In this issue:

Dollar Collapse Threatens To Bring Down the Bubble—Now!

Commerce Dept. Report: Foreign Investment in U.S. Dries Up

Wall Street Journal Moots End of 'Invincible Dollar'

German Daily: 'Apolcalyptic' Crash in U.S. Could Provoke ... Horrors! Government Intervention!

2002: 'Year of the Jobless Recovery'

Telecoms Continue To Melt Down

Symptom of Systemic Collapse: Silicon Valley Loses Symphony Orchestra

Frantic Efforts Underway To Stop Brazil's Financial 'Turbulence'

NAFTA Drives Mexico's Maquiladoras, Farms into Extinction


From the Vol.1, no.14 issue of Electronic Intelligence Weekly

ECONOMICS NEWS DIGEST

Dollar Collapse Threatens To Bring Down the Bubble—Now!

The plunging value of the U.S. dollar has set off alarms in financial circles, amid fears that the failing U.S. economy will cause foreign investors to pull their money out of U.S. markets, further deflating the value of U.S. stocks and bonds. While the decline of the dollar is being welcomed by desperate domestic corporations and their creditors, who view it as an opportunity to raise prices on domestic goods (and thereby bolster weak balance sheets and increase their chances of paying their debts), the shift actually threatens to pull the foundation out from under the whole system.

The financial system is caught between the proverbial "rock and a hard place," with the specter of a dollar-led blowout on the one side, and a blowout in the corporate debt sector on the other. There are indications that Federal Reserve Chairman Alan Greenspan and the Bush Administration hope to walk a fine line between the two positions without falling into the abyss on either side, but reality is unlikely to cooperate with their delusions.

As Lyndon LaRouche observed in his May 28 webcast, "We are now in a depression" worse than the 1929-1933 period. "It is presently irreversible. Anything they do to try to prevent it will only make things worse." The only alternative is a new system, LaRouche's New Bretton Woods. - Global Implications -

The implications of the dollar collapse are cataclysmic for the bankrupt IMF system. As EIR has frequently pointed out, the U.S. economy has sustained itself on capital sucked in from the rest of the world, giving the U.S. a Current Account Deficit of more than $400 billion a year. The U.S. has had a huge Current Account Deficit almost every year since 1971.

To keep the U.S. economy afloat, therefore, the U.S. has to bring in anywhere from $1 to $2 billion a day. As of early 2002, there were already signs that this inflow was declining sharply. Among the shaky regions was Japan, the financial sector upon which the U.S. has depended for stoking dollars into the Wall Street bubble. With Japan's reluctance to play the toady visibly increasing, the international financial authorities have begun to play hardball, with the latest move being the downgrading of Japanese government debt to incredible levels—equal to that of Botswana.

Some observers have speculated that the purpose of this bashing is to bring monies flowing back into the United States. After all, Japan's Current Account Surplus is approximately the same level as the U.S. Current Account Deficit!

It's unpredictable as to how fluctuations in the dollar values, which have gone down over 8% against the euro and the yen in recent weeks, will affect the massive financial crap-game called the derivatives market. Another major development reflecting the instability of the system is the rapid rise in the gold price, now headed above $330 an ounce for the first time in years. Gold is traditionally seen as a hedge against financial turbulence. - Virtual Cycle -

Since the mid-1990s, the U.S. dollar has soared, as money flooded into the U.S. to buy stocks, corporate and government bonds, real estate and other assets. As the money poured in, both the value of these assets and the dollar itself rose, in what the speculators like to call a "virtuous cycle." Both U.S. and foreign "investors" benefited from the sharp rise in the monetary value of these assets, and the foreign investors got the added bonus of watching their dollar-denominated assets increase in value relative to their own national currencies.

This process fed upon itself, with the net capital inflow of foreign assets into the U.S. rising from $142 billion in 1990, to $466 billion in 1995 and $1,024 billion in 2000, according to figures from the Commerce Dept.'s Bureau of Economic Analysis. The trillion-dollar influx in 2000 amounted to about $2.8 billion every calendar day, and about $4.2 billion every business day.

The year 2000 was the year the U.S. stock market hit its high-water mark and began to decline; since then, depending upon the fluctuations, U.S. stocks have lost in the range of $5 trillion in market value, as the dot.com frenzy died, the bull market in energy trading proved to be mostly bull, and the telecommunications sector began to melt down.

One result of this massacre was to push the dollar down, as foreign investors began to cut back their U.S. investments. In 2001, the net capital inflow of foreign assets into the U.S. declined by $129 billion—13%—to $895 billion, and that decline appears to be deepening in 2002.

Should this disinvestment cross the line between orderly withdrawal and a panicked exit, the result for the financial system would be catastrophic, puncturing the overblown stock markets and triggering a chain-reaction collapse of the global financial system. - Debt Blowout -

The falling level of corporate income spells trouble for the holders of U.S. corporate debt. Only eight U.S. corporations are rated triple-A by Moody's and Standard & Poor's, compared to more than 60 in 1979. Some 60% of all U.S. public companies have ratings below investment grade, a polite way of saying junk. A record 216 corporations defaulted on $116 billion of debt in 2001, and $34 billion in debt was defaulted on in the first quarter of 2002, according to Standard & Poor's. Nearly every day's headlines bring reports of yet another company in trouble.

Much of this debt is owned by institutional investors such as mutual funds, pension funds, insurance companies, and the like. These institutions often protect themselves from defaults on these loans by buying credit protection in the form of credit insurance from insurance companies or credit derivatives from the commercial and investment banks, putting the banks at considerable risk from bond defaults.

The bankers are clearly battening down the hatches, switching unsecured debts to secured debts as fast as they can. The rash of cash-out mortgages to pay down credit card debt is one aspect of this push, as is the reduction of commercial paper to force companies into the bond markets, but there is no such thing as secured debt in a global blowout.

The police-state measures being implemented under the guise of combatting terrorism are another response to the financial crisis, and are actually a better indication of the severity of the crisis than the soap-opera disinformation found in the business pages. The system is coming down, just as LaRouche forecast. The only question is what will replace it, an American System recovery under LaRouche, or an imperial bankers' dictatorship.

—Reprinted from an article by John Hoefle in The New Federalist, June 10.

Commerce Dept. Report: Foreign Investment in U.S. Dries Up

Foreign investment in the United States, to acquire or establish business, plunged by 60% in 2001, to $132.9 billion from a record-high of $335.6 billion in 2000, reflecting a sharp drop in merger and acquisition activity, especially in the telecommunication sector and computer industry, according to a report issued on June 5 by the Commerce Department's Bureau of Economic Analysis. Starting in 1998, foreign investment had grown at an unprecedented rate.

Year Investment Outlays($ billions)
1992 15.33
1993 26.23
1994 45.63
1995 57.20
1996 79.93
1997 69.71
1998 215.26
1999 274.96
2000 335.63
2001 132.94

The largest investment outlays occurred to acquire finance (except depository institutions) and insurance companies, especially life insurance firms.

Industry 2000 2001 ($ billions)
Manufacturing 143.3 35.6
Information 67.9 26.0
Finance and insurance 44.4 37.9

By country, the biggest flow of investments came from Canada and Britain.

Country 2000 2001 ($ billions)
Canada 28.3 16.9
United Kingdom 110.2 16.6
Japan 26.0 3.8
Europe (as a whole) 249.2 72.1

Wall Street Journal Moots End of 'Invincible Dollar'

The Wall Street Journal's front-page article June 3, "No Safe Haven: Dollar's Slide Reflects Wariness About U.S.," worries that it looks like the end of the era of the "seemingly invincible dollar." The recent nosedive in the dollar's value against other currencies, the "beginning of a long-anticipated slide," shows that wary foreign investors are pulling out of U.S. markets, with "bigger implications than in the past," because the United States is "dependent to an unprecedented degree on foreign capital," to finance its current-account deficit. "A love affair is dying," frets Barton Biggs of Morgan Stanley melodramatically. This reduction of capital inflow to the United States, creates "unnerving parallels with countries such as Thailand and Argentina," he adds.

The Bush Administration officially supports a "strong dollar policy," Briggs suggests, but hasn't signalled worry about a further drop in the dollar, nor shown the inclination to try to stop the decline.

Japan's conservative Nikkei news service, ran the entire Wall Street Journal article.

German Daily: 'Apolcalyptic' Crash in U.S. Could Provoke —. Horrors! Government Intervention!

Americans might riot and demand government intervention, as their pensions melt down, the German daily Frankfurter Allgemeine Zeitung mooted in its weekly financial market overview June 3. FAZ notes that investors are now finally realizing "the full extent of manipulation and fraud that was behind the tech-stock euphoria of the century." Obviously, the criminal actions by Enron and German "New Market" companies are just the "tip of the iceberg," as more and more large corporations become the subject of fraud allegations. Even positive government data can no longer impress any investors. Since the start of the year, the Nasdaq is down 23%, while the London tech market has lost one-third of its value.

FAZ then relates an "apocalyptic—let's hope fictional" scenario by Barton Biggs of Morgan Stanley, in which a further crash of tech stocks leads to a panic, and flight out of investment funds. In particular, the pension funds run into disaster. Private households, recognizing the "devastating performance of their pensions funds" demand government aid. In reality, the first large protest rally by angry pensioners has already taken place in Harrisburg, Pennsylvania. On top of this, another catastrophe is looming in the housing market, Briggs notes. Once interest rates start to rise, housing prices will fall, triggering "the collapse of the consumption miracle."

2002: 'Year of the Jobless Recovery'

The number of Americans collecting jobless benefits has hit a 19-year high, reports the New York Post's Beth Piskora, who dubs 2002 "The Year of the Jobless Recovery." The total number of workers receiving unemployment benefits, is 3.89 million, the highest since 1983.

In other "recovery" news:

* Hewlett-Packard will cut 15,000 jobs in two stages: 10,000 by Nov. 1, and the remaining 5,000 in FY2003, a year ahead of schedule. CEO Carly Fiorina said she no longer expects even a "muted" recovery in the second half of 2002.

* IBM will cut 1,500 jobs in its microelectronics unit, amid the collapse of the semiconductor industry, and will sell its hard-disk-drive business to Hitachi.

* Birmingham Steel filed for Chapter 11 bankruptcy protection as part of an agreement reached last week to be bought by Nucor Corp. for $615 million. Nucor would take possession of Birmingham's four operating mills in Alabama, Illinois, Mississippi, and Washington, with a total annual capacity of about 2 million tons.

Telecoms Continue To Melt Down

Two of the world's top telecommunications companies hit the wall this past week, adding to the wreckage of telecoms globally.

KPNQwest, Europe's largest fiber-optic network operator, filed for bankruptcy on May 31 after failing to sell assets to raise funds to keep its network running, amid heavy debt and low revenues. The company, founded in 1999 by Dutch telecom operators KPN and the U.S. carrier Qwest, is reportedly in talks with AT&T to sell a substantial part of its business. The company's market valuation has plunged from over 42 billion euros to 13 million in just two years. KPNQwest's shares will be removed from the Dutch blue-chip AEX index as of June 6.

* Qwest Communications, the fourth-largest local phone company in the United States, had its credit rating downgraded to "junk" status by Moody's on May 30, paving the way for a likely near-term bankruptcy filing, as it is in danger of violating credit agreements. Qwest's long-term debt is $21.4 billion, with real assets of $39 billion ($30.2 billion in property, plants, and equipment), against $38 billion in liabilities. The company is trying to sell its yellow-pages business for $6 billion.

Symptom of Systemic Collapse: Silicon Valley Loses Symphony Orchestra

San Jose, California—the "capital" of Silicon Valley—may have enjoyed its last Classical music concert June 4, leaving it with the dubitable distinction of becoming the nation's largest city without a symphony orchestra. The eleventh largest city in the U.S., San Jose has been unable to raise the funds to keep the orchestra alive. The only question is whether it will file a Chapter 7 bankruptcy, or Chapter 11, which would permit it to reorganize under court protection.

Frantic Efforts Underway To Stop Brazil's Financial 'Turbulence'

Brazilian officials held a hurried conference call on June 7 with 800 investors to promise them they will "do something" to stop Brazil's financial "turbulence." Goldman, Sachs and Co., the Wall Street investment firm, sponsored the 90-minute conference call with Central Bank chief Arminio Fraga, Deputy Finance Minister Amaury Bier, and the head of monetary policy at the Central Bank, Luiz Fernando Figueiredo. One participant said afterwards, that "basically Fraga said, 'Look what we've done in the past, and you will see that we always did what was necessary to soothe tensions.'" Another said there was no new information on the call, "but just the fact that they did it at least tells the market they are aware of the problems." Investors reportedly pressed the Central Bank to take action, including, if necessary, spending some of its foreign currency reserves to stop the precipitous fall in the value of the real and government bonds.

The call was organized, as investors began to panic that Brazil could be heading towards default, unable to meet payments on the $500 billion in foreign obligations (by EIR's calculation)—more than twice that of Argentina. An enormous amount of Brazil's government debt alone comes due between now and the end of 2002—O Estado de Sao Paulo reported June 3 the total amount at R$110 billion, or US$42-44 billion, depending on the exchange rate—which must be refinanced. Yet, Brazil's ability to pay its debt is being hit simultaneoulsy from three sides:

* Country risk—the amount over the interest rate of U.S. Treasury bills which "the market" demands to buy another country's comparable government bonds—went over 1,200 in the first week in June. That means, that Brazil's government would have to offer over 15% interest, in order to sell any paper. Those interest rates spill over into Brazilian private companies' bond sales as well. At those rates, neither the government nor private companies can afford to refinance their debt. The Argentine daily Clarin aptly commented June 5, that the rise in country risk is "recreating the mechanisms which ended up crushing Argentina."

* The currency, the real, lost over 3.5% in the first week of June alone, closing at 2.6280. Every devaluation automatically increases Brazil's total debt load, as 45% of "domestic" government debt is indexed to the dollar.

* Credit is being cut off. On June 3, J.P. Morgan issued a recommendation to its clients to reduce their exposure to Brazilian debt; that is, to sell it. On June 5, Moody's downgraded Brazil's foreign currency bond rating, and lowered its outlook from positive to stable. Moody's argued that Brazil will have difficulty refinancing its debts, and that it faces problems, no matter who wins the October 2002 Presidential elections, because of the great amount of debt, foreign and domestic, coming due in 2002 and 2003. Brazilian Treasury officials play down any danger, citing the R$52 billion they have deposited at the Central Bank as a reserve—about 3-4 months worth of roll-overs. But their problems are accelerating at they go, as private investors refuse to buy paper which comes due after January 2003, thus building in a further bulge in debt payments due for the end of the year.

NAFTA Drives Mexico's Maquiladoras, Farms into Extinction

For the past decade, Mexico has been touted worldwide as a model of free trade, largely based on the spectacular yearly rise in maquiladora employment and exports, beginning with implementation of the North American Free Trade Agreement (NAFTA). Maquiladoras are low-wage, low-technology manufacturing enclaves, mostly on the Tex-Mex border, where workers live in abominable conditions, producing low-price goods for export.

Mexican Economics Secretary Luis Ernesto Derbez admitted to the French magazine, L'Express, that those days are over. "If they don't change, the maquiladoras are, effectively, condemned to extinction, because they are no longer competitive.... We can no longer continue this way.... Mexican workers are incapable of rivaling those of China or India," who make (in the case of China) 40 cents an hour, while Mexican workers make $3.50 an hour, he said. He dismissed either a devaluation of 30 or 40% or government subsidies as "artificial solutions" which the government rejects, but proposed nothing other than a vague shift to an economy based on "intermediate technology."

At the same time, farm leaders are warning that Mexican agriculture will all but disappear, when zero tariffs for most farm products go into effect under NAFTA on Jan. 1, 2003 (only corn, beans and powdered milk are exempted). Jesus Vizcarra Calderon, president of the National Agriculture and Cattle Council, charged on May 28, that the way things are going with the U.S. farm bill, Americans will fully control all Mexican agriculture by 2008. Sonoran farm leader Romulo Diaz Brown complained that Sonora's wheat producers and the corn growers of the state of Sinoloa have lost 40-50% of their profits in the last period, and they are in no position "to compete with the U.S. Treasury." Pork producers charge that Mexican pork has lost 50% of its value over the last eight months, due to record dumping of pork by U.S. producer-cartels into the Mexican market.

Calls for meat imports to be prohibited, until protective measures for Mexican producers can be evaluated and decided upon, are coming from various quarters, including from a PRI Senator from Tlaxcala, Joaqu Cisneros, various pork-producer associations, and others. Arturo De la Garza, president of the Special Cattle-Raising Commission of the Chamber of Deputies, said on May 14 that he would be presenting a resolution calling upon the Executive branch to take protective measures under Article 131 of the Constitution, and to close the border to all meat and poultry products, until protective measures have been reviewed.

Mexican Economics Secretary Luis Ernesto Derbez reiterated on May 16, however, that the Fox government will not subsidize Mexico's farmers, since the solution is not for us to subsidize ourselves, but to get the others to eliminate their subsidies.

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