From Volume 5, Issue Number 28 of EIR Online, Published July 11, 2006

U.S. Economic/Financial News

Derivatives Bubble Grows as System Collapses

Pyramid schemes must either constantly expand, or they will collapse, and the current derivatives bubble is no different. At the end of 2005, the level of derivatives outstanding at U.S. commercial banks broke the $100 trillion barrier, ending the year with $102 trillion, and that number increased to $111 trillion in the first quarter. The derivatives market took off after the crash of 1987, and it took 14 years for the commercial banks to hit the $50 trillion mark, but less than five years to get the next $50 trillion. The level of derivatives, with some fluctuations, has gone up consistently quarter by quarter, with the glaring exception of the post-9/11 fourth quarter of 2001, when the level dropped from $51.7 trillion to $45.5 trillion, suggesting some major disasters papered over during the market shutdown after the attack.

In these days of deregulation, the big banks are organized into holding companies, which include engaging in activities not permitted to the commercial banks themselves, such as investment banking. Adding the extra derivatives held by these subsidiaries to the total yields $115 trillion in derivatives at the bank holding companies, 89% of which is held by just three companies. JP Morgan Chase, the world's top zombie bank, had a whopping $54 trillion in derivatives as of March 31, more than the entire U.S. banking system had in September 2002, and nearly as much as the next two banks, Citigroup with $25.6 trillion and Bank of America with $23 trillion, combined. The big three are also heavy players in the credit derivatives market: JPMC has $2.8 trillion, more than twice its $1.3 trillion in assets; while Citigroup has $1.1 trillion in credit derivatives against $1.6 trillion in assets; and Bank of America has $813 billion versus $1.4 trillion.

U.S. Manufacturing Rapidly Reaching 'Point of No Return'

Economic figures that the government does not track show that the U.S. has been steadily losing home market to products from overseas, i.e., globalization, assert Alan Tonelson and Peter Kim, of the U.S. Business and Industry Council Educational Foundation, in a Washington Times op-ed July 2. "Unless this rising import penetration is reversed, the nation's long-time global industrial leadership and all the benefits it has generated will be irretrievably lost," they warn.

The U.S. Business and Industry Council found that of 112 industries examined, import penetration fell in only four, between 1997 and 2004. "Among the losers were industries critical to the fate of any modern industrialized economy," including aircraft, machine tools, and turbines for power plants. Import penetration rates more than doubled in 19 of the 112 industries. This means imports have seized control of numerous industries that have long fueled U.S. economic growth, productivity gains, technological progress, and high-wage jobs. In seven of 112 industries, imports now represent at least 70% of U.S. market—including machine tools.

Unlike financial indicators, import penetration rates focus on activity that contributes directly to domestic economic growth. A country whose manufacturing sector keeps losing its share of a growing national market is a country with weakening, not strengthening, fundamentals. Without fundamental change, they warn, U.S. industry's decline will be pushed closer to "the point of no return."

Honda To Pay Third World Wages in New Indiana Plant

Greensburg, Indiana will be the site of a $500 million Honda plant to be built by 2008, according the a Democratic county chair, contacted by the LaRouche Political Action Committee. Headlines all over the state are reporting that workers will be paid $8 to $9 an hour. When told that auto union rates are three times that with benefits, the chair responded "I know, but people here are desperate for jobs."

Another Democratic county chair from Carroll County praised the Republican Gov. Mitch Daniels for offering incentives to get Honda to locate in the state, such as a $1.5 million job training program. When the chair was told that Honda is getting the highest skilled work force in the world for Third World wages, he defended Honda claiming that they will be paying high wages. Governor Daniels announced on the TV news that "Honda is going to feel right at home in Indiana, and you are going to love Greenburg and this part of our state."

Nucor Could Be Target of a Buyout Operation

Dan Dimicco, the CEO of Nucor, the largest steel producer in the U.S., told an interviewer for July 21, "When Mittal went after Arcelor, that was an industry life-changing event that tells you that anybody is fair game." Dimicco also reiterated his opposition to a steel futures market, saying, "For us, it's just an attempt by bankers to make money. We have real concerns over the unethical trading in other metals futures markets. I do not believe it will fly for steel." While Nucor is an anti-union scrap recycling mini-mill, they have constructed new steel mills over the past few years, in addition to acquiring bankrupt steel companies.

Bush-Man Woodley Opposes Repair of Locks and Dams

Assistant Secretary for the Army for Civil Works, John Paul Woodley, Jr., a Bush-appointee, prepared a report earlier this year, obtained by Minnesota Public Radio March 7, in which Woodley states opposition to the Corps' desire to rebuild the 39 locks and dams of the Upper Mississippi System. He cites cost-benefit analysis—which has been given a pedigree by a National Academy of Sciences report opposing rebuilding these locks, a report cited by Woodley. "Our basic concern is not that it's not an economically justified project necessarily, but that we don't have the tools that we usually like to see and rely upon to make judgments on the likelihood of economic justification." Woodley's report was submitted to the Office of Management and Budget in April. The Corps has been trying for over 13 years to get the go-ahead to repair the aged locks on the Upper Mississippi.

Woodley, appointed to the Pentagon by Bush 43, earlier served under Virginia Gov. James Gilmore as his Secretary of Natural Resources, "protecting" the environment, and in the state's Attorney General's office.

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