U.S. Economic/Financial News

U.S. Trade Deficit Jumped to Record-High in September

The unprecedented trade gap of $66.1 billion was nearly $6 billion higher than the previous record, registered in February of this year. U.S. exports of goods and services for September relative to August, fell by $2.3 billion; almost all of that was accounted for by a $2.4 billion drop in civilian aircraft exports, reflecting the effects of the ongoing Boeing strike. Imports of goods and services for September, relative to August, rose by $4 billion; $1.5 billion—more than a third—was accounted for by the increase in imported oil, due to the shooting up of oil prices. Yet another $2.5 billion of the increase in imports was due to the U.S. importing other goods.

For the first nine months of the year, the U.S. has run a trade deficit on goods and services of $529.8 billion; on an annual basis, this constitutes a $706.4 billion deficit.

However, restricting attention solely to physical goods—excluding services—for the first nine months of 2005, the U.S. has run a trade deficit on physical goods of $571 billion; on an annual basis, this constitutes a $761 billion deficit. Showing the uncontrolled nature of the process, were the trend to continue, the U.S. physical goods trade deficit for 2005 would exceed the level of 2003—barely two years ago—by a quarter of a trillion dollars.

Sen. Byron Dorgan Attacks Globalization and Free Trade

Sen Byron Dorgan: "When the bubble bursts, and it will, because this is something that can't continue, they will all stand and look back and say: 'How on earth could we have sat by while this happened?'" Senators Dorgan and Debbie Stabenow (D-Mich) held a press conference on the issue of the newly announced record trade deficit in September, and Bush's trip to China. While both Democrats blamed China (and Japan) for currency manipulation and piracy and so forth, as if this were the cause of the crisis, they correctly identified the insanity of globalization and free trade.

Dorgan described the $2 billion per day ($66 billion per month) as follows: "Now if ever 'brain dead' applied to anything, the term brain dead has to apply to this trade policy. We have a president who doesn't care. We have a Congress; they don't care. We have the cheerleaders, such as the Washington Post and New York Times that have always supported this free trade strategy. They don't care.... We are drowning in a sea of red ink. Do you know what these red lines mean? The red lines mean Huffy Bicycles fired all their workers in the United States, moved to China. Why pay $11 an hour when you can pay 30 cents an hour and work them seven days a week, 12 hours a day? Little Red Wagon, Radio Flyer, gone to China. Pennsylvania House fine furniture, gone to China. Etch-a-Sketch, gone to China." He added that it's not just China, although they represent one-third of our deficit. "This is about a corporate agenda that says we want to produce work cheap and sell back into our country. That doesn't work, because our country is injured irrevocably because of it."

Delphi Bankruptcy 'Almost Caused a Breakdown of the Fast-Growing Credit Derivatives Market'

So noted a feature in Switzerland's Neue Zuercher Zeitung Nov. 10. Credit derivatives are the fastest growing segment of the global derivatives business. In the first half of 2005 alone, the volume of outstanding credit derivatives shot up by 48% to $12.43 trillion. By credit derivatives, an owner of corporate bonds can protect himself against a default by the issuer of the bond. All of that works fine—as long as the default never happens.

Unfortunately, Delphi recently filed Chapter 11, and Delphi bonds have a significant share in the popular credit derivatives index, Dow Jones CDX. Due to the Delphi bankruptcy, owners of Delphi-related credit derivatives could turn to their counter-party and demand cash payments from their credit derivative counter-party—only, however, by physically delivering the defaulted bond to that counter-party. Now it turns out that there had been 14 times more Delphi-related credit derivatives ($27.5 billion) contracted than actual Delphi bonds outstanding ($2 billion). A squeeze in the corporate bond market was the consequence. All the owners of the credit derivatives suddenly tried to catch Delphi bonds, thereby pushing up the Delphi bond price, in spite of the fact that Delphi just had defaulted.

Louisiana Faces 'Great Depression' Rates of Default

The ominous forecast was given at a field hearing in New Orleans of the U.S. Senate Commerce, Science, and Transportation Committee on Nov. 7, by Mike Olivier, who is the head of the Louisiana Department of Economic Development. Highlighting the unspoken reality that the Cheney/Bush team has stiffed Gulf states' citizens victimized by Hurricanes Katrina and Rita, Olivier told the Senate panel, "If the lack of access to capital continues, we are facing the largest default rate for private and public entities—including local governments—since the Great Depression."

The harsh economic reality in Louisiana—a $1 billion revenue deficit and a $3.7 billion bill from FEMA for the state's share of costs add up to nearly a quarter of the state's whole budget—was presented to the Senate committee hearing by spokesmen from the fishing industry, small businesses, and the ports, all decimated by the storms. The BayouBuzz op-ed put it this way, "On top of [the FEMA bill and revenue loss] plus companies failing, ... fractured levees, ... miles of homes without insurance, ruinage beyond [what] the eyes can see, and no possible way to generate revenues; in sum, considering the enormity of the losses, there is no way to patch this budget, pay off FEMA debt, and restore a resemblance of an economy when many of our major industries—seafood, tourism, the ports, are either crippled or demolished. No way."

Louisiana is asking for $10 billion in business grants and $30 billion in tax-exempt 'hurricane recovery bonds' similar to the $8 billion 'Liberty Bonds' issued to New York after Sept. 11, 2001. Mississippi is asking for $15 billion in such bonds.

Auto Industry Shutdown in High Gear

Auto layoffs, plant closures, and bankruptcy losses are mounting while suppliers are threatening to halt shipments. Some highlights:

* Ford is cutting about 1,500 jobs at some plants it took back last month from Visteon; Ford said it plans to offer buy-outs to about 5,000 employees at the former Visteon operations. The automaker plans to close two former Visteon plants, and is seeking to sell 13 others.

* Visteon is targetting 20 more facilities in North America and Europe for possible downsizing or restructuring, as it posted a third-quarter loss of $200 million. For example, the supplier announced the indefinite layoffs of 49 hourly workers at its Bedford, Ind. plant.

* Maker of auto seat mechanisms, Romech said it is closing its plant in Red Oak, Iowa, gutting 400 jobs. Gear maker Eaton Corp. is moving to close its plant in Marshall, Mich., eliminating 117 jobs. Axle supplier American Remanufacturers filed for Chapter 11 bankruptcy protection.

* A major maker of car and truck wheels sued GM and is threatening to stop deliveries if the automaker doesn't pay more for its parts to offset higher steel prices; a halt would potentially shut down at least some of GM's assembly plants. Topy Corp. said that it is losing money on every wheel it sells to GM. And four Delphi suppliers have also filed legal action, threatening to halt shipments of parts.

* Fitch cut GM's debt rating by two notches deeper into junk, to "B-plus," the fourth-highest junk rating.

* Delphi reported a $788-million loss in the third quarter, far worse than its loss of $119 million in 3Q 2004, due in part to a drop of 16% in revenue from GM.