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From the Vol.1, no.10 issue of Electronic Intelligence Weekly

ECONOMICS NEWS DIGEST

Spannaus: 'Recovery' Reports Faked; 'Give It Up, Sucker!'

Spannaus for Senate, the campaign committee of LaRouche Democrat Nancy Spannaus, who is challenging Republican John Warner in the Virginia Senate race this year, issued the following statement on May 15.

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All the 'Recovery' Reports Are Faked: 'Give It Up, Sucker!'

The customers of the legendary "snake-oil salesman" had nothing on the Americans who are being lured back into the stock market in the United States today. Some of you think you're a sophisticated investor, playing for the "long term." Others of you are just desperately hoping that "things will get better" so you don't have to get off your duff, and fight alongside Democratic Presdential pre-candidate Lyndon LaRouche and me for a new monetary system. In fact, you are nothing but a pathetic sucker!

Sure, there have been a slew of "recovery" reports, all contrasting starkly with the avalanche of layoffs, bankruptcies, and budget shortfalls staring you in the face. There is good reason to believe that many of these are simply made up—like the healing properties of the snake oil.

But, sucker, did you hear? Over the last weeks, the offending agencies themselves have admitted that they are carrying out accounting fraud! There are myriad methods, including the addition of special magical properties of computers, or simply an increase in speedup. But the basic M.O. goes something like this: First, you announce a huge increase in Gross Domestic Product, or employment, or profits, for one month. Then, the next month you "adjust" that report downwards—sometimes to a negative figure. Thirdly, on the strength of that revised figure, you announce a new spectacular increase in GDP, employment, or profits! Until the next month's "revision," that is.

The fraud and fakery are deliberate, and scandalous, even by Arthur Andersen standards. But you, the typical American sucker, want to believe they're true. There are ugly consequences to come from your willful delusion, of course, and not just for you. The acceptance of this fraud gives the vultures on Wall Street more time to loot the future out of our country, and the world, before the inevitable collapse hits anyway.

Give it up, sucker! Don't let your desire to be fooled take our nation, and the world, down the road to hell.

More Economic Fraud To Keep the Suckers Happy

There have been a growing number of instances of economic fraud, including by Federal Reserve Board chairman Alan Greenspan (aka "Dreamspin") to suck in the suckers. During the past two weeks, there have been three reports released by the U.S. government, which are filled with fraud. At the same time, a series of non-government reports have been released exposing the fraud in other aspects of U.S. economics. As Lyndon LaRouche has said, "These reports of a recovery are based on nothing but the fakest of fake accounting practices done in all known human history, here or anywhere else." These reports are intended to suck the sucker back into the market. and push the market up.

The frauds cover five basic areas: 1) Gross Domestic Product; 2) productivity; 3) employment/unemployment; 4) profits; and 5) U.S. government surplus or deficit.

* Gross Domestic Product: On April 30, the U.S. Commerce Department reported that U.S. GDP had risen by 5.8% during the first quarter of 2002. The truth is:

a. During the fourth quarter of 2001, U.S. private business reduced its inventories by $119.3 billion; during the first quarter of 2002, U.S. private business reduced its inventories by $36.2 billion. Thus, private business reduced its inventories by $83.1 billion less during first-quarter 2002 than during fourth-quarter 2001. Incredibly, the Commerce Department counted this $83.1 billion as a positive contribution to GDP, even though the economy was not growing by $83.1 billion. This $83.1 billion, all by itself, added 3.1% of the 5.8% GDP "growth" during the first quarter.

b. U.S. spending for computers and for information equipment increased by $7.5 billion during the 1Q 2002 over the level of 4Q 2001. Were this properly corrected for inflation, this would represent no increase at all, or a neglible amount. But the Commerce Department applied the so-called "hedonic method"—a variant of the Quality Adjustment Method—and said that U.S. spending for computers, and for information equipment increased by $34.4 billion during the 1Q 2002 over the level of 4Q 2001. This adjustment, alone, added 1.3% of the 5.8% GDP "growth" during the first quarter.

LaRouche observed, "The hedonic GDP method comes from hedonism. If your mother-in-law dies, and that makes you happy, that could increase GDP."

c. U.S. consumers spent $17.9 billion more for homes in 1Q 2002 over the level of 4Q 2001, which actually represents the hyperinflationary housing bubble. That added 0.6%, all by itself, to the 5.8% GDP growth during the first quarter.

Just these three items added 5.0% to the first-quarter 5.8% GDP "growth." In fact, GDP fell, and when corrected for infrastructure and other forces in the real world, it collapsed at a growing rate.

Productivity: On May 7, the Department of Labor claimed that during the first quarter, U.S. "productivity" rose by 8.5%, the highest level in two decades. But the way the DOL calculates "productivity" is to divide GDP (with a few modifications) by hours worked. All the elements of GDP, as we have shown above, using the inventory changes, etc., were fake. The hours of labor were cut by 1.8%, as there were massive layoffs. Thus, the numerator of GDP output was faked upward, while the denominator of hours worked was slashed downward in the real world. The result: a completely faked, non-existent growth in "productivity"; this has nothing to do with productivity as LaRouche advances that concept.

Employment: On May 3, the Department of Labor's Bureau of Labor Statistics (BLS) reported that during April, there was an increase of 483,000 workers on unemployment, and that the U.S. unemployment rose from 5.7% in March to 6.0% in April.

But to cover up this reality, the BLS, the Bush Administration, and the media focused on something else entirely. In the same May 3 report, the BLS alleged that employment on non-agricultural payrolls had risen by 43,000.

However, in March, the BLS had also reported an increase of in employment of non-agricultural workers, at that time by 58,000, only to revise that March figure downward, from plus 58,000 to negative 21,000! Moreover, the BLS seems to be making a specialty of deploying this same fraudulent proceducre. In February, the BLS reported an increase in employment of non-agricultural workers of 66,000, only to revise that February figure downward from plus 66,000, to negative 2,000.

Are you beginning to see a pattern here? Now, in April, the BLS announces an increase of 43,000 workers in non-farm-payroll employment. Watch carefully to see what happens when the (revised) figures are released next month.

Thus, on all the leading measures, from GDP, to "productivity," to the way that employment/unemployment is reported, there is lying of monumental proportions. On the question of profits and the U.S. budget surplus/deficit, there is also outright lying, as the following reports show.

Statistics Used To Create 'Deliberate and Scandalous Fraud'

"There is a deliberate and scandalous fraud" in the way statistics are being put together by the American government, in the area of housing, and on what is used to 'prove the recovery,'" a highly informed City of London source commented to our reporter May 14.

"The data are restated from month to month, and the revising is very extensive. Past months' figures are revised downwards, for no real reason, to make current figures look better."

Asked how long this kind of official scam could continue, he responded, "It will continue as long as the fraud is generally accepted, by the public, and by the 'experts.' But once it begins to be realized how deliberate all this is, and how scandalous things like the 'hedonic calculus' are, there will be a lot of anger. Sooner or later, it will be begun to be understood, that the official statisticians are not above doing what Arthur Andersen did."

He added: "Greenspan still gets away with it. He told the Business Council, behind closed doors, the other day, that 'first-quarter figures are subject to distortion.' This was his strange way of telling these Business Council leaders that their bad corporate profits were not a reflection of the recovery that is now occurring. By saying so, he reversed all classical notions of what a recovery is about, where profits increase before growth numbers. But these Business Council leaders are not trained economists, and they all left, feeling much better. Despite everything," the source concluded, "Greenspan has not lost his public credibility yet, but when he does, I see some interesting moments for the markets."

No FY01 'Budget Surplus,' Says New York Post Columnist

A U.S. Treasury report for fiscal year 2001, did not show a $127.1-billion surplus, as reported earlier, but a $514.8-billion deficit, when placed on an accrual-accounting basis, according to a May 14 column by New York Post financial writer John Crudele. Crudele points to a report on the U.S. Treasury website, authored by Secretary Paul O'Neill and entitled, "Financial Report of the United States Government, 2001," which states, "In this our fifth year of preparing financial statements, we are making progress in our quest to report the financial activities of the U.S. Government timely, reliably in a format useful for readers."

The Treasury then reports the fiscal year 2001 U.S. budget (which ran from Oct. 1, 2000 through Sept. 30, 2001) on an accrual-accounting basis. On this basis, an entity such as a government or a company, reports the actual expenses it will accrue, rather than reporting the liability only when it comes time to pay it in cash. On the old basis, the U.S. Treasury reported that in fiscal year 2001, the U.S. government ran a $127.1-billion surplus. However, in O'Neill's words, on an accrual basis, "the deficit was $514.8 billion in fiscal 2001." It is known that one of the expenses the U.S. Treasury had refused to report, on the old basis, was the cost of Social Security. EIW is now investigating to get to the bottom of this.

On the budget fraud, Lyndon LaRouche noted, "The Congress is saying, 'If we told the truth, we would never get re-elected. Therefore, you [the population] made us do it. You demanded we do it.' "

U.S. Companies Madly Restate Fake Financial Reports

It ain't just Enron and Andersen: One of the biggest frauds now operating is the reporting of U.S. corporate profits. Two recent studies help to fill out the picture that our news service has begun to draw. The first study, by Min Wu, of New York University's Stern School of Business, found that between 1997 and 2001, under SEC investigation or the implied threat of SEC investigation, the number of companies restating their financial statements has tripled. Such restatement means that companies admit that they have practiced "false or faulty accounting." Last year, 158 companies restated their financial statements, and this year, companies are on a pace to exceed last year's level. Over the last four and one-quarter years, all told, it appears that more than 700 companies restated their financial statements.

The second study was done by Lynn Turner, who is the director of Colorado State University's Center for Quality Financial Reporting, and who was the Chief Accountant of the Securities and Exchange Commission from July 1998 through August 2001. Turner found that shareholders had suffered $200 billion in losses since 1997 from inaccurate financial statements, which had to be restated.

In previous statements, Min Wu and Lynn Turner identified some of the fraudulent ways to mis-state profits:

*"All kinds of transactions between members of management and outside firms and affiliates ... which provide an opportunity for self-dealing";

*"The build-up of off-balance-sheet financing, such as securing debt with leases and special purpose entities, or SPEs [Enron used this method]. Investment bankers, lenders, auditors, and other outsiders often help put these kinds of deals together as a way to get around showing debt in the financial statements." If the debt and debt service costs are hidden, this swells profits;

*Counting barter-in-kind as revenue. For example, one Internet company advertises on another Internet company's website, and vice versa. Each company boosts revenues and profits, but no real economic activity has taken place. There are many variants of this, such as telecoms "swapping" use of each other's lines;

*A company booking revenues it hasn't earned yet. For example, last month, the SEC ordered Xerox Corp. to restate its financial statement, and imposed a $10-million fine, because Xerox prematurely booked $3 billion in equipment-lease revenue over a four-year period starting in 1997.

Most amazing, is that if an SEC investigation or the implied threat of an SEC investigation has forced hundreds of companies to restate financial statements, and eliminate a good part of once-claimed profits, what must be the case for thousands of companies that use the same fraudulent practices to fabricate profits, but have not yet been compelled to restate their financial statements? The statement by U.S. companies of profit is a fraud, but that fraud is used to boost stocks.

Reliant Forced To 'Fess Up: Faked Energy Trades; Inflated Revenues

Reliant Resources admitted to making fake energy trades with four power companies, reaching 20% of its trading volune in 2001, and inflating revenue by 10% over the past three years, a disclosure that sent its share price plummeting by 17% on May 14. The "round-trip" or "wash" trades—buying and selling a commodity at the same price, at the same time—were carried out with CMS Energy, Xcel Energy, EnCana, and the Merchant Energy Group of the Americas. Reliant had engaged in such transactions since 1999, increasing from 30 million megawatts three years ago, to 78 million last year, CEO Steve Letbetter acknowledged.

Dynegy admitted last week that it had conducted round-trip trades with CMS Energy.

Treasury To Plunder Retirement Funds To Avoid Default

The U.S. Treasury Department plans to take $44 billion from the Federal Employee Retirement System's Government Securities Investment Fund, and the Civil Service Retirement and Disability Fund, to allow the government to continue to borrow to finance its obligations through mid-June, as Congress has not yet raised the $5.95-trillion debt limit. And Treasury is suspending all new issues of state and local government securities.

Because of uncertainty about tax receipts due June 17, further measures may have to be taken. These steps include suspending U.S. dollar investments in the Exchange Stabilization Fund, resorting to the Federal Financing Bank for stopgap cash, and using its cash reserves held with large banks.

But these maneuvers "will be insufficient to manage debt, subject to limit, beyond June 28," warned Treasury Secretary Paul O'Neill. On June 28, Treasury must make an interest payment of about $67 billion to various Federal trust funds, including Social Security.

'Anglo-Saxon' Housing Bubble Threatens World Economy

In a lengthy front-page feature headlined, "In hot housing markets, signs of overheating—A new bubble is feared as prices rise," the May 14 International Herald Tribune points to the threat posed to the world economy, by real-estate bubbles in the "Anglo-Saxon economies." In particular, in the U.S., Britain, and Ireland, home prices have been driven up by investors "disillusioned with the stock market," assisted by historically low interest rates. "By pushing up the values of homes and maintaining a feeling of affluence after the collapse of the dot-com bubble they have stimulated a post-Sept. 11 spending spree that has compensated for a sharp slump in business spending." The "fever pitch in housing" is "most evident in London," where "seemingly runaway growth in home prices" has turned central parts of the city "into the most expensive residential real estate in the world." The average British home "is now selling for as much as 17% more than a year ago," and "prices have doubled over the last five years."

There are growing concerns "that after several years of rapid price rises, a new bubble may be building up" in the mentioned countries. And, "if interest rates were to rise sharply or the global economy were to unexpectedly fall back into recession, the bubble could burst." A particular "threat to the U.S. housing market, with the potential for ripple effects overseas, is a decline in the dollar.... If the dollar fell sharply, the Fed might be forced to raise interest rates aggressively in an effort to support the currency. That could easily shake the foundations of U.S. housing price inflation."

The "economic repercussions" of a bursting housing bubble "could be more powerful than when technology stocks collapsed," because many people "have more money wrapped up in their homes than in the stock market," the IHT warned.

Stiglitz Has High Praise for Soros's New Book

Former World Bank chief economist Joseph Stiglitz has written a glowing review of megaspeculator George Soros's new book, On Globalization, to appear in The New York Review of Books May 23 issue. Stiglitz, a Nobel Economics Prize winner who also served as President Clinton's Chairman of the Council of Economic Advisers, writes, "George Soros has written a brilliant, powerful book ... which goes beyond just describing the failures of the current international arrangements. He proposes concrete, practical reforms. Soros, having made his fortune on the international capital markets, should know something about them. But what makes this book so impressive is that he combines these insights with a humanity that comes through."

With Stiglitz and Soros's talk of the need to provide funding for "global public goods," the review makes clear why new citizens sometimes ask, "Isn't this what LaRouche is saying?" The gist of the review is that "globalization entails more interdependence," but the "international economic institutions, such as the IMF and the World Bank," have failed. "The solution is not to abolish them, but to reform them." Stiglitz, who left the World Bank because he allegely opposed its destructive, anti-development policies, describes Soros's proposals, including use of a Special Drawing Rights arrangement, as an alternative to the way the United States "has become the 'deficit of last resort.' " Soros proposes that the SDR funding should go for "allocation to the provision of global public goods, including development."

"My only criticism is that it does not go far enough," says Stiglitz.

Goldman Sachs Economist: Dollar Collapse May Be Immiment

The chief economist of Goldman Sachs told the German newspaper Frankfurter Allgemeine Zeitung that a collapse of the U.S. dollar may be imminent. In an interview published May 12, Thomas Meyer said the dollar is clearly overvalued, and people "should not be blinded" by experts who say a dollar collapse is not to be expected. "The situation with the currency is like that with stocks," he said. Just as the stock bubble collapsed, so "the dollar will go down, to a reasonable level." When will this happen? "It is hard to predict exactly," said Meyer, "but the situation is increasingly precarious. America needs $2 billion each business day to cover its current account deficit.... Soon no foreigners will be buying U.S. stocks."

An accompanying article, entitled "The Dollar Is Sliding," details the reasons for a reversal of capital flows into the United States. "The books of U.S. companies look terrible. There are faked balances, record write-offs, the menace of bankruptcies.... Remember the second half of the 1980s, when the dollar lost half of its value in three years.... Nobody knows when the dollar will drop to its knees, but when it happens, the fall will be fast and violent," the paper concludes.

The Era of Free Trade Is Over; Good Riddance to Bad Rubbish

Several recent developments point to an overdue expiration of the free-trade lunacy that has wrecked the U.S. and world economy for more than 35 years. A few examples:

*The U.S. Senate begins its fifth week of debate on fast track, next week, as anti-free-trade clinker-amendments counter any deal that has been attempted to okay fast-track authority—now politely called "trade promotional authority." (The House passed fast-track in December 2001 by only one vote, 215 to 214.)

On May 9, U.S. Trade Representative Bob Zoellick and Commerce Secretary Don Evans held a press conference on Capitol Hill, to oppose a pending anti-free-trade amendment by Senators Larry Craig (R-Idaho) and Mark Dayton (D-Minn.) retaining the right for Congress to amend any and all trade laws deemed harmful to Americans; the Craig/Dayton amendment easily passed on May 14 by voice vote; Zoellick issued a two-sentence denunciation of it, as "protectionism under procedural cover" (see UNITED STATES NEWS DIGEST).

*The Andean nations free-trade law (H.R. 3009, Andean Free Trade Preference Extension) expired this week, as the U.S. Senate debated the issue in Washington. For the four Andean nations, this throws into question all the devastating export-dependence patterns that have evolved in recent years: Peru (fish products, asparagus), Ecuador (seafoods), Bolivia (textiles), Colombia (floraculture), etc. This, notwithstanding President Bush's visit to Lima last month to "rah-rah" the beauties of the now-expired U.S.-Andean preferred trade relations!

*The final communiqué of the May 15-16 Ministerial Conference on the Doha Trade and Development Agenda, pledged "to reject the use of protectionism." The May 18 Asia Times reported that the ministers came to Paris "to express their barely contained rage" against the United States—for steel and lumber tariffs, and the Farm Act subisidies.

*U.S. Trade Representative Bob Zoellick stayed away from the OECD Paris meet May 15-16 because "Drawing upon [EU] Commissioner Lamy's metaphor, he [Zoellick] is 'pedalling his bike' furiously on Capitol Hill to obtain a satifactory Trade Promotion Authority [i.e., fast track] bill," explained his substitute, Deputy U.S. Trade Representative Peter Allgeier, to the angry Paris Ministers. Also present was U.S. White House economics consultant Glenn Hubbard, who told the gathering that the U.S. economy would grow between 3% and 3.5% in 2002, and so could help drive the world economy.

*A joint IMF/World Bank/WTO statement denouncing protectionism was submitted on May 16 to the OECD Council; it was co-signed by IMF Managing Director Horst Koehler, World Trade Organization Director-General Michael Moore, and World Bank President James Wolfensohn. Not mentioning the United States by name, it declared, "Any increase in protectionism ... is damaging ... sending the wrong signal, threatening to undermine the ability of governments everywhere to build support for market-oriented reforms."

*Japan imposes its first-ever retaliatory tariffs on U.S. imports beginning on June 18, slapping 100% duties on $4.88 million of U.S. steel-plate imports. Another $118.55 million in tariffs could be applied, if the WTO were to decide that U.S. steel tariffs violated trading rules.

*The European Union issued a statement May 15, threatening retaliation against U.S. protectionist measures. "In response to the illegal U.S.A. safeguard measure on steel products, and in full compliance with the WTO Agreement of Safeguards, the EU has notified to the WTO the lists of potential suspension of concessions which would be applied if the U.S.A. does not remove the safeguard measure." The EU has drawn up a "long list" to go into effect upon "condemnation by the WTO [of the United States];" and a "short list" which could go into effect June 18, "if the U.S.A. does not offer in the meantime compensation for its measure." (List available on EU website.)

World Exports Plummet in 2001; Largest Decrease Since 1982

World exports nosedived by 1% in volume in 2001, and by 4% in value, to $6 trillion—the largest annual decrease in 20 years—hitting all three major merchandise product groups: agricultural products, mining products, and manufactures, according to a World Trade Organization report issued on May 2. In the fourth quarter of 2001, the volume of world exports had fallen to 6% below the previous year's level. The regions and countries with the largest export decline, were those trading intensively in information technology—East Asia and the United States.

Japanese Machinery Orders Down Again; Third Straight Quarter

Japan's machinery orders plunged more than 7% for the third straight quarter, Nikkei reported May 14. Private-sector machinery orders, excluding those for ships and those issued by power utilities, totalled 2.4 trillion yen in the January-March period, according to a Cabinet Office survey released on May 14. The fall in orders—a leading indicator of private-sector capital investment—stemmed from a larger-than-expected decline of 11.0% in orders issued by non-manufacturers and a drop in information technology-related investments by insurance and other financial companies. Machinery orders in April-June are expected to total 2.38 trillion yen, down again from the previous quarter, the survey predicts.

Auto Crisis Hits Europe—Italy Worst Affected

Figures published by the European auto industry show a 2.6% decline of sales in the European Union, with a dramatic 13.4% drop in Italy during the month of April. Worst hit is the Fiat auto group, with a collapse of 20.1% in April, and a decline from 10% to 7.9% of the European market share.

Fears that the largest Italian industrial group, Fiat, could be bought by foreign interests have materialized, as the group's value declined to an all-time low. As a result of declining earnings in 2001 and the first quarter of 2002, Fiat's capitalization is today half of what it was two years ago: down from 14.7 billion to 7.6 billion euros. This makes the group a potential target for a hostile takeover, and the idea that Fiat could pass into foreign hands, and that Italy might lose a center of automobile production, has sent shock waves through the country. Fiat used to employ up to 300,000 workers, but a years-long downsizing has cut its workforce in Italy down to 80,000.

As a result of the auto crisis which started in 2001, indebtedness of the entire Fiat group rose to 6.6 billion euros. Fiat's management reacted to the crisis by announcing layoffs for 2,400 workers and short work for 10,000 in June, in order to achieve a production cut of 14,700 cars. Given that for each Fiat worker there are three who work in the supply industry, it is feared that the real figures could quickly multiply. Additionally, Fiat is looking for cash through the sale of components producer Marelli and part of its crown jewel, Ferrari. Trade unions oppose the measures and have announced strikes.

Groundbreaking Study, 'Why FDR's Recovery Worked' Now Available on the Web

The website of the FDR Political Action Committee (FDR-PAC), www.larouchespeaks.com, has posted the timely, groundbreaking study by LaRouche associate Richard Freeman on FDR's actions to save the nation, called, "Then and Now: Why Roosevelt's Explosive 1933-45 Recovery Worked." The article, which first appeared in a Special Report entitled "Economics: The End of a Delusion," issued by Lyndon LaRouche's 2004 Presidential campaign organization, provides a vital insight for today's international leaders and statesmen to solve the ongoing global financial crisis.

As we do today, FDR then faced global depression and world war; his solutions saved the United States from fascism—a lesson that must be learned for today. Freeman writes: "In the period 1933-45, President Franklin Delano Roosevelt transformed an American economy that was collapsed by depression, and whose banking system had fissured apart, leading it through a successful economic recovery. At a time of intense crisis, he shaped the course of history. Thereby, he saved the American republic and civilization.... To that purpose, Roosevelt built a labor-farm-minority-urban-machine alliance, as the new base of the Democratic Party. Roosevelt instituted his American System recovery in two phases. First, through the New Deal of the years 1933-37, Roosevelt revived the existing manufacturing and agricultural capability, which had been closed by the Depression. He also built a magnificent array of technology-transmitting infrastructure.

"Later, during the economic mobilization for World War II, which was conducted from 1939-44, Roosevelt introduced a qualitative change. He made scientific discovery—and the machine-tool design principle—the driver for the economy.... Upon taking office, Roosevelt had to confront both a devastating physical reality, and more challenging, the fatally flawed method of the British System. The 1929-32 Depression was deep. At the start of 1933, unemployment ws officially 12.83 million, representing 24.9% of the labor force. Worse, industrial production was down 54% from its 1929 levels. Steel production operated at only 24% of its capacity. The banking and financial system was shattered...."

This history of the FDR New Deal, in 45 pages, with additional Appendices, also appeared in EIR in three successive issues, on April 26, May 3, and May 10, 2002; they can be purchased online at www.larouchepub.com, or by calling 1-888-347-3258.

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