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U.S. Policy Shift Before Real
Economy Is Totally Destroyed?

Three articles in the Economics section of the Oct. 26, 2001 EIR examine whether U.S. policy can shift to the "LaRouche path" of recovery, before the onrushing financial -economic collapse reaches bottom. Highlights of the articles appear below.

Cannibalism Is Not A Viable
Long-Term Economic Strategy

by John Hoefle

In the aftermath of the Sept. 11 events, the breakup of the global financial and economic system has taken center stage, as sector after sector issues dire warnings and gets in line for potential government bailouts. The laissez-faire free-market mantra of recent decades has all but stopped, replaced by calls for government intervention to save the financial markets and corporate America. The blather about how the economy has "hit bottom" and can now only rebound, has largely stopped, as the realization spreads that the bottom is not yet even in sight. What is visible, is panic, a growing, palpable fear that the system is spinning out of control, and that all of Federal Reserve Board Chairman Alan Greenspan's horses and all of his men, won't be able to put it back together again.

None of this should be a surprise. Lyndon LaRouche forecast it all, repeatedly warning that the hyperbolic growth of financial claims, the similar growth of the money supply to service those claims, and the destruction of the productive sector of the economy through a deliberate policy of deindustrialization and the undercutting of research, development, and infrastructure, must inevitably bankrupt the economy and render the giant pile of financial claims worthless.

While the bubble was growing, many of its inherent weaknesses could be papered over, bailed out, or otherwise swept into hidden corners. Today, however, that growth has largely ended, and the economy has entered a self-feeding deflationary spiral in which most categories of financial assets are rapidly losing value, corporations are cutting back operations and laying off employees, and bankruptcies are soaring, triggering further cutbacks, layoffs, bankruptcies, and so on, in a self-feeding process. As the economy contracts, the pressures on the corporations intensify: sales fall, debts which once had the illusion of manageability begin to take on a deadly air, bonds which were once highly rated begin their slide toward junk status, and companies find themselves caught between falling profits and Wall Street's demands for increased stock dividends.

An economy which lives off leverage and debt, as the United States has for the last three decades, dies by leverage and debt when the bloom comes off the rose.

Falling Corporate Profits

For corporate America, the illusion began to collapse in the fourth quarter of 1997; profits dropped sharply from a then-record $858 billion in the third quarter down to $770 billion in the second quarter of 1998. That represents an annualized drop of about $90 billion, and a drop of roughly $170 billion from what they would have been had profits continued to grow at the previous rate.

This decline occurred at the same time that the Anglo-American financial interests, fronted by hedge-fund speculator George Soros, launched their currency warfare attack on Asian nations, an event popularly but inaccurately known as the "Asian crisis."

Interestingly, earlier in 1997 a British money manager named Tony Dye caused quite a stir with predictions of disaster in the global derivatives market. Dye's warnings were reported by the London Sunday Telegraph on March 9, 1997, in a piece entitled the "$55 Trillion Horror." Just a couple of weeks before that, on Feb. 21, 1997, Federal Reserve Chairman Greenspan admitted to a Coral Gables, Florida meeting sponsored by the Atlanta Fed, that "there have been occasions when we have been on the edge of a significant breakout." Thus far, he concluded, the Fed's response has "turned out to be adequate to stem the atomic erosion."

The events of 1997 suggest that the Soros-led attack on the Asian Tigers was in fact a response to some sort of major derivatives disaster, in which money was stolen from Asia through market manipulations, in order to plug a hole in the bubble. The attacks threw world trade into a tailspin, and put a significant dent in U.S. corporate profits.

Congressional Fight Could Set Stage
To Reverse Rail Infrastructure Decay

by Richard Freeman

A new push has been launched in the U.S. Congress, especially during the past three to six months, for railroad infrastructure building, including proposed legislation for high-speed rail and magnetically levitated (maglev) train systems. This is necessary to begin to address the decades-long decay and obsolescence of significant sections of the U.S. rail grid.

The proposed legislation represents an increase in the tempo of the organizing for rail and other infrastructure construction, as the crisis of the breakdown of the U.S. physical economy intensifies.

The two principal legislative thrusts are the "High-Speed Rail Investment Act of 2001," which is sponsored mostly by Democrats with some Republican support, and the "Rail Infrastructure Development and Expansion Act" (RIDE), which is a largely Republican-sponsored bill, with some Democratic support. The two proposals share some important premises, but also have differences. Both would rebuild sections of the U.S. rail grid, and also build high-speed rail networks, including maglev train systems.

What is important, is that the debate on infrastructure is concentrated on relatively sane and rational purposes, as opposed to the insane and often dangerous discussion of these issues that has predominated in Congress for the past 35 years.

Now that the myth that the "U.S. economic rebound is just around the corner," is shattering, it is possible to think beyond the budget-balancing constraint which has shackled the minds of members of the U.S. Congress. This had created a climate in which a fundamental change in axioms of thinking of long-term economic policy can be made, and the underlying U.S. financial-economic disintegration can be addressed.

Airline Bailout Is For Wall Street,
Not General Welfare

by Anita Gallagher

The $15 billion airline bailout legislation which recently sailed through a panicked Congress exemplifies exactly the wrong approach to take to the reorganization of bankrupt industries essential to the general welfare of the United States. The airline package is shaped to appeal to the market by forcing mergers of "weak" airlines with stronger, to promote union-busting and give-backs by skilled employees, and even to allow the government to make money if the airlines were to turn "profitable" again.

U.S. 2004 Democratic Presidential pre-candidate Lyndon LaRouche blasted this approach in a Sept. 17 statement, "Policy On Financial Crisis Management: Terror As Used For Bailout" (see EIR, Sept. 28, 2001). LaRouche warned, "The added danger at this moment is that lunacy in Washington will insist that everything must be wasted in the futile effort to 'save the market,' throwing away precious assets for a 'bailout' of 'the market,' instead of conserving our national sovereign credit for the urgent need, that of saving the real economy.

"An emergency financial reorganization of the national airline industry must occur, preferably in parallel with kindred emergency measures by other nations. This means, that we must forget the Wall Street financial capital-gains market, and concentrate on long-term flexible budgeting of Federal and other credit-resources to keep the industry functioning physically, using 10- to 20-year financial organization as the way of stabilizing the industry, both financially and in physical functioning."

Robert Reich Agrees On Bankruptcy

In an Oct. 16 Wall Street Journal op-ed, Clinton's Secretary of Labor, Robert Reich, defends bankruptcy as the way to reorganize the airline industry. Reich correctly points out that bankruptcy was looming for the airlines before the Sept. 11 attacks: The airlines were experiencing their worst year in a decade, with $2.5 billion in potential losses. In fact, he says, bankruptcy looms before many industries, such as steel.

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