From Volume 8, Issue 7 of EIR Online, Published Feb. 17, 2009

U.S. Economic/Financial News

GM Threatening Bankruptcy as D-Day Approaches

Feb. 14 (EIRNS)—Facing a Feb. 17 deadline for coming up with a restructuring plan that slashes operating costs and debts, General Motors is preparing to offer the government two options: either provide more bailout money so that it can continue operations, or provide financial backing as part of a bankruptcy filing. The deadline was established in the agreement by which it took $13.4 billion in loans from the government, late last year, but negotiations with both the UAW and the bondholders have been slow—thus the consideration of a bankruptcy filing. Treasury Department officials are said to believe that GM needs about $5 billion. The bankruptcy proposal would have GM gathering its supposedly viable assets into a new company and selling off everything else. It would also include a broad restructuring involving the closing of more than ten plants.

Chrysler, facing the same deadline, is reported to be preparing to present two options. One is to reorganize as an independent company; the other involves its partnership with the Italian carmaker Fiat SpA, which would have Fiat owning a 35% stake in the company. Chrysler has said that it needs about $3 billion to stay afloat.

Schwarzenegger Swings the Ax, Cuts 10,000 Jobs

Feb. 11 (EIRNS)—California Gov. Arnold Schwarzenegger has again wielded his ax, announcing that 10,000 state employees will lose their jobs by Feb. 13, if no budget agreement is reached. The layoffs would save the state approximately $750 million between now and July 2010, a mere drop in the bucket, considering that the budget deficit is over $40 billion. Notices will be sent out to 20,000 workers, to give officials time to determine which 10,000 jobs to cut. His mandatory "furlough" plan, of two unpaid days off per month for state employees, which started last week, has already reduced the pay of those employees by over 9%.

Schwarzenegger's announcement came on the heels of a report from Comptroller John Chiang that tax collections fell $2.2 billion in January 2009, in comparison with January 2008. Chiang has cut payments to vendors and counties already, and suspended state tax refunds, to preserve cash to maintain debt service and other mandatory payments. He said that California "has only $6 to pay for every $10 worth of bills." He is withholding payments "to save the state from defaulting."

Schwarzenegger later announced a new "compromise" on the budget, closing the deficit by increasing the state sales tax by 1% to 8.25%; increasing state income taxes and corporate taxes; increasing the car tax to 1.15% from 0.65%; a 12-cent per-gallon excise tax on gasoline; plus significant budget cuts; and a large chunk of funds to the state from the Federal "stimulus" package. Combined, the measures being considered would raise taxes and fees and other revenue by $14 billion, and are coupled with $16 billion in spending cuts and $10 billion in new debt. The tax increases would be "temporary," lasting from two to five years.

Though Arnie said he's confident this will pass, Republicans in the state legislature still could defeat it, if they maintain their unity against tax increases.

Food Chain Breaking Down for Dairy, Poultry Producers

Feb. 12 (EIRNS)—U.S. meat, milk, and crop farmers have been hit with drastic losses from low prices, broken contracts, and high costs of production. The farm price for raw milk is about half of what it was a year ago, while production costs remain high—for electricity, hauling, feed, veterinary costs, etc. A year ago, a Central States dairy farmer might be getting $17 for 100 pounds of milk, and now is getting $9.20. Many of the nation's 60,000 dairy farmers are seeking ways to quit. The monthly loss per milk cow is $200.

Looking at chicken farms, which are highly "vertically integrated" with mega-processors—Tyson Foods (the largest), Pilgrims Pride (second), Perdue Farms (third), Cargill, and others, some producers have been hit by sudden termination of their standing contracts to receive chicks and grow them out. Pilgrims Pride, after declaring bankruptcy in 2008, cancelled the contracts for some 300 farmers in Arkansas, North Carolina, and Florida. This spells bankruptcy and/or ruin within months for these farmers, who shoulder the debt for large chicken houses, now empty.

Pilgrims Pride still has contracts with 5,000 or more farmers. The company has stated its intention to limit its downsizing, but who knows? Tyson and Perdue aver that they will not cancel contracts. But there is no policy or process of government intervention to protect the food-production capacity. The forecast is that the U.S. will produce less chicken in 2009 than 2008, the first year-on-year decline since 1975.

For dairy farmers, there is a program called MILC—"Milk Income Loss Contract," to mitigate the farm milk-price collapse, but it is minuscule. For the chicken farmers, nothing. A lawsuit has been filed against Pilgrims Pride by 74 poultry growers in Arkansas, claiming damages because they were wrongfully induced by the company to go into debt for poultry production facilities, then summarily dropped.

The guiding principle for the 1930s and wartime FDR farm/food policy was that it is in the public interest, for a stable, secure food supply, that there be a decent and stable income for farmers. This principle, which was overturned in the last 40 years of globalization, can be reinstated in emergency economic measures of the kind proposed by Lyndon LaRouche.

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