From Volume 6, Issue Number 2 of EIR Online, Published Jan. 9, 2007

World Economic News

LaRouche: Brit Pound Collapse Aimed at U.S. Dollar

The real financial issue for Britain "is a collapse of sterling," not of real estate, a leading City of London analyst told EIR Jan. 5

"This is correct; this is the issue," Lyndon LaRouche responded. This is a strategic issue, and the "real aim of a collapse of the pound would be to pull down the American dollar." This has been done before by the British, LaRouche said. This was the policy in 1963, when the British began devaluing the pound to bring down the dollar. The way of doing this is to pull down the biggest financial element outside of the U.S. dollar, which was the pound sterling and the British financial empire, and then target the dollar itself.

The London source pointed out that central banks outside of Britain have been accumulating sterling, as an "alternative" to the dollar as the reserve currency. If the dollar continues to fall, and bottoms out, these central banks could pull out of sterling, and buy up dollars "cheap." Sterling is vulnerable, since it has been sold to other central banks at a rate of $5 billion per quarter for the last several years; Britain's net foreign and gold reserves are only about $20 billion at most.

He also said that China is supporting the dollar, which is sustaining the dollar's value at this time. The Chinese know that the value of their huge reserves would be destroyed if the dollar crashes, and that if it goes down, "everyone else" would use this as an opportunity to get out of the dollar, making the crisis worse. This, the Chinese will try to prevent by continuing their trade surplus with the U.S. and buying dollar assets.

LaRouche traced the history of British operations against the American dollar, in the 1960s, starting with the Harold Wilson government and ending with the devaluation of the dollar in 1968. LaRouche stressed that there is no alternative to the dollar; it is the international currency. He emphasized that this is a strategic issue, and that the enemies of the U.S. are going to try to pull something along these lines against the dollar system, to destroy the entire financial system, fast. We have about three months to get the new Democratic Congress up and running, and it is in this interval that the British will try to pull this dollar collapse.

Britain: 'Overvalued House Prices Threaten Crash'

British house prices are now at their most overvalued for 15 years, since the 1991 houses price crash, according to the new figures compiled by the Daily Telegraph/Lombard Street Research Housing Affordability Index, the Telegraph reported Jan. 2. Householders also face a record tax burden and unprecedented levels of costs for utilities and other household bills. House affordability has fallen almost 20% in the past four years, with the average home buyer having to borrow 6.5 times their salary when buying a new property.

Banks and building societies are reporting that the average amount loaned for mortgages is now 146,900 pounds, which is a 12% rise just this year, and almost three times wage increases. The average salary is 22,900 pounds.

The Telegraph also quotes Prof. David Smith of the University of Derby, leader of the "shadow" (opposition) monetary policy committee, saying that borrowing rates could rise from 5% to 6.25% by mid-2008, because of the vast British debt bubble.

When the British housing bubble burst in the early 1990s, some 1.5 million homeowners suffered serious financial trouble due to the negative equity of their properties. Now, interest rates are much lower—5% instead of 15%—but the debt is much larger overall, so even a small interest-rate hike will bring disaster. In 1991, 75,540 houses were repossessed, 1 in 130 houses.

Thousands of British Homebuyers Can't Pay Mortgages

Britain's Financial Services Authority warned that thousands of homebuyers taking out "interest-only" mortgages have no idea how to repay them, the Guardian reported Dec. 14. The FSA said that 10% of borrowers of interest-only mortgages, some 50,000 people in 2006, "have either no idea or, at best, only a rough idea, of how they plan to repay the loan." Another 5% also have questionable repayment capabilities.

Some of these borrowers did not even know that the lender has the right to sell the house if the borrower fails to repay the loan capital.

Now, a full 25% of British borrowers are taking out these mortgages, some 500,000 this year. Many banks and building societies are not checking if the borrower has set up a way to repay the capital of the loan, the FSA reported.

Corporate Failures in Britain Up 10.7% in 2006

Corporate failures in Britain totalled 20,067 in 2006, which is 1,938 more than in 2005, reported Experian Business Information Jan. 2. This is the highest number of corporate failures since the company began reporting in 1997. The last quarter was the worst, with failures shooting up by 29.1%, the highest quarterly rate of failures since 1997, Experian reported.

The biggest number of failures was in "business services," up 24.6%, and the tenuous state of the housing market was shown by the increase in failures in building materials (up 95%) and property (up 23.7%). Other service "industries" also showed sharply rising failure rates, from 20%-65%.

Chrysler Signs Deal To Import Chinese-Made Cars

The Chrysler deal with China will make it the first automaker to confirm that it will sell Chinese-built cars in the U.S. market, reported Dec. 30. The deal calls for Chinese state-owned automaker Chery to build entry-level cars under the Dodge nameplate that will go on sale in the U.S. in 2008. Industry consultants say that Chrysler's deal will be examined very closely by Ford and GM to see if they should do it too. GM Asia Pacific President Nick Reilly says that GM already exports Chinese-made cars to Russia. "We've proven we can do it," he says.

Chrysler's deal is portrayed in the Detroit News Dec. 30 as a "signal" to the United Auto Workers Union of its determination to cut costs. Past comments by DaimlerChrysler's China strategist, Ruediger Grube, about the company's interest in importing cars from China, had earlier sparked concern about the loss of jobs at home.

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