interest rates, causing a crash on stock and bond markets.

In a separate interview with the May 25 Financial Times, Cotis "dropped the usual diplomatic language of international organizations in relation to the risks posed by growing imbalances in the world economy." He stated: "We're not saying there will be a doomsday tomorrow morning ... but because the adjustments [to global imbalances] are very slow, we are running the risk that an accident will happen. That's where we are." He added: "[A global adjustment] may happen, but late and at a less propitious time. Time is running out—the numbers are getting big, big, big."

Central Bankers Against Hedge-Fund Regulation

In response to questions from members of the European Parliament, European Central Bank president Jean-Claude Trichet on May 23 denied any urgent need to regulate the hedge-fund sector. Instead, he called for a study, which will probably take years to complete. Trichet said: "We are all called to study this question of the hedge funds and the reason why they have developed so rapidly over the last years.... Also, the very rapid development of some credit derivatives is calling for further examination.... After having understood exactly what is at stake," that is, after the study has been published, lawmakers can "draw the consequences."

Bundesbank board member Edgar Meister, in an extended interview with the German daily Die Welt on May 24, also rejected the need for short-term action. Any regulation of hedge funds, in any case, has to be done on an international level, he said, and "in certain ways" hedge funds would contribute to the "stability of the financial system."

European Commissioner Charlie McCreevy, responsible for financial services, told reporters in Vienna on May 23, that hedge funds are playing a positive role in markets, and he isn't planning rules on the industry at present. He added: "I don't think we should ever reach a situation in financial markets by excessive regulation to such an extent that you hinder innovation. We are not planning as of present to introduce any new legislation in this area.

"I'm also very much aware that there is disquiet in many member states as to the activity of hedge funds. I have read some complimentary articles about hedge funds in newspapers in recent weeks, which have said that hedge funds do provide a tremendous benefit by keeping everything competitive in the financial world."

China Produces Nearly One-Fifth of World's Clothing

Seventeen percent of the clothing worn in the world is produced by Chinese textile companies, as reported by both Bloomberg and the China Daily May 23. With Wal-Mart and other mega-retailers seeking to take advantage of China's cheap labor, this number will grow. This year, quotas for textiles coming into countries ended, and Wal-Mart sought to save 12-15% on apparel. Hence, it is no surprise that retailers are opposed to the quotas being reimposed. The quotas were favored by the American textile manufacturers. However, applying quotas on Chinese textiles will not bring back the textile industry in the U.S.; market penetration into the United States will still exist.

Fawn Evenson, a vice president of the American apparel and footwear association, said 1 million manufacturing jobs have been lost since the 1980s, and those jobs are not coming back. If anything, companies will outsource to other countries in Asia or South America, where cheap labor is plentiful, she said. Essentially, European firms and U.S firms can easily get around the quotas being imposed on China.

One of the areas in the United States that has not been crushed by globalization is the cotton industry. But U.S. cotton growers do not rely on the domestic market to sell their high-quality cotton, most of which comes from Arizona and California. For the eighth straight year, demand for cotton by the U.S. has shrunk. So, who keeps the 31,400 U.S. cotton growers in business? China: Some 60% of the cotton China uses come from the United States.

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