From Volume 4, Issue Number 39 of EIR Online, Published Sept. 27, 2005

U.S. Economic/Financial News

U.S. Capital Inflows Dominated by Hedge Funds and City of London

The supposedly good news, presented by the U.S. Treasury on Sept. 16, was that foreign capital flows into the U.S. during the month of July remained strong. They amounted to $87.4 billion, the second-highest this year. The U.S. dollar rose on that day, based on the assumption that foreigners seem to be ready to finance even a U.S. trade deficit in the range of a $1 trillion per year.

However, the country-by-country breakdown of the Treasury figures reveals that there has been a dramatic shift in the composition of foreign investors. Until recently, most of the capital flowing into the U.S. from abroad was the by-product of currency interventions by Asian countries, leading to the build-up of giant holdings of U.S. government bonds and agency bonds at the central banks of Japan and China in particular. However, month by month, the combined share of the City of London, where thousands of hedge funds have been set up in the last few years, as well as that of the unregulated financial offshore centers is increasing. Out of the $87.4 billion capital inflows in July, $50.4 billion had been delivered by Britain ($25.8 billion), and the three most important offshore centers—the various Caribbean Islands ($11.5 billion), the Bahamas ($8.6 billion), and the Cayman Islands ($4.5 billion). Capital inflows from all Asian countries totalled $27.8 billion, headed by China ($13.8 billion), Hong Kong ($5.1 billion), and Japan ($4.9 billion).

While most of the offshore centers were continuing their fire-sales of U.S. Treasuries in July, the type of security accounting for, by far, the largest net purchases by foreigners in that month, was agency bonds ($37.8 billion), that is, the debt titles issued by the mortgage finance institutes Fannie Mae and Freddie Mac. Net purchases of U.S. Treasuries amounted to $28.5 billion, while those of corporate bonds plunged to $25.0 billion.

Speculators Rushing into New York Mercantile Exchange

According to a Sept. 20 column in the Washington Post, NYMEX is seeing "a torrent of cash flooding in from speculative investors," "speculative 'hot money' chasing big returns," "like steroids, pumping up prices and leading people to talk about super-spikes to $100 a barrel or more.... But because buyers and sellers of physical oil and gas rely on prices set at the NYMEX, large amounts of speculation can artificially boost prices," according to Post writer Ben White.

"Over the last five years, there has been a huge move by money managers to own hard assets," said David P. Prokupek, CEO of Geronimo Partners, a hedge-fund and money-management firm. "There is a substantial amount of capital in the commodities market that has nothing to do with oil production."

Companies Announce Additional Massive Layoffs

Manufacturers and airlines slashed more jobs, on top of the fall-out from Hurricane Katrina. Meanwhile, of course, the Bush Administration says the U.S. economy is in a "recovery."

* Mass layoffs have hit more than 1 million workers so far, from January through August, which does not include the impact of Katrina. Just in August, over 127,000 workers lost jobs from mass layoffs, with auto industry employment falling by 4,400.

* Sony announced the cutting of 10,000 jobs and the closure of 11 plants.

* Goodyear said it is closing plants, reducing manufacturing capacity by 8-12% as part of a plan to cut costs by $1 billion over the next three years.

* Delta Airlines announced its plan to emerge from bankruptcy by cutting 9,000 jobs over the next two years. This is on top of $5 billion in previously targetted cuts.

* Bankrupt Northwest Airlines will lay off 1,400 flight attendants between Oct. 31 and January 2006.

* The number of people unemployed due to Hurricane Katrina and seeking unemployment benefits is 214,000.

Dairy Farmers Being Driven Out of Maryland

Dairy farmers are being driven out of Maryland by the real-estate bubble and the collapse of industry. The state has been losing farms at twice the national rate due to high value of farmland. Maryland had 4,000 dairy farms in 1970; 3,000 by 1980; 2,000 by 1990; 1,000 by 2000, with only 643 left today. Some speculate there will be none remaining by 2010.

The number-one reason for the exodus of dairy farmers, is the high price real estate "developers" are willing to pay for farmland—as much $300,000 for 2-3 acre lots. Some farmers are selling their farms and then establishing new farms in North Carolina and Alabama, where it is cheaper to operate.

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