From Volume 6, Issue Number 1 of EIR Online, Published Jan. 2, 2007

World Economic News

Money Supply Surges, Financing Predatory Buyouts

The European Central Bank reported on Dec. 29 that M3 money supply surged in November by 9.3%, from the level of a year earlier, in the 12 European nations covered by the ECB. This is the fastest acceleration in European M3 money supply since April 1990, 16-1/2 years ago. Driving this process is the explosion in bank lending, both for predatory mergers and acquisitions, and the home bubble.

ECB head Jean-Claud Trichet may utilize this as a reason to hike the ECB's key interest rate, which currently stands at 3.5%

In the United States, the same process is under way. It will be recalled that on March 23, 2006, the Federal Reserve stopped publishing M3 money supply data, precisely so that it would not have to make publicly known the explosion in M3. However, economist John Williams, using the same data available to the Federal Reserve, reconstructed M3. On the website, he shows that for 2006, M3 money supply is swelling at an approximately 9% annual rate.

During 2005, Lyndon LaRouche focussed on the hedge funds' manic speculative investments, typified by commodities, derivatives, and takeovers, as setting off a Weimar hyperinflationary shock front, which would be accompanied by an explosion in money supply.

Another Warning of Growing Financial Risks

In a background interview with Die Welt published Dec. 28, the chairman of Axa Private Equity, Stephan Illenberger, warned of the "growing risks" in the field of private equity transactions and mergers. Illenberger estimates that in the next year, a major "accident" will occur. "It doesn't have to be something like 9/11," Illenberger told Die Welt. "But it is enough, if a major client falls out. If that were to happen, there would no longer be enough security reserves." The warning from Axa Private Equity comes in line with similar warnings made some weeks ago by ECB officials, comments Die Welt. On average, only one-fourth of the capital used for private equity fund buyouts is capital owned by the buyer; the rest is credit and high-yield loans which are imposed on the companies being taken over. According to S&P estimates, corporations are sinking ever more into debt, and the risk of insolvency is increasing accordingly. Illenberger therefore concludes that only a major "accident" will bring matters back into line.

Substantial 'Corrections' Could Follow Record Year in Real Estate

In its year-end review, cited in Frankfurter Allgemeine Zeitung on Dec. 29, Jones Lang LaSalle, a leading European real estate developer, notes that with more than $800 billion "invested" in real estate globally, 2006 comes close to the previous record year of 2003; yet, the volumes traded today are twice those of three years ago. 200 billion euros (about $250 billion), were pumped into Europe, 50 billion of those into Germany, alone. Russian and Arab money is increasingly pumped into the European bubble (instead of being invested into the real economy).

There are two risks involved, however, and they will show in 2007, the review warns: As compared to 2003, commercial real estate prices are down by 35% in Frankfurt and Warsaw, by 33% in Berlin, by 25% in Hamburg, and 24% in Madrid. Thus, the hopes of speculators that prices can be brought back to 2003 levels, will flop, therefore bigger losses (or, "corrections," implying "dangers," as the review calls them), will occur. Also in the boom towns, like Moscow (up 110%, as compared to 2003), Brussels (17%) or Milan (14%), "corrections" will ruin many speculators' expectations.

Five Years Later, a General Attack on the Euro

On Dec. 28, the French daily Liberation covered its front page with the headline: "There Is No More Love for the Euro." The article presents the results of two nearly identical sets of statistics, one presented by the French polling institute TNS for the Catholic magazine Le Pelerin; the other in an annual report of the European Commission, showing that the euro has fallen into disgrace with the majority of the European population. In France, 52% of the population (compared to 45% in 2003) believe that "the euro is a bad thing"; 53% (against 50% in 2003) say that it has a bad influence on employment; and 57% think that the euro is bad for them "personally" (56% in 2003). An article in Le Parisien adds that this is not just a French sentiment, citing German polls published recently that indicate 58% of Germans want to go back to the deutschmark. The annual report of the EU confirms those statistics: only 48% of European citizens are favorable to the euro today, against 59% in 2002.

United Arab Emirates Shifting to Euro?

The German daily Die Welt reported Dec. 28, based on background discussions with Emirate economists, that the (UAE) will be "shifting in a 'limited way' from dollar reserves and gold into the euro." According to Die Welt, since many of the Emirates think that the dollar will remain vulnerable in 2007, not only the Emirates, but all Gulf countries (Saudi Arabia, Kuwait, Bahrain, Oman, etc.) consider it "advantageous" to diversify. In 2006, the dollar-euro shift was 10%. It is also pointed out that, aside from Iran, which announced a shift in a limited way in this direction in December, and now the Emirates, Venezuela and Indonesia have also begun similar moves.

China To Slow Auto Investment

In a move that will affect all the major world auto producers, China has declared controls on auto industry investments, requiring automakers who seek to expand their factories to show that sales exceed 80% of last year's authorized output, AP reported Dec. 27. China is the world's third-largest auto market, and all of the major automakers also produce parts in Chinese factories. China is said to be imposing the controls in an effort to control inflation and "prevent a debt crisis," a new euphemism for dollar collapse.

China's U.S. Trade Surplus Poses Financial Challenges

Due to China's huge trade surplus against the United States, the Chinese currency, the renminbi (RMB), was at a record high of 7.808 against the U.S. dollar at the end of December. This was the seventh record high of the RMB for the month. The value of the RMB against the dollar is up almost 3.86% since China revalued the currency in July 2005.

As of November, China's trade surplus was $156.521 billion, up 42% over 2005. The People's Bank of China has had to issue more RMB to buy excess foreign exchange. The Xinhua news agency reported Dec. 29 that the huge influx of foreign exchange is responsible for about one-third of China's money supply.

China's banks are also facing internal problems. RMB savings deposits exceeded loans by 11 trillion yuan ($1.41 trillion) in November, with the loan/savings ratio at a record low of 66.74%, according to the People's Bank of China. This is up from a margin of 9 trillion RMB in January. With savings increasing rapidly, banks are finding it difficult to lend effectively. The Chinese government has established a policy of restricting investment in local construction or other projects, in order to attempt to prevent real estate or other bubbles. However, the banks are now under pressure to pay interest on the savings deposits, and the huge gap between loans and deposits could pressure the commercial banks to again loosen credit. There is also the potential that these funds would flow into the stock or securities markets, making the problem of excess liquidity worse.

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