In this issue:

Dollar and Markets Fall; Gold, Platinum Zooms Upward

U.S. Banks Gear Up Home-Equity Loans To Keep Consumer Bubble Growing

U.S. Cities Suffer Huge Job Losses in 2002

Governors' Budget Axes Fall on Education, Health Care

United Airlines Posts Record Quarterly, Annual Losses

As United Goes, So Goes Chicago....

US Airways Pilots Fight To Keep Pension Plan

Wall Street Bonuses Ain't What They Used To Be


From Volume 2, Issue Number 5 of Electronic Intelligence Weekly, Published Feb. 3, 2003

U.S. Economic/Financial News

Dollar and Markets Fall; Gold, Platinum Zooms Upward

Gold for February delivery ended the trading day Jan. 27--on the eve of President Bush's State of the Union address--at $369.40 per ounce on the New York Commodity Exchange, up $1.20, after trading earlier at a six-year high of $372.55; in European trading, gold rose $4.10 to $370.40 per ounce, after reaching the highest level since December 1996. The U.S. dollar, having fallen 20% in the past year against the euro, hit new lows against the European currency, which has only been in circulation for three years, before rebounding amid rumors that the Federal Reserve was checking prices with trading desks on Wall Street, and the euro ended the trading session at $1.0853. In addition, the dollar rose to 118.47 yen. Crude oil futures fell to $32.29 per barrel.

The Dow Jones (post-)Industrial Average fell 1.7% to 7989.56, its first close below 8,000 since last October. In the past year, the DJIA index has lost more than 19%. The S&P 500 Index lost 1.6%, closing at 847.48; it has fallen 9% since Jan. 14. European stock markets fell about 3% for the day.

"Capital flows out of the U.S. seeking higher-yielding sovereigns" are causing the dollar to drop, acknowledges a Dow Jones wire, which also cites the stock collapse as a "reflection of waning foreign interest in U.S. assets."

On Jan. 31, platinum for April delivery on the New York Commodity Exchange (COMEX) closed today at $658.90 per ounce, up $11.90 from its close on Jan. 30. This is its highest level since September 1986. In London, the metal is trading above $665 per ounce.

U.S. Banks Gear Up Home-Equity Loans To Keep Consumer Bubble Growing

The Mortgage Bankers Association predicts that this year the gimmick of cash-out refinancing will fall significantly. EIR estimates that in 2002, through employing this gimmick, homeowners extracted approximately $115 billion in cash from their homes, which they then used for consumer spending; this is predicted to fall by half. To offset the drop, U.S. financial institutions are gearing up home-equity loans, which have already grown considerably during the past decade. The intent is to keep households borrowing against the inflated value of their homes, for the dual purpose of propping up the housing bubble and building up consumer spending.

As a way of increasing the volume of home-equity loans, Wells Fargo Bank started in October 2002 to offer a "two-fer": a loan that combines a first mortgage with a home-equity line of credit. For purposes of example: assume a household bought a $300,000 home by taking out a $300,000 first home mortgage. At that point, the household has $300,000 in debt and zero dollars in equity in the home. Assume further, that over the course of time, the household pays down $25,000 of the first mortgage: then, it has $275,000 in debt, and $25,000 in equity in the home, that is, it owns $25,000 in the value of the home. Wells Fargo's offer is that the household could borrow against a portion, or all of the $25,000 that the household owns in the equity of house. The more mortgage debt that the household pays, the larger the home-equity line of credit that the household can draw on. In effect, the banks are attempting to keep the household continuously in debt up to $300,000.

Economists at the U.S. Federal Reserve Board have told EIR that half of the value of home-equity loans are not spent on home improvements; thus, half the value of home-equity loans can be used for consumer spending, keeping the over-built U.S. consumer spending bubble alive.

According to SMR Research, in 1999, some 18% of all U.S. homeowners with a home mortgage had an outstanding home-equity loan, as well; this jumped to 25% in 2002; and SMR Research predicts that by the end of 2003, 28% of all homeowners with mortgage will also have an outstanding home-equity loan. Home-equity loans can be alluring, but dangerous, because they are most frequently an adjustable-rate loan, tied to the moving prime lending rate. Rates on home-equity lines of credit currently average just 4.96%. But as recently as December 1999, the rate on the average home-equity line was 10%; and they can go much higher.

U.S. Cities Suffer Huge Job Losses in 2002

U.S. cities were hit with huge jobs losses in 2002, according to a just-released survey done by the U.S. Conference of Mayors. Metropolitan areas lost a total of 646,000 jobs; 213 of the nation's 319 metro areas, or two-thirds, lost jobs. Six metro areas--New York, Chicago, Atlanta, San Jose, Boston, and Seattle--each lost more than 40,000 jobs, while four others--San Francisco, Detroit, Denver, and Los Angeles--lost over 20,000 each. Los Angeles Mayor Jim Hahn reported that "the ratio of residents to jobs is 3 to 1" citywide, but "skyrockets to over 7 to 1" in South L.A.

The Mayors' report also notes these losses are on top of "the recession year 2001," losses which were especially high in Midwest manufacturing centers and in high-tech metro areas. For example, in 2001, job losses were: 55,000 in Detroit; 19,000 in Cleveland; 16,000 in Chicago; 15,000 in Seattle; 13,000 in San Jose; 12,000 in St. Louis; and 11,000 in San Francisco.

Governors' Budget Axes Fall on Education, Health Care

*New York: Governor George Pataki (R) proposed deep cuts in education and health-care spending, and slashing the state workforce, but avoided what he called "job-killing taxes" in his $90.8-billion state budget proposal, to close a projected $11.5-billion deficit over the next 14 months, which he dubbed the most serious fiscal crisis "in our lifetime." His plan would raise undergraduate tuition by up to 35%, or $1,200 a year for New Yorkers attending the State University of New York, the first increase since 1995. He would cut state aid to elementary and secondary schools by $1.24 billion, or 8.5%. The proposal would cut more than $1 billion in Medicaid and other health-care spending. Pataki said he would seek to reduce the state workforce by 5,000 employees, supposedly mainly through attrition, not layoffs.

The proposed spending cuts would hit heavily in New York City, which receives almost 40% of all state school aid, and accounts for almost 67% of Medicaid spending in the state.

*New Jersey: Governor James McGreevey (D) proposed 10% budget cuts for the nine state universities, after having slashed their state aid by 5% a year ago.

United Airlines Posts Record Quarterly, Annual Losses

UAL, United Airlines' parent company, reported a record $1.5-billion loss in the fourth quarter of 2002, and its worst-ever annual loss of $3.2 billion in 2002--50% larger than its previous record loss in 2001. The major U.S. airlines reported a combined loss of more than $9 billion for last year, as sales have fallen about 20% from the level in 2000.

As United Goes, So Goes Chicago....

As the bankrupt United Airlines eliminates flights and jobs, under pressure from creditors, Chicago's reputation as the transportation hub of America has taken a hit, affecting about 200,000 companies in the region, especially in the tourism sector, the Washington Post reported Jan. 30. Many conventioneers, for example, question whether United will survive, and as a result, may not book conventions in Chicago. "We believe that as United goes, so goes Chicago," said Gerald Roper, president and CEO of the Chicagoland Chamber of Commerce.

Were United to fail and be liquidated, Chicago would lose its role as a crossroads to the world, and face massive job losses. United Airlines "is our fundamental infrastructure for connecting with the rest of the world, and it establishes our ability to serve as an operational center for companies in North America," said Paul O'Connor, executive director of World Business Chicago, the city's economic development division. "The whole system is at stake," he warned.

US Airways Pilots Fight To Keep Pension Plan

US Airways pilots are fighting a threat that they will lose their entire pension plan under bankruptcy reorganization, according to the Washington Post Jan. 29. The head of US Airways' pilots union, William D. Pollock, assailed the airline's threat to terminate the pilots' pension fund, as a move that would "take away the pilots' accrued benefits that we have fought and paid for during our careers." The Pension Benefit Guaranty Corp., a government agency that insures private pension funds, had earlier this month refused the carrier's request to stretch out payments to its pension plan, which is underfunded by $3.1 billion, from seven years to 30 years. The pilots' plan represents about 70% of the unfunded liabilities.

As a result, the airline would likely terminate the pension fund and turn it over to the agency--which would slash retirement checks for pilots by about 75%. The pension-fund liability has to be resolved, according to CEO David Siegel, for the airline to obtain a $900 million Federal loan guarantee and keep $200 million in interim financing from the Retirement Systems of Alabama.

Wall Street Bonuses Ain't What They Used To Be

Things are really getting tough on Wall Street these days: Bonuses paid by banks and brokerages were down 37% last year, compared to 2001, according to an estimate by New York State Comptroller Alan Hevesi, adding to what he called the "daunting" fiscal challenges faced by the city and the state. New York City gets nearly 20% of its tax revenue from the financial sector, while the state gets about 15%; for 2002, the state will get about $300 million less this year than it did last year from personal income taxes on the bonuses, while the city will be down by $110 million.

Hevesi said 164,000 financial services employees got an average $48,500 bonus in 2002 (for a total of $7.9 billion); compared to 173,700 getting an average $72,600 in 2001 (for a total of $12.6 billion); and 185,800 employees got an average $104,600 in 2000 (a total of $19.4 billion).

Governor Pataki said this week that the state faces a $11.5-12-billion revenue shortfall.

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